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 quarterly period ended March 31, 1998
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
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
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)
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Three months ended
March 31,
-----------------------
1998 1997
- ------------------------------------------------------------------------
Operating Revenues
Local service $ 1,366 $ 1,254
Network access:
Interstate 579 565
Intrastate 272 270
Long-distance service 189 211
Other 268 235
- ------------------------------------------------------------------------
Total operating revenues 2,674 2,535
- ------------------------------------------------------------------------
Operating Expenses
Cost of services and products 1,025 938
Selling, general and administrative 431 425
Depreciation and amortization 480 462
- ------------------------------------------------------------------------
Total operating expenses 1,936 1,825
- ------------------------------------------------------------------------
Operating Income 738 710
- ------------------------------------------------------------------------
Other Income (Expense)
Interest expense (89) (84)
Other income (expense) - net (10) -
- ------------------------------------------------------------------------
Total other income (expense) (99) (84)
- ------------------------------------------------------------------------
Income Before Income Taxes 639 626
- ------------------------------------------------------------------------
Income Taxes 237 231
- ------------------------------------------------------------------------
Net Income $ 402 $ 395
- ------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- ------------------------------------------------------------------------------
BALANCE SHEETS
Dollars in millions
- ------------------------------------------------------------------------------
March 31, December 31,
-----------------------------------
1998 1997
- ------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 91 $ 79
Accounts receivable - net of allowances
for uncollectibles of $36 and $33 1,752 1,819
Prepaid expenses 269 156
Deferred charges 45 39
Deferred income taxes 148 192
Other current assets 162 167
- ------------------------------------------------------------------------------
Total current assets 2,467 2,452
- ------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 31,553 31,011
Less: Accumulated depreciation and amortization 18,914 18,460
- ------------------------------------------------------------------------------
Property, Plant and Equipment - Net 12,639 12,551
- ------------------------------------------------------------------------------
Other Assets 35 11
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Total Assets $ 15,141 $ 15,014
- ------------------------------------------------------------------------------
Liabilities and Shareowner's Equity
Current Liabilities
Intercompany loans $ 1,429 $ 473
Current portion of long-term obligations 85 172
- -------------------------------------------------------------------------------
Total debt maturing within one year 1,514 645
Accounts payable and accrued liabilities 2,468 3,041
- ------------------------------------------------------------------------------
Total current liabilities 3,982 3,686
- ------------------------------------------------------------------------------
Long-Term Debt 4,585 4,824
- ------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 522 383
Postemployment benefit obligation 2,493 2,574
Unamortized investment tax credits 217 224
Other noncurrent liabilities 290 305
- ------------------------------------------------------------------------------
Total deferred credits and other noncurrent
liabilities 3,522 3,486
- ------------------------------------------------------------------------------
Shareowner's Equity
Common stock - one share, no par value 1 1
Paid-in surplus 2,845 2,745
Retained earnings 206 272
- ------------------------------------------------------------------------------
Total shareowner's equity 3,052 3,018
- ------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity $ 15,141 $ 15,014
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- ------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash
equivalents
(Unaudited)
- ------------------------------------------------------------------------
Three months ended
March 31,
1998 1997
- --------------------------------------------------------------------
Operating Activities
Net income $ 402 $ 395
Adjustments to reconcile net income tnet cash
provided by operating activities:
Depreciation and amortization 480 462
Provision for uncollectible accounts 30 23
Amortization of investment tax credits (7) (8)
Deferred income taxes 145 125
Other - net (758) (483)
- --------------------------------------------------------------------
Total adjustments (110) 119
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Net Cash Provided by Operating Activities 292 514
- --------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (531) (553)
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Net Cash Used in Investing Activities (531) (553)
- --------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with
original maturities of three months or less 955 256
Issuance of other short-term borrowings - 120
Repayment of other short-term borrowings - (75)
Issuance of long-term debt 195 -
Repayment of long-term debt (531) (1)
Dividends paid (468) (412)
Equity received from parent 100 155
- --------------------------------------------------------------------
Net Cash Provided by Financing Activities 251 43
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Net increase in cash and cash equivalents 12 4
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Cash and cash equivalents beginning of year 79 69
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Cash and Cash Equivalents End of Period $ 91 $ 73
- --------------------------------------------------------------------
Cash paid during the three months ended March 31 for:
Interest $ 94 $ 76
Income taxes $ 113 $ 91
See Notes to Financial Statements.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- -----------------------------------------------------------------------
STATEMENT OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
- -----------------------------------------------------------------------
Common Paid-in Retained
Stock Surplus Earnings
- -----------------------------------------------------------------------
Balance, December 31, 1997 $ 1 $ 2,745 $ 272
Net income - - 402
Dividend to shareowner - - (468)
Net equity from parent - 100 -
- -----------------------------------------------------------------------
Balance, March 31, 1998 $ 1 $ 2,845 $ 206
- -----------------------------------------------------------------------
See Notes to Financial Statements.
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months 1998 1997
then ended:
-------- ---------
Return on weighted average total capital . 22.38% 22.85%
Debt ratio . . . . . . . . . . . . . . . . 66.65% 64.47%
Network access lines in service (000) . . 16,025 15,198
Access minutes of use (000,000) . . . . . . 15,066 14,225
Number of employees . . . . . . . . . . . . 50,740 49,640
<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. 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 1997 Annual Report on Form 10-K filed
with the SEC. Comprehensive income for SWBell is the same as Net Income for
all periods presented.
2. SOFTWARE COSTS SWBell currently expenses costs as incurred software for
purchased or developed for internal use, except for initial operating
software costs, which are capitalized and amortized over the lives of the
associated hardware. The American Institute of Certified Public Accountants
has issued a Statement of Position (SOP) that will require capitalization of
certain computer software expenditures beginning in 1999, with earlier
adoption permitted.
SWBell did not elect to early adopt the provisions of the SOP. Management is
currently evaluating the impact of the change in accounting required by the
SOP, but is not able to quantify the effect at this time. The SOP would tend
to cause an increase in net income in the first year of adoption.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS
Overview Financial results for Southwestern Bell Telephone Company (SWBell) for
the first quarter of 1998 and 1997 are summarized as follows:
- ---------------------------------------------------------------------------
Three-Month Period
-----------------------------
Percent
1998 1997 Change
- ---------------------------------------------------------------------------
Operating revenues $ 2,674 $ 2,535 5.5%
Operating expenses $ 1,936 $ 1,825 6.1%
Net income $ 402 $ 395 1.8%
===========================================================================
SWBell reported net income of $402 for the first quarter of 1998, relatively
unchanged from the first quarter of 1997 as growth in demand for services and
products was offset by increases in employee compensation, including those
resulting from higher force levels, and costs associated with implementation of
the merger between SBC Communications Inc. (SBC) and Pacific Telesis Group.
Revenues Components of operating revenues for the first quarter of 1998 and 1997
are as follows:
- ----------------------------------------------------------------------------
Three-Month Period
------------------------------
Percent
1998 1997 Change
- ----------------------------------------------------------------------------
Local service $ 1,366 $ 1,254 8.9%
Network access:
Interstate 579 565 2.5
Intrastate 272 270 0.7
Long-distance service 189 211 (10.4)
Other 268 235 14.0
- -------------------------------------------------------------------
Total $ 2,674 $ 2,535 5.5%
============================================================================
Local Service revenues increased in the first quarter of 1998 due
primarily to increases in demand, including increases in access lines and
vertical services revenues. The number of access lines increased by 5.4%
since March 31, 1997, 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 services, call control options,
Caller ID and other services, increased by approximately 16%.
Additionally, Federal payphone deregulation implemented in April 1997
increased local service revenues and decreased long-distance and
interstate network access; the overall impact was a slight increase in
total operating revenues.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
Network Access Interstate network access revenues increased in the first
quarter of 1998 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. Also contributing to the increase was the absence of the 1997
revenue offset required for net payments for long-term support which were
designed to subsidize universal service. This change is discussed further
in Cost of Services and Products below. Partially offsetting these
increases were the effects of the 1997 rate reduction related to the
Federal productivity factor adjustment, as discussed in SWBell's 1997
Annual Report on Form10-K.
Intrastate network access revenues increased slightly in the first quarter
of 1998 as increases in demand, including usage by alternative intraLATA
toll carriers, were partially offset by net price decreases resulting from
1997 state regulatory rate orders.
Long-Distance Service revenues decreased in the first quarter of 1998 due
to the effect of price competition from alternative intraLATA toll
carriers, regulatory rate orders and the introduction and deployment of
extended area local service plans.
Other operating revenues increased in the first quarter of 1998 due to
increased demand for nonregulated services and products and increases in
Caller ID equipment sales.
Expenses Components of operating expenses for the first quarter of 1998 and 1997
are as follows:
- ---------------------------------------------------------------------------
Three-Month Period
-----------------------------
Percent
1998 1997 Change
- ---------------------------------------------------------------------------
Cost of services and products $ 1,025 $ 938 9.3%
Selling, general and administrative 431 425 1.4
Depreciation and amortization 480 462 3.9
- ------------------------------------------------------------------
Total $ 1,936 $ 1,825 6.1%
===========================================================================
Cost of services and products for the first quarter of 1998 increased $87,
or 9.3%, over the first quarter of 1997. These costs increased primarily
as a result of increases in employee compensation, including force
additions, network expansion and maintenance, and interconnection costs.
Also increasing expenses were increases in the Federal Universal Service
Fund charges implemented January 1, 1998, which replaced the 1997 net
payments for long-term support which were accounted for as an offset
against Interstate Network Access Revenues. Other factors increasing
expenses were continuing costs of local number portability implementation
of $12, employee training, and right-to-use fees. These costs were
partially offset by reductions in employee benefit expenses.
Selling, general and administrative expense for the first quarter of 1998
increased $6, or 1.4%, due to costs of merger implementation, other costs
associated with the consolidation of operations since the merger and
increased other taxes. These increases were partially offset by a decrease
in contract labor.
Depreciation and amortization for the first quarter of 1998 increased by
$18, or 3.9% over the first quarter of 1997. The majority of the increase
resulted from increased plant levels and a smaller portion of the increase
resulted from rate variances related to the net impact of revised
composite rates.
Income Tax expense increased $6, or 2.6%, compared to 1997 primarily due to
higher income before income tax.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITIVE AND REGULATORY ENVIRONMENT
Long-distance Applications SBC Communications Inc. (SBC) continues to seek entry
into interLATA long-distance through the courts and by approval from the Federal
Communications Commission. SWBell has section 271 applications pending to
provide interLATA long-distance service in Arkansas, Kansas, Oklahoma and Texas,
and application is expected to be filed soon in Missouri.
OTHER BUSINESS MATTERS
Employees A tentative labor agreement was reached on April 7, 1998 between
SWBell and the Communications Workers of America (CWA) to replace a contract
that would expire on August 8, 1998. The new agreement is subject to
ratification by the CWA membership, and covers approximately 40,000 employees of
SWBell through April 1, 2001. Among other items, the contract specifies an 11%
increase in wages over the life of the contract.
<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
On March 12, 1998 SWBell filed a Current Report on Form 8-K, reporting on
Item 7, Financial Statements and Exhibits. In the report, SWBell filed
exhibits relating to the issuance of $200 million in 6 7/8% Debentures due
March 31, 2048.
On March 4, 1998 SWBell filed a Current Report on Form 8-K, reporting on
Item 5, Other Events. In the report, SWBell filed unaudited Supplemental
Financial Data for December 31, 1997.
On February 17, 1998 SWBell filed a Current Report on Form 8-K, reporting
on Item 5, Other Events. In the report, SWBell filed certain financial
statement information included in a January 28, 1998 SBC press release.
<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 11, 1998 /s/ Richard G. Lindner
----------------------
Richard G. Lindner
Vice President and Chief Financial
Officer (Principal Accounting/Financial
Officer)
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL TELEPHONE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
<CAPTION>
----------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Accounting Changes $ 639 $ 626 $ 1,888 $ 2,168 $ 1,688 $ 1,586 $ 1,424
Add:Interest Expense 89 84 343 327 340 358 385
1/3 Rental Expense 10 9 41 33 26 25 23
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Earnings $ 738 $ 719 $ 2,272 $ 2,528 $ 2,054 $ 1,969 $ 1,832
========= ========= ========== ========== ========== =========== ===========
Total Interest Charges $ 96 $ 89 $ 370 $ 348 $ 340 $ 358 $ 385
1/3 Rental Expense 10 9 41 33 26 25 23
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Fixed Charges $ 106 $ 98 $ 411 $ 381 $ 366 $ 383 $ 408
========= ========= ========== ========== ========== =========== ===========
Ratio of Earnings to Fixed Charges 6.96 7.34 5.53 6.64 5.61 5.14 4.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN BELL TELEPHONE COMPANY'S MARCH 31, 1998 FINANCIAL STATEMENTS ON
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 91
<SECURITIES> 0
<RECEIVABLES> 1,788
<ALLOWANCES> 36
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,467
<PP&E> 31,553
<DEPRECIATION> 18,914
<TOTAL-ASSETS> 15,141
<CURRENT-LIABILITIES> 3,982
<BONDS> 4,585
0
0
<COMMON> 1
<OTHER-SE> 3,051
<TOTAL-LIABILITY-AND-EQUITY> 15,141
<SALES> 0<F2>
<TOTAL-REVENUES> 2,674
<CGS> 0<F3>
<TOTAL-COSTS> 1,025
<OTHER-EXPENSES> 480
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 639
<INCOME-TAX> 237
<INCOME-CONTINUING> 402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 402
<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>
