10-K405 1 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, 1994 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: 1-8610 SOUTHWESTERN BELL CORPORATION Incorporated under the laws of the State of Delaware I.R.S. Employer Identification Number 43-1301883 175 E. Houston, San Antonio, Texas 78205-2233 Telephone Number 210-821-4105 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Shares New York, Chicago and (Par Value $1.00 Per Share) Pacific Stock Exchanges Securities registered pursuant to Section 12(g) of the Act: None. 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. ( X ) Based on composite closing sales price on February 28, 1995, the aggregate market value of all voting stock held by non-affiliates was $25,290,132,635. As of February 28, 1995, 607,570,754 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of Southwestern Bell Corporation's annual report to shareowners for the fiscal year ended December 31, 1994 (Parts I and II). (2) Portions of Southwestern Bell Corporation's Notice of 1995 Annual Meeting and Proxy Statement dated March 14, 1995 (Parts III and IV). TABLE OF CONTENTS PART I Item Page 1. Business 2. Properties 3. Legal Proceedings 4. Submission of Matters to a Vote of Security Holders Executive Officers of the Registrant 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 Financial Condition and Results of Operations 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 PART I ITEM 1. BUSINESS GENERAL Southwestern Bell Corporation (SBC) is a diversified communications holding company, with various subsidiaries providing telecommunications services and products, directory advertising and publishing, business, consumer and cellular telecommunications equipment, and owning cable television interests in both domestic and international markets. SBC has its principal executive offices at 175 E. Houston, San Antonio, Texas 78205-2233 (telephone number 210-821- 4105). In order to better reflect SBC's position as a diversified global communications company, SBC's Board of Directors approved in September 1994 a change in the corporate name to SBC Communications Inc., subject to shareowner approval at the 1995 Annual Meeting of Shareowners scheduled for April 1995. SBC 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). THE MFJ AND LINE OF BUSINESS RESTRICTIONS The MFJ, as originally approved by the District Court in 1982, placed restrictions on the types of businesses in which SBC could engage. The principal restriction prohibits SBC from providing telecommunications services between Local Access and Transport Areas (LATAs), which are generally centered on a standard metropolitan statistical area or other identifiable community of interest. The MFJ also initially restricted SBC from providing information services, engaging in nontelecommunications lines of business, and manufacturing or providing telecommunications products, other than the provision of customer premises equipment (CPE) manufactured by others. CPE, as defined in the MFJ, represents equipment used on customers' premises to originate, route or terminate telecommunications. These services and products are collectively known as "restricted lines of business." The MFJ permits SBC to obtain relief from these restrictions upon a showing that there is no substantial possibility that it could use its monopoly power to impede competition in the specific market it seeks to enter (the Waiver Standard). As a result of proceedings before the District Court since divestiture, the restrictions against engaging in nontelecommunications lines of business and providing intraLATA information services have been removed. SBC has also been 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. SBC has submitted various requests to the District Court which seek to remove or modify the remaining restrictions. These include, among others, pending waiver requests to provide information services on an interLATA basis and to provide interLATA long-distance service outside the five-state area (defined below) and to cellular customers. In addition, SBC and two other RHCs have asked the District Court, in a joint petition filed in July 1994, to vacate the MFJ. This matter is currently pending. BUSINESS OPERATIONS SBC provides services and products through several subsidiaries, which include: Southwestern Bell Telephone Company (Telephone Company), Southwestern Bell Mobile Systems, Inc. (Mobile Systems), SBC International, Inc. (SBC International), Southwestern Bell Yellow Pages, Inc. (Yellow Pages), Southwestern Bell Telecommunications, Inc. (Telecom) and SBC Media Ventures, Inc. (Media Ventures). These services and products (which are described more fully below) include landline and wireless telecommunications services, sales of advertising for and publication of yellow pages and white pages directories, sales of customer premises, private business exchange (PBX) and cellular equipment, and cable television services. Landline telecommunications services are provided in the states of (listed by number of access lines) Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area) by the Telephone Company. Wireless telecommunications services are provided by Mobile Systems. SBC's revenues are categorized for financial reporting purposes as local service (substantially all of which were provided by the Telephone Company and Mobile Systems), network access (provided by the Telephone Company), long-distance service (substantially all of which were provided by the Telephone Company), directory advertising (principally provided by Yellow Pages) and other (including equipment sales at Mobile Systems and Telecom, nonregulated products and services provided by the Telephone Company, billing and collection services for interexchange carriers provided by the Telephone Company, and cable television services provided by SBC International and Media Ventures). The following table sets forth for SBC 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 1994 1993 1992 Local service: Landline 35% 37% 37% Wireless 15% 12% 10% Long-distance service 8% 9% 10% Network access 25% 25% 25% Telecommunications services Telecommunications services include local, long-distance and network access services. Local services involve the transport of landline and wireless 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), except for certain wireless service areas which cover more than one LATA, for which SBC has obtained MFJ waivers. Long-distance services also include such other services 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 non-Telephone Company 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 Telephone Company is SBC's largest subsidiary, providing approximately 65% of SBC's consolidated net income in 1994. The Telephone Company provides its services over approximately 9 million residential and 4 million business access lines in the five-state area. During 1994, nearly two-thirds of the Telephone Company's access line growth occurred in Texas. During 1994, 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. Caller ID is now being offered in certain markets in all of the states in the Telephone Company's five-state area. The Federal Communications Commission (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 thus far 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 charged 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. Telecom provides voice messaging services to medium and large business customers through its Voice Processing division. Voice messaging services are provided under the registered trademark CallNotes to residential and small business customers through Southwestern Bell Messaging Services, Inc., another SBC subsidiary. At the end of 1994, Mobile Systems provided cellular services to 2,979,000 customers, or 7.4 out of every 100 residents living in its service areas. These services are provided in 34 metropolitan markets, including 5 of the nation's top 15 metropolitan areas, as follows: Washington, D.C.; Chicago, Illinois; Boston, Massachusetts; St. Louis, Missouri; and Dallas-Fort Worth, Texas. Mobile Systems (or partnerships in which it has an ownership interest) is licensed to provide service in 27 rural service areas and is currently providing service in all of these markets. All of these rural service areas are contiguous to an existing metropolitan service area or another rural service area operated by Mobile Systems, which allows for the expansion of service in a way that may add value to customers' service. Mobile Systems operates in certain areas under the name of Cellular One by means of a partnership arrangement which holds the Cellular One service mark, with McCaw Cellular Communications, Inc. and Vanguard Cellular Systems, Inc. These areas include both metropolitan and rural service areas, such as Washington, D.C.; Chicago, Illinois; and other service areas in Illinois, Massachusetts, New York, Virginia and West Virginia. In October 1994, SBC announced the formation of a long-term marketing alliance between Mobile Systems and GTE in their Texas markets. This alliance will enable both companies to begin offering cellular service in each other's markets, using the host company's cellular system. As a result, Mobile Systems will have access to a number of additional markets, including Houston, Austin and El Paso. Mobile Systems began providing commercial digital service by launching the largest digital deployment program in North America with commercial digital service in Chicago in July 1993. Digital service improves sound quality, provides a greater degree of privacy on individual calls, increases call-handling capacity of the networks and reduces exposure to billing fraud. Mobile Systems also began providing commercial digital service in St. Louis in September 1993, in Dallas-Fort Worth in January 1994, and in Washington-Baltimore in March 1994. Mobile Systems plans to begin providing digital service in Boston during 1995. In December 1994, SBC acquired for $705 million the domestic cellular business of Associated Communications Corporation, including cellular systems in Buffalo, Rochester, Albany and Glens Falls, New York. These properties are adjacent to smaller cellular systems in Syracuse, Utica and Ithaca, New York which SBC purchased from other parties in two separate transactions in the second quarter of 1994. In October 1994, SBC announced that it entered into an agreement with United States Cellular Corporation to acquire a cellular property that operates in and around Watertown, New York. This acquisition will increase the number of markets served by Mobile Systems to 62 and increase Mobile Systems' potential customer base to more than 40 million. This transaction is expected to close during 1995. International A consortium consisting of SBC International, together with a subsidiary of France Telecom and a group of Mexican investors led by Grupo Carso, S.A. de C.V., has voting control of Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications company, through its ownership of all of Telmex's Class AA shares. The Mexican investors have voting control of the consortium. The Class AA shares owned by SBC International represent approximately 5% of Telmex's total equity capitalization. SBC International's total interest in Telmex, including ownership of Class L shares with limited voting rights, represents approximately 10% of Telmex's total equity capitalization. Telmex provides complete landline and wireless telecommunications services within Mexico. At the end of 1994, Telmex had 8.5 million access lines in service and provided cellular service to more than 305,000 subscribers. For additional information regarding SBC's investment in Telmex, see Note 3, "Equity Investments," on page 39 of SBC's annual report to shareowners for the fiscal year ended December 31, 1994, which is incorporated herein by reference pursuant to General Instruction G(2). In October 1994, SBC International formed a strategic alliance with Compagnie Generale des Eaux (CGE), a French diversified public company. In December 1994, SBC International invested $615 million through this alliance to acquire an indirect 10% ownership of Societe Francaise du Radiotelephone S.A. (SFR), a French national cellular company, and minority ownership interests in other communications businesses controlled by CGE. As part of this alliance, CGE is expected to invest $247 million to attain a 10% interest in SBC's Washington-Baltimore wireless operations. This investment is expected to occur during the first half of 1995. In February 1995, SBC International purchased 40% of VTR S.A. (VTR), a privately owned telecommunications holding company in Chile, for $317 million. Through its subsidiaries, VTR provides local, long-distance, wireless and cable television services in Chile. VTR is 51% owned by Grupo Luksic, a large Chilean conglomerate. SBC International's cable television operations in the United Kingdom include Midlands Cable Communications and Northwest Cable Communications, with combined service areas containing 1.3 million potential households. At the end of 1994, SBC International's cable television operations in the United Kingdom served approximately 117,000 subscribers, for a penetration rate of 23.7%. Penetration rate is defined as the number of customers, as a percentage of solicited households, that have network access. Cable operators in the United Kingdom may provide both cable television and local exchange services. At the end of 1994, SBC International provided local exchange service to approximately 114,000 subscribers. During 1993 and 1994, SBC International sold 50% of its United Kingdom cable television operations to Cox Cable Communications (Cox). SBC International and Cox each own 50% and share management of the cable operations. SBC International also holds a minority interest in Golden Channels, a cable television provider in Israel. Golden Channels holds franchises in areas containing 368,000 potential households. At the end of 1994, Golden Channels served approximately 224,000 households, for a penetration rate of approximately 61%. In Israel and Australia, SBC International also has interests in companies involved in the publication of yellow pages directories and marketing directory software. Directory Advertising and Publishing Yellow Pages publishes nearly 42 million copies of 360 classified directories within the Telephone Company's five-state area. The ten largest revenue-producing yellow pages directories are currently published in the second half of SBC's fiscal year. Directory advertising revenues and expenses associated with yellow pages directories are recognized in the month the related directory is published. Customer Premises Equipment and Other Equipment Sales Telecom markets business and residential communications equipment through two divisions, Business Systems and Original Equipment. Telecom's offerings range from single-line and cordless telephones to sophisticated digital PBX systems. PBX is a private telephone switching system, usually located on a customer's premises, which provides intra-premise telephone services as well as access to the public switched network. The Business Systems division markets a wide variety of telecommunications products and services to business customers in the Telephone Company's five-state area. The Original Equipment division, through an exclusive, long-term distribution agreement with Conair Corporation, markets a full line of residential telephones to retailers nationwide, under the Freedom Phone name. Separately, the Original Equipment division markets residential and business products to U.S. telephone companies and internationally in 39 countries. Mobile Systems markets cellular communications equipment in each of its service areas. Domestic Cable Television In January 1994, SBC completed the purchase of two cable television systems serving suburban Washington, D.C. for $650 million from Hauser Communications, Inc. These systems serve Montgomery County, Maryland, and Arlington County, Virginia. The individual systems operate as Cable TV Montgomery and Cable TV Arlington, which together form SBC's Media Ventures. At the end of 1994, these systems served 255,000 customers and passed 402,000 homes. In February 1994, SBC announced the Telephone Company's plans for a consumer trial of video and interactive services in Richardson, Texas. With the construction of the broadband network currently under way, the Telephone Company plans to begin offering telephone service to customers over the network in early 1995. Delivery of video service is expected to begin during 1996. Eventually, 42,000 homes will be included in the trial. Printing In December 1994, Southwestern Bell Printing Company, which operated plants in Texas and Oklahoma, ceased doing business. Beginning in 1995, SBC's yellow and white pages directories will be printed by R.R. Donnelley & Sons. GOVERNMENT REGULATION In the five-state area, the Telephone Company is subject to regulation by state commissions which have the power to regulate 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 non-Telephone Company carriers. Additional information relating to federal and state regulation of the Telephone Company is contained in the registrant's annual report to shareowners for 1994 under the heading "Regulatory Environment" on page 27, and is incorporated herein by reference pursuant to General Instruction G(2). SBC's recently acquired cable systems are subject to federal and local regulation, including regulation by the FCC and local franchising authorities, concerning rates, service and programming access. IMPORTANCE, DURATION AND EFFECT OF LICENSES The FCC authorizes the licensing of only two cellular carriers in each geographic market. These cellular licenses have a standard duration of ten years and are renewable upon application and a showing of compliance with FCC use and conduct standards. The FCC licenses granted to Mobile Systems in Chicago, Illinois; San Antonio, Texas; Boston, Massachusetts; Oklahoma City, Oklahoma; and Wichita, Kansas all expired in 1994. Renewal applications were filed in each of these markets during August 1994. Renewal licenses are expected to be awarded during 1995. Renewal licenses were received for Washington, D.C.; Baltimore, Maryland; Kansas City, Missouri/Kansas; St. Louis, Missouri; and Dallas, Texas in October 1994. Renewal applications are to be filed in the following markets during August 1995: Gary, Indiana; Worcester, Massachusetts; Syracuse, New York; Rochester, New York; and Corpus Christi, Texas. The FCC adopted an order in 1993 which outlines the development of licenses for new personal communications services (PCS). Under an auction process, up to seven PCS licenses could be awarded in each of 51 geographical areas. SBC is allowed to participate fully in bidding for licenses in areas outside its cellular service areas, and may bid on a smaller license in areas where it has a cellular presence. SBC is participating in the auctions, which began in December 1994, and is pursuing licenses in a number of markets that would complement its existing cellular service territories. Cable television systems generally are operated under nonexclusive permits or "franchises" granted by local governmental authorities. SBC operates its recently acquired cable systems under franchises granted by Montgomery County, Maryland (expires May 25, 1998); Arlington County, Virginia (expires October 18, 2000); and the City of Gaithersburg, Maryland (expires November 2, 2001). Each franchise is renewable upon a showing of compliance with established local and federal standards. MAJOR CUSTOMER Approximately 10% in 1994, and 12% in 1993 and 1992, of SBC's consolidated revenues were from services provided to AT&T. No other customer accounted for more than 10% of consolidated revenues. COMPETITION Telecommunications Information relating to competition in the telecommunications industry is contained in the registrant's annual report to shareowners for 1994 under the heading "Competition" on page 28, and is incorporated herein by reference pursuant to General Instruction G(2). International Most major and several minor cable operators in the United Kingdom have begun to offer both cable television and local exchange services in selected franchise service areas. The United Kingdom's domestic telephone companies are restricted from offering video entertainment over their networks until 1998. In addition to cable, viewers in the United Kingdom may select television programming from four television stations which are broadcast free, or may subscribe to programming directly from satellite broadcasting services. Directory Advertising and Publishing Yellow Pages faces competition from numerous directory publishing companies as well as other advertising media. There are 51 other directory publishers in the five-state area producing yellow page directories. Customer Premises Equipment and Other Equipment Sales Telecom faces significant price competition from numerous companies in both its Business Systems division and Original Equipment division. RESEARCH AND DEVELOPMENT The majority of company-sponsored basic and applied research activities is conducted at Bell Communications Research, Inc. (Bellcore). The Telephone Company owns a one-seventh interest in Bellcore along with the other six RHCs. Bellcore is the central point of contact for coordinating the Federal government's telecommunications requirements on 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 assessment services to SBC and its subsidiaries. EMPLOYEES As of December 31, 1994, SBC and its subsidiaries employed 58,750 persons. Approximately 66% of the employees are represented by the Communications Workers of America (CWA). Effective in August 1992, a three-year contract was negotiated between the CWA and the Telephone Company. Effective in December 1992, a three-year contract was negotiated between the CWA and Yellow Pages. These contracts will be subject to renegotiation in mid 1995. Effective February 1994, a three-year contract was negotiated between the CWA and Telecom. The CWA also represents a minor number of employees in other subsidiaries of SBC. ITEM 2. PROPERTIES The properties of SBC do not lend themselves to description by character and location of principal units. At December 31, 1994, 91% of the property, plant and equipment of SBC was owned by the Telephone Company. 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 Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareowners in the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position Held Since Edward E. 53 Chairman and Chief Executive 1-90 Whitacre Jr. Officer James R. Adams 55 Group President 7-92 Royce S. 56 President and Chief Executive 4-94 Caldwell Officer of Southwestern Bell Telephone Company Cassandra C. 50 Senior Vice President - Human 5-94 Carr Resources Robert A. 51 Senior Vice President - Corporate 5-94 Dickemper Communications William E. 56 Senior Executive Vice President - 7-93 Dreyer External Affairs James D. Ellis 51 Senior Executive Vice President 3-89 and General Counsel Charles E. 58 Group President 10-90 Foster James S. Kahan 47 Senior Vice President - Strategic 7-93 Planning and Corporate Development Donald E. 54 Senior Vice President, Treasurer 7-93 Kiernan and Chief Financial Officer All of the above Executive Officers have held high-level managerial positions with SBC or its subsidiaries for more than the past five years, except for Messrs. Kiernan and Kahan who have held such high- level managerial positions since May 1990 and January 1992, respectively. Prior to their appointments as Executive Officers, Mr. Kiernan was a partner with Ernst & Young and Mr. Kahan held responsible managerial positions with SBC. Executive Officers are not appointed to a fixed term of office but hold office until their successors are elected and qualified. PART II ITEMS 5 THROUGH 8. The information required by these Items is included in the "1994 Financial Highlights - Number of shareowners" line on page 1, page 22 through page 45 and in the "Stock Data" section on the back cover of the registrant's annual report to shareowners for the fiscal year ended December 31, 1994. Such information is appended hereto as Exhibit 13 and is incorporated herein by reference pursuant to General Instruction G(2). 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. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report since the registrant did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. The other information required by these Items is included in the registrant's definitive proxy statement, dated March 14, 1995, from page 4 through page 7 and beginning with the last paragraph on page 13 through page 20 and is incorporated herein by reference pursuant to General Instruction G(3). 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: Consolidated Statements of Income * Consolidated Balance Sheets * Consolidated Statements of Cash Flows * Consolidated Statements of Shareowners' Equity * Notes to Consolidated Financial Statements * * Incorporated herein by reference to the appropriate portions of the registrant's annual report to shareowners for the fiscal year ended December 31, 1994. (See Part II.) Page (2) Financial Statement Schedules Covered by Report of Independent Auditors: VIII - 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 3-a Restated Certificate of Incorporation, of Southwestern Bell Corporation, dated June 6, 1988. (Exhibit 3-a to Form 8-A/A, dated June 22, 1994, File 1-8610.) 3-b Bylaws of Southwestern Bell Corporation, dated June 28, 1991. (Exhibit 3-b to Form 10-Q for the second quarter 1991, File 1-8610.) 4-a 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 or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 4-b Support Agreement dated November 10, 1986, between Southwestern Bell Corporation and Southwestern Bell Capital Corporation. (Exhibit 4-b to Registration Statement No. 33-11669.) 4-c Form of Rights Agreement, dated as of January 27, 1989, between Southwestern Bell Corporation and American Transtech, Inc., the Rights Agent, which includes as Exhibit B thereto the form of Rights Certificate. (Exhibit 4-a to Form 8-A dated February 9, 1989, File 1- 8610.) 4-d Amendment of Rights Agreement, dated as of August 5, 1992, between Southwestern Bell Corporation, American Transtech, Inc., and The Bank of New York, the successor Rights Agent, which includes the Form of Rights Certificate as an attachment identified as Exhibit B. (Exhibit 4-a to Form 8-K, dated August 7, 1992, File 1-8610.) 4-e Form of Rights Certificate (included in the attachment to the Amendment of Rights Agreement and identified as Exhibit B.) (Exhibit 4-b to Form 8-K, dated August 7, 1992, File 1- 8610.) 4-f Second Amendment of Rights Agreement, dated June 15, 1994, between Southwestern Bell Corporation and The Bank of New York, as successor Rights Agent. (Exhibit 4-e to Form 8-A/A, dated June 22, 1994, File 1-8610.) 10-a Southwestern Bell Corporation Senior Management Short Term Incentive Plan, revised January 1, 1991. (Exhibit 10-a to Form 10-K for 1990, File 1-8610.) 10-b Southwestern Bell Corporation Senior Management Long Term Incentive Plan, revised effective January 1, 1993. (Exhibit 10-b to Form 10-K for 1992, File 1-8610.) 10-c Southwestern Bell Corporation Senior Management Survivor Benefit Plan. (Exhibit 10-c to Form 10-K for 1986, File 1- 8610.) 10-d Southwestern Bell Corporation Senior Management Supplemental Retirement Income Plan, revised effective January 1, 1993. (Exhibit 10-d to Form 10-K for 1992, File 1-8610.) 10-e Southwestern Bell Corporation Senior Management Deferred Compensation Plan (effective for Units of Participation Having a Unit Start Date Prior to January 1, 1988), revised July 30, 1993. (Exhibit 10.5 to Registration Statement No. 33-54795, File 1-8610.) 10-f Southwestern Bell Corporation Senior Management Deferred Compensation Plan of 1988 (effective for Units of Partici pation Having a Unit Start Date of January 1, 1988 or later), revised July 30, 1993. (Exhibit 10.6 to Registration Statement No. 33-54795, File 1-8610.) 10-g Southwestern Bell Corporation Senior Management Long Term Disability Plan. (Exhibit 10-f to Form 10-K for 1986, File 1-8610.) 10-h Southwestern Bell Corporation Senior Management Incentive Award Deferral Plan. (Exhibit 10-g to Form 10-K for 1986, File 1-8610.) 10-i Southwestern Bell Corporation Senior Management Financial Counseling Program. (Exhibit 10-h to Form 10-K for 1986, File 1-8610.) 10-j Southwestern Bell Corporation Senior Management Executive Health Plan, effective January 1, 1987. (Exhibit 10-i to Form 10-K for 1986, File 1-8610.) 10-k Southwestern Bell Corporation Retirement Plan for Non- Employee Directors. (Exhibit 10-t to Form 10-K for 1985, File 1-8610.) 10-l Form of Indemnity Agreement, effective July 1, 1986, between Southwestern Bell Corporation and each of its directors and officers. (Appendix 1 to Definitive Proxy Statement dated March 18, 1987, File 1-8610.) 10-m Form of Southwestern Bell Corporation Change of Control Severance Agreements for all Officers of the Corporation and certain Officers of the Corporation's subsidiaries. (Exhibit 10-p to Form 10-K for 1988, File 18610.) 10-n Southwestern Bell Corporation Stock Savings Plan, revised effective February 1, 1994. (Appendix A to Definitive Proxy Statement dated March 18, 1994, File 1- 8610.) 10-o Southwestern Bell Corporation 1992 Stock Option Plan, revised effective December 1, 1993. (Exhibit 10.15 to Registration Statement No. 33-54795, File 1-8610.) 10-p Southwestern Bell Corporation Key Executive Officer Short Term Incentive Plan. (Appendix B to Definitive Proxy Statement dated March 18, 1994, File 1-8610.) 10-q Southwestern Bell Corporation Restricted Stock Plan for Non-Employee Directors. (Exhibit 10.17 to Registration Statement No. 33-54795, File 1-8610.) 10-r Southwestern Bell Corporation Officer Retirement Savings Plan. (Exhibit 10.18 to Registration Statement No. 33- 54795, File 1-8610.) 12 Computation of Ratios of Earnings to Fixed Charges. 13 Portions of Southwestern Bell Corporation's annual report to shareowners for the fiscal year ended December 31, 1994. Only the information incorporated by reference into this Form 10-K is included in the exhibit. 21 Subsidiaries of Southwestern Bell Corporation. 23 Consent of Ernst & Young LLP. 24 Powers of Attorney. 27 Financial Data Schedule. 99-a Annual Report on Form 11-K for the Southwestern Bell Corporation Savings Plan for the year 1994 to be filed under Form 10-K/A. 99-b Annual Report on Form 11-K for the Southwestern Bell Corporation Savings and Security Plan for the year 1994 to be filed under Form 10-K/A. Southwestern Bell Corporation will furnish to shareowners upon request, and without charge, a copy of the annual report to shareowners and the proxy statement, portions of which are incorporated by reference in the Form 10-K. Southwestern Bell Corporation will furnish any other exhibit at cost. (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. SOUTHWESTERN BELL CORPORATION Schedule VIII - Sheet 1 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Allowance for Uncollectibles Dollars in Millions
COL. A COL. B -----COL. C------ COL. D COL. E Additions (1) (2) Balance at Charged Charged Balance Description Beginning to Costs to Other Deductions at End of of Period and Accounts -Note (b) Period Expenses -Note (a) Year 1994 $ 111.2 165.9 41.2 187.9 $ 130.4 Year 1993 $ 95.5 149.9 35.2 169.4 $ 111.2 Year 1992 $ 82.3 134.9 36.5 158.2 $ 95.5 (a)Amounts previously written off which were credited directly to this account when recovered. (b)Amounts written off as uncollectible.
SOUTHWESTERN BELL CORPORATION Schedule VIII - Sheet 2 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Accumulated Amortization of Intangibles Dollars in Millions
COL. A COL. B ---COL. C------- COL. D COL. E Additions (1) (2) Balance at Balance Description Beginning Charged Deductions at End of of Period Charged to Other Period to Expense Accounts Year 1994 $ 368.2 96.6 - 37.2 $ 427.6 Year 1993 $ 443.6 100.1 .7 176.2 (a) $ 368.2 Year 1992 $ 366.0 80.1 - 2.5 $ 443.6 (a)Primarily related to the disposition of Metromedia Paging Services, Inc.
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 14th day of March, 1995. SOUTHWESTERN BELL CORPORATION By /s/ Donald E. Kiernan (Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer) 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 E. Whitacre Jr.* Chairman and Chief Executive Officer Principal Financial and Accounting Officer: Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer /s/ Donald E. Kiernan Directors: (Donald E. Kiernan, as attorney-in-fact and on his own behalf as Principal Edward E. Whitacre Jr.* Financial Officer and Principal Clarence C. Barksdale* Accounting Officer) James E. Barnes* Jack S. Blanton* August A. Busch III* March 14, 1995 Ruben R. Cardenas* Martin K. Eby, Jr.* Tom C. Frost* Jess Hay* B. R. Inman* Charles F. Knight* Sybil C. Mobley* Haskell M. Monroe, Jr.* Carlos Slim Helu* Patricia P. Upton * * by power of attorney EXHIBIT INDEX Exhibits identified in parentheses below, on file with the Securities and Exchange Commission (SEC), are incorporated by reference as exhibits hereto. Exhibit Number 3-a Restated Certificate of Incorporation, of Southwestern Bell Corporation, dated June 6, 1988. (Exhibit 3-a to Form 8-A/A, dated June 22, 1994, File 1-8610.) 3-b Bylaws of Southwestern Bell Corporation, dated June 28, 1991. (Exhibit 3-b to Form 10-Q for the second quarter 1991, File 1-8610.) 4-a 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 or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 4-b Support Agreement dated November 10, 1986, between Southwestern Bell Corporation and Southwestern Bell Capital Corporation. (Exhibit 4-b to Registration Statement No. 33-11669.) 4-c Form of Rights Agreement, dated as of January 27, 1989, between Southwestern Bell Corporation and American Transtech, Inc., the Rights Agent, which includes as Exhibit B thereto the form of Rights Certificate. (Exhibit 4-a to Form 8-A dated February 9, 1989, File 1- 8610.) 4-d Amendment of Rights Agreement, dated as of August 5, 1992, between Southwestern Bell Corporation, American Transtech, Inc., and The Bank of New York, the successor Rights Agent, which includes the Form of Rights Certificate as an attachment identified as Exhibit B. (Exhibit 4-a to Form 8-K, dated August 7, 1992, File 1-8610.) 4-e Form of Rights Certificate (included in the attachment to the Amendment of Rights Agreement and identified as Exhibit B.) (Exhibit 4-b to Form 8-K, dated August 7, 1992, File 1- 8610.) 4-f Second Amendment of Rights Agreement, dated June 15, 1994, between Southwestern Bell Corporation and The Bank of New York, as successor Rights Agent. (Exhibit 4-e to Form 8-A/A, dated June 22, 1994, file 1-8610.) 10-a Southwestern Bell Corporation Senior Management Short Term Incentive Plan, revised January 1, 1991. (Exhibit 10-a to Form 10-K for 1990, File 1-8610.) 10-b Southwestern Bell Corporation Senior Management Long Term Incentive Plan, revised effective January 1, 1993. (Exhibit 10-b to Form 10-K for 1992, File 1-8610.) 10-c Southwestern Bell Corporation Senior Management Survivor Benefit Plan. (Exhibit 10-c to Form 10-K for 1986, File 1- 8610.) 10-d Southwestern Bell Corporation Senior Management Supplemental Retirement Income Plan, revised effective January 1, 1993. (Exhibit 10-d to Form 10-K for 1992, File 1-8610.) 10-e Southwestern Bell Corporation Senior Management Deferred Compensation Plan (effective for Units of Participation Having a Unit Start Date Prior to January 1, 1988), revised July 30, 1993. (Exhibit 10.5 to Registration Statement No. 33-54795, File 1-8610.) 10-f Southwestern Bell Corporation Senior Management Deferred Compensation Plan of 1988 (effective for Units of Partici pation Having a Unit Start Date of January 1, 1988 or later), revised July 30, 1993. (Exhibit 10.6 to Registration Statement No 33-54795, File 1-8610.) 10-g Southwestern Bell Corporation Senior Management Long Term Disability Plan. (Exhibit 10-f to Form 10-K for 1986, File 1-8610.) 10-h Southwestern Bell Corporation Senior Management Incentive Award Deferral Plan. (Exhibit 10-g to Form 10-K for 1986, File 1-8610.) 10-i Southwestern Bell Corporation Senior Management Financial Counseling Program. (Exhibit 10-h to Form 10-K for 1986, File 1-8610.) 10-j Southwestern Bell Corporation Senior Management Executive Health Plan, effective January 1, 1987. (Exhibit 10-i to Form 10-K for 1986, File 1-8610.) 10-k Southwestern Bell Corporation Retirement Plan for Non- Employee Directors. (Exhibit 10-t to Form 10-K for 1985, File 1-8610.) 10-l Form of Indemnity Agreement, effective July 1, 1986, between Southwestern Bell Corporation and each of its directors and officers. (Appendix 1 to Definitive Proxy Statement dated March 18, 1987, File 1-8610.) 10-m Form of Southwestern Bell Corporation Change of Control Severance Agreements for all Officers of the Corporation and certain Officers of the Corporation's subsidiaries. (Exhibit 10-p to Form 10-K for 1988, File 1-8610.) 10-n Southwestern Bell Corporation Stock Savings Plan, revised effective February 1, 1994. (Appendix A to Definitive Proxy Statement dated March 18, 1994, File 1- 8610.) 10-o Southwestern Bell Corporation 1992 Stock Option Plan, revised effective December 1, 1993. (Exhibit 10.15 to Registration Statement No. 33-54795, File 1-8610.) 10-p Southwestern Bell Corporation Key Executive Officer Short Term Incentive Plan. (Appendix B to Definitive Proxy Statement dated March 18, 1994, File 1-8610.) 10-q Southwestern Bell Corporation Restricted Stock Plan for Non-Employee Directors. (Exhibit 10.17 to Registration Statement No. 33-54795, File 1-8610.) 10-r Southwestern Bell Corporation Officer Retirement Savings Plan. (Exhibit 10.18 to Registration Statement No. 33- 54795, File 1-8610.) 12 Computation of Ratios of Earnings to Fixed Charges. 13 Portions of Southwestern Bell Corporation's annual report to shareowners for the fiscal year ended December 31, 1994. Only the information incorporated by reference into this Form 10-K is included in this exhibit. 21 Subsidiaries of Southwestern Bell Corporation. 23 Consent of Ernst & Young LLP. 24 Powers of Attorney. 27 Financial Data Schedule. 99-a Annual Report on Form 11-K for the Southwestern Bell Corporation Savings Plan for the year 1994 to be filed under Form 10-K/A. 99-b Annual Report on Form 11-K for the Southwestern Bell Corporation Savings and Security Plan for the year 1994 to be filed under Form 10-K/A. EX-12 2 EXHIBIT 12 SOUTHWESTERN BELL CORPORATION COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Dollars In Millions
YEAR ENDED DECEMBER 31, 1994 1993 1992 1991 1990 Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles* $ 2,300.0 $ 1,882.9 $ 1,701.2 $ 1,557.0 $ 1,541.4 Add: Interest Expense 480.2 496.2 530.0 577.7 529.7 1/3 Rental Expense 41.8 41.0 45.1 37.5 43.4 Adjusted Earnings $ 2,822.0 $ 2,420.1 $ 2,276.3 $ 2,172.2 $ 2,114.5 Total Interest Charges $ 480.2 $ 496.2 $ 530.0 $ 577.7 $ 529.7 1/3 Rental Expense 41.8 41.0 45.1 37.5 43.4 Adjusted Fixed Charges $ 522.0 $ 537.2 $ 575.1 $ 615.2 $ 573.1 Ratio of Earnings to Fixed Charges 5.41 4.51 3.96 3.53 3.69 *Undistributed earnings on investments accounted for under the equity method have been excluded.
EX-13 3 Exhibit 13 1994 1993 Change Number of 928,670 963,355 (3.6)% shareowners The above information appears on page one of the printed Annual Report.
Selected Financial and Operating Data Dollars in millions except per share amounts At December 31 or for the year ended: 1994 1993 1992 1991 Financial Data Operating revenues $ 11,618 $ 10,690 $ 10,015 $ 9,332 Operating expenses $ 8,828 $ 8,310 $ 7,818 $ 7,198 Operating income $ 2,790 $ 2,380 $ 2,197 $ 2,134 Interest expense $ 480 $ 496 $ 530 $ 578 Equity in net income of affiliates $ 223 $ 250 $ 208 $ 95 Income taxes $ 785 $ 625 $ 568 $ 488 Income before extraordinary loss and cumulative effect of changes in accounting principles $ 1,649 $ 1,435 $ 1,302 $ 1,157 Extraordinary loss on early extinguishment of debt, net of tax - $ (153) - $ (81) Cumulative effect of changes in accounting principles, net of tax - $ (2,127) - - Net income (loss) $ 1,649 $ (845) $ 1,302 $ 1,076 Earnings per common share: Income before extraordinary loss and cumulative effect of changes in accounting principles $ 2.74 $ 2.39 $ 2.17 $ 1.93 Extraordinary loss on early extinguishment of debt, net of tax - (0.25) - (0.14) Cumulative effect of changes in accounting principles, net of tax - (3.55) - - Net income (loss) $ 2.74 $ (1.41) $ 2.17 $ 1.79 Total assets $ 26,005 $ 24,308 $ 23,810 $ 23,179 Long-term debt $ 5,848 $ 5,459 $ 5,716 $ 5,675 Construction and capital expenditures $ 2,350 $ 2,221 $ 2,144 $ 1,826 Free cash flow (1) $ 1,616 $ 1,220 $ 1,470 $ 1,067 Dividends declared per common share $ 1.58 $ 1.51 $ 1.46 $ 1.42 Book value per common share (2, 3) $ 13.72 $ 12.61 $ 15.47 $ 14.77 Ratio of earnings to fixed charges 5.41 4.51 3.96 3.53 Return on weighted average shareowners' equity (2, 4) 20.61% 19.29% 14.28% 13.22% Debt ratio (2, 3) 47.36% 47.49% 42.99% 45.08% Operating Data* Network access lines in service (000) 13,612 13,145 12,724 12,328 Access minutes of use (000,000) 48,430 44,203 41,235 38,885 Long-distance messages (000,000) 1,018 1,012 974 976 Cellular customers (000) 2,979 2,049 1,413 960 Number of employees 58,800 58,400 59,500 61,200 *Operating data may be periodically revised to reflect the most current information available. 1 Free cash flow is net cash provided by operating activities less construction and capital expenditures. 2 Prior years have been restated to conform to the current year's classifications. 3 Shareowners' equity used in book value per common share and debt ratio calculations includes extraordinary loss and changes in accounting principles. 4 Calculated using income before extraordinary loss and changes in accounting principles. These impacts are included in shareowners' equity. 5 Compound Annual Growth Rate from 1984 to 1994. NA - Not Available.
Selected Financial and Operating Data Dollars in millions except per share amounts At December 31 or for the year ended: 1990 1989 1988 1987 Financial Data Operating revenues $ 9,113 $ 8,730 $ 8,453 $ 8,003 Operating expenses $ 7,071 $ 6,722 $ 6,503 $ 5,926 Operating income $ 2,042 $ 2,008 $ 1,950 $ 2,077 Interest expense $ 530 $ 544 $ 578 $ 532 Equity in net income of affiliates $ 6 $ 6 $ 8 $ 5 Income taxes $ 440 $ 387 $ 350 $ 544 Income before extraordinary loss and cumulative effect of changes in accounting principles $ 1,101 $ 1,093 $ 1,060 $ 1,047 Extraordinary loss on early extinguishment of debt, net of tax - - - - Cumulative effect of changes in accounting principles, net of tax - - - - Net income (loss) $ 1,101 $ 1,093 $ 1,060 $ 1,047 Earnings per common share: Income before extraordinary loss and cumulative effect of changes in accounting principles $ 1.83 $ 1.82 $ 1.76 $ 1.74 Extraordinary loss on early extinguishment of debt, net of tax - - - - Cumulative effect of changes in accounting principles, net of tax - - - - Net income (loss) $ 1.83 $ 1.82 $ 1.76 $ 1.74 Total assets $ 22,196 $ 21,161 $ 20,985 $ 21,500 Long-term debt $ 5,483 $ 5,456 $ 5,039 $ 5,649 Construction and capital expenditures $ 1,778 $ 1,483 $ 1,222 $ 1,450 Free cash flow (1) $ 893 $ 1,283 $ 1,308 $ 1,028 Dividends declared per common share $ 1.38 $ 1.30 $ 1.24 $ 1.16 Book value per common share (2, 3) $ 14.31 $ 13.92 $ 14.15 $ 13.63 Ratio of earnings to fixed charges 3.69 3.52 3.26 3.72 Return on weighted average shareowners' equity (2, 4) 12.92% 12.90% 12.69% 12.98% Debt ratio (2, 3) 43.97% 42.01% 41.42% 44.59% Operating Data* Network access lines in service (000) 12,042 11,708 11,295 11,086 Access minutes of use (000,000) 36,982 34,295 31,412 30,114 Long-distance messages (000,000) 961 988 940 873 Cellular customers (000) 667 382 244 155 Number of employees 66,700 66,200 64,900 67,100 *Operating data may be periodically revised to reflect the most current information available. 1 Free cash flow is net cash provided by operating activities less construction and capital expenditures. 2 Prior years have been restated to conform to the current year's classifications. 3 Shareowners' equity used in book value per common share and debt ratio calculations includes extraordinary loss and changes in accounting principles. 4 Calculated using income before extraordinary loss and changes in accounting principles. These impacts are included in shareowners' equity. 5 Compound Annual Growth Rate from 1984 to 1994. NA - Not Available.
Selected Financial and Operating Data Dollars in millions except per share amounts At December 31 or for the year ended: 1986 1985 1984 CAGR(5) Financial Data Operating revenues $ 7,902 $ 7,925 $ 7,191 4.9% Operating expenses $ 5,705 $ 5,802 $ 5,254 5.3% Operating income $ 2,197 $ 2,123 $ 1,937 3.7% Interest expense $ 543 $ 542 $ 521 - Equity in net income of affiliates $ 3 - - - Income taxes $ 711 $ 655 $ 579 - Income before extraordinary loss and cumulative effect of changes in accounting principles $ 1,023 $ 996 $ 883 6.4% Extraordinary loss on early extinguishment of debt, net of tax - - - - Cumulative effect of changes in accounting principles, net of tax - - - - Net income (loss) $ 1,023 $ 996 $ 883 - Earnings per common share: Income before extraordinary loss and cumulative effect of changes in accounting principles $ 1.71 $ 1.67 $ 1.51 6.1% Extraordinary loss on early extinguishment of debt, net of tax - - - - Cumulative effect of changes in accounting principles, net of tax - - - - Net income (loss) $ 1.71 $ 1.67 $ 1.51 - Total assets $ 20,300 $ 19,291 $ 18,042 3.7% Long-term debt $ 4,912 $ 5,001 $ 4,935 - Construction and capital expenditures $ 1,912 $ 1,989 $ 1,727 3.1% Free cash flow (1) $ 659 $ 209 $ 481 12.9% Dividends declared per common share $ 1.07 $ 1.00 $ 0.93 5.4% Book value per common share (2, 3) $ 13.04 $ 12.38 $ 11.71 - Ratio of earnings to fixed charges 3.91 3.78 3.57 - Return on weighted average shareowners' equity (2, 4) 13.34% 13.71% 13.14% - Debt ratio (2, 3) 43.43% 43.72% 43.65% - Operating Data* Network access lines in service (000) 11,067 10,886 10,641 2.5% Access minutes of use (000,000) 28,034 26,623 NA - Long-distance messages (000,000) 831 797 747 - Cellular customers (000) 41 35 9 - Number of employees 67,500 71,400 71,900 - *Operating data may be periodically revised to reflect the most current information available. 1 Free cash flow is net cash provided by operating activities less construction and capital expenditures. 2 Prior years have been restated to conform to the current year's classifications. 3 Shareowners' equity used in book value per common share and debt ratio calculations includes extraordinary loss and changes in accounting principles. 4 Calculated using income before extraordinary loss and changes in accounting principles. These impacts are included in shareowners' equity. 5 Compound Annual Growth Rate from 1984 to 1994. NA - Not Available.
Management's Discussion and Analysis of Financial Condition and Results of Operations SBC's subsidiaries principally provide landline and wireless telecommunications services and equipment, directory advertising, publishing and cable TV services. Dollars in millions except per share amounts Southwestern Bell Corporation (SBC) is a holding company whose subsidiaries operate predominantly in the communications service industry. SBC's subsidiaries principally provide landline and wireless telecommunications services and equipment, directory advertising, publishing and cable television services. SBC's largest subsidiary is Southwestern Bell Telephone Company (Telephone Company), which provides telecommunications services over approximately 13.6 million access lines in (listed by number of access lines) Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area). The Telephone Company is a public utility subject to regulation by each of the state jurisdictions in which it operates and by the Federal Communications Commission (FCC). In 1994, the Telephone Company provided 72% of SBC's operating revenues. In December 1994, SBC discontinued its printing operations, closing plants in Texas and Oklahoma. In December 1993, SBC sold Metromedia Paging Services, Inc. (Paging), which provided paging services. This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes. Results of Operations Summary Financial results, including changes from the prior year, are summarized as follows: Percent change 1994 1993 1994 1993 1992 vs. vs. 1993 1992 Operating revenues $ 11,618.5 $10,690.3 $ 10,015.4 8.7% 6.7% Operating expenses $ 8,828.2 $ 8,310.7 $ 7,818.0 6.2% 6.3% Income before extraordinary loss $ 1,648.7 $ 1,435.2 $ 1,301.7 14.9% 10.3% and accounting changes Extraordinary loss - $ (153.2) - - - Accounting changes - $ (2,127.2) - - - Net income (loss) $ 1,648.7 $ (845.2) $ 1,301.7 - - SBC reported income before extraordinary loss and cumulative effect of changes in accounting principles of $1,648.7, $1,435.2 and $1,301.7 in 1994, 1993 and 1992, respectively. The corresponding earnings per common share for those years were $2.74, $2.39 and $2.17, respectively. In 1993, an extraordinary loss associated with early extinguishment of debt was $153.2, or $.25 per share. The adoption of financial accounting standards relating to postretirement benefits, postemployment benefits and income taxes resulted in one-time charges totaling $2,127.2, or $3.55 per share, in the first quarter of 1993. As a result, net loss for 1993 was $845.2, or $1.41 per share. Subsidiaries other than the Telephone Company provided 35%, 29% and 26% of SBC's income before extraordinary loss and cumulative effect of changes in accounting principles in 1994, 1993 and 1992, respectively. The primary factors contributing to the increase in income before extraordinary loss and cumulative effect of changes in accounting principles in 1994 were the growth in demand for services and products at Southwestern Bell Mobile Systems, Inc. (Mobile Systems) and the Telephone Company. These factors were partially offset by rate reductions at the Telephone Company and an increase in license fees paid by the Telephone Company for switching system software. Results for 1994 also reflect a $34 after-tax charge relating to the devaluation of the Mexican peso on the foreign currency denominated debt of SBC's equity affiliate, Telefonos de Mexico, S.A. de C.V. (Telmex). The primary factors contributing to the increase in income before extraordinary loss and cumulative effect of changes in accounting principles in 1993 were the growth in demand for services and products at Mobile Systems and the Telephone Company, the decrease in license fees paid by the Telephone Company for switching system software, and the increase in income generated from SBC's equity investments, primarily Telmex. These factors were partially offset by increased postretirement benefit and depreciation expenses and accruals for potential rate reductions, mainly at the Telephone Company. Results for 1993 also reflect one-time charges for Telephone Company restructuring and write-off of analog cellular equipment, partially offset by a gain on the sale of Paging. Items affecting the comparison of the operating results between 1994 and 1993, and between 1993 and 1992, are discussed in the following sections. Operating Revenues Total operating revenues increased $928.2, or 8.7%, in 1994 and $674.9, or 6.7%, in 1993. Components of total operating revenues, including changes from the prior year, are as follows: Percent change 1994 1993 1994 1993 1992 vs. vs. 1993 1992 Local service Landline $ 4,039.1 $ 3,904.9 $ 3,727.5 3.4% 4.8% Wireless 1,748.7 1,282.5 940.9 36.4 36.3 Network access Interstate 1,912.5 1,804.7 1,710.3 6.0 5.5 Intrastate 944.5 880.7 837.5 7.2 5.2 Long-distance 917.1 977.3 1,011.7 (6.2) (3.4) service Directory 946.8 869.0 847.9 9.0 2.5 advertising Other 1,109.8 971.2 939.6 14.3 3.4 $ 11,618.5 $ 10,690.3 $ 10,015.4 8.7% 6.7% Local Service Landline revenues increased in 1994 and 1993 due to increases in demand, including growth in the number of access lines of 3.6% and 3.3%, respectively. Nearly two-thirds of the access line growth occurred in Texas. To a lesser extent, landline revenues also increased during 1993 as a result of extended area service plans, which expanded the area defined as local service. Previously ordered rate reductions, primarily in Texas and Missouri, reduced 1994 revenues by approximately $80. Wireless revenues increased in 1994 and 1993 due primarily to the growth in the number of cellular customers of 45.4% and 45.0%, respectively. These increases were partially offset by declines in average revenue per customer in both periods. Market penetration at the end of 1994, 1993 and 1992 was 7.4, 5.7 and 4.0 customers per 100 residents, respectively, in Mobile Systems' service areas. Excluding acquisitions completed during 1994, the number of cellular customers increased by 36.2% and market penetration at the end of 1994 was 7.8%. Network Access Interstate network access revenues increased in 1994 and 1993 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 increases in both years. Revenues in 1994 reflect a retroactive billing adjustment that decreased interstate access revenues slightly while increasing intrastate access revenues. In 1993, these increases were partially offset by decreases in interstate rates recognized by the Telephone Company. Intrastate network access revenues increased in 1994 and 1993, due primarily to increases in demand. Also affecting intrastate revenues in 1994 was the partial replacement of the Texas pool settlement process with a system of primary toll carrier access charges. Under this system, charges received by the Telephone Company from other intrastate carriers are recorded as intrastate access revenues, while those paid by the Telephone Company are recorded as cost of services and products. These amounts were each approximately $40 and did not materially affect operating income in 1994. Previously, only the net settlement pool payment or receipt was recognized as an adjustment to revenue. The retroactive billing adjustment noted in the preceding paragraph also slightly increased intrastate access revenues. Previously ordered rate reductions, primarily in Texas, reduced revenues by approximately $120 and $25, in 1994 and 1993, respectively. Long-Distance Service message volumes in 1994 are relatively unchanged from 1993, as the implementation of optional calling plans encouraged higher volumes which offset competition-related decreases in messages. These optional calling plans also lower the average revenue per message and, combined with other demand-related decreases and rate decreases (primarily in Missouri), caused a decrease in long-distance service revenue. The 1993 decrease was due mainly to accruals for potential rate reductions in Oklahoma and the impact of extended area service plans, partially offset by increases in demand for long-distance services. Although extended area service plans have reduced long- distance service revenues, this effect is partially offset by related increases in local service revenues, as noted in the discussion of landline local service revenues. Directory Advertising increased in 1994 and 1993, reflecting growth in yellow pages revenues, including product enhancements and increased use of color. Increases in 1993 were offset by the absence of revenues associated with certain directory operations sold in June 1992. Other revenues increased in 1994 due primarily to increases in equipment sales, mainly at Mobile Systems, and increases in demand for the Telephone Company's nonregulated services and products, including Caller ID equipment, computer network services and videoconferencing services. Revenues in 1994 also increased due to the addition of cable television revenues resulting from the January 1994 acquisition of two systems from Hauser Communications, Inc. (Hauser). These increases were partially offset by the absence of revenues associated with the sale of Paging in the fourth quarter of 1993. Other revenues increased in 1993 due to increases in equipment sales, primarily at Mobile Systems, and increases in demand for the Telephone Company's nonregulated services and products, partially offset by the absence of revenues associated with operations sold during 1993, including residential equipment sales, commercial printing and paging services. Operating Expenses Total operating expenses increased $517.5, or 6.2%, in 1994 and $492.7, or 6.3%, in 1993. Components of total operating expenses, including changes from the prior year, are as follows: Percent change 1994 1993 1994 1993 1992 vs. vs. 1993 1992 Cost of services and $ 3,746.9 $ 3,387.6 $ 3,423.4 10.6% (1.0)% products Selling, general and 3,043.5 2,916.1 2,552.4 4.4 14.2 administrative Depreciation and 2,037.8 2,007.0 1,842.2 1.5 8.9 amortization $ 8,828.2 $ 8,310.7 $ 7,818.0 6.2% 6.3% Cost of Services and Products increased in 1994 due to increased demand for services and products at Mobile Systems and the Telephone Company, increases of approximately $100 in switching system software licensing fees at the Telephone Company, including fees related to enhanced services, and Texas primary toll carrier access charges noted in the discussion of intrastate network access revenues. These increases were partially offset by the absence of expenses associated with paging services and residential equipment sales operations sold in 1993. The decrease in 1993 was due primarily to a decrease of more than $160 in license fees at the Telephone Company for switching system software and the absence of expenses associated with operations that were sold, including residential equipment sales and commercial printing (sold in 1993) and directory advertising operations (sold in 1992). These decreases were partially offset by costs related to increased demand for services and products at Mobile Systems and the Telephone Company, and by annual compensation increases. Selling, General and Administrative expenses increased in 1994 due primarily to growth in cellular operations and higher pension benefit expenses, partially offset by savings associated with 1993 force reductions. Additionally, as discussed in Other Business Matters, expenses in 1993 included a one-time charge for the restructuring of operations at the Telephone Company. In addition to the restructuring charge noted above, expenses in 1993 increased due primarily to increased demand for cellular services and products and the increase of approximately $110 in postretirement benefits expense required by the adoption of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (Statement No. 106), as discussed in Note 7 to the financial statements. The increased expenses also reflect increases in property and other taxes and annual compensation increases. Expenses in 1992 included one-time charges for an offer of pension enhancements and related benefits to designated nonmanagement employees and for estimated expenses associated with relocating SBC's headquarters. Depreciation and Amortization increased in 1994 due mainly to growth in cellular and cable television investment levels and changes in plant levels and composition at the Telephone Company. These increases were partially offset by the completion of accelerated regulatory amortization of certain analog equipment at the Telephone Company. The increase in 1993 was mainly due to changes in plant level and composition, particularly at the Telephone Company and Mobile Systems. Depreciation expense also increased in 1993 due to a reduction in cellular analog equipment lives. These increases were partially offset by a decrease in reserve deficiency amortization at the Telephone Company. Interest Expense decreased $16.0, or 3.2%, in 1994. The decrease was due to lower interest rates on debt refinanced by the Telephone Company and the repayment of debt during 1993, partially offset by interest accrued on potential rate reductions. Interest expense decreased $33.8, or 6.4%, in 1993 due to lower interest rates on short- term obligations and interest savings on long-term debt refinanced by the Telephone Company in 1993. Equity in Net Income of Affiliates decreased $26.6, or 10.7%, in 1994 due mainly to a fourth quarter charge of approximately $52 to reflect SBC's share of Telmex's exchange loss on its foreign currency denominated debt resulting from the sharp decline in the value of the Mexican peso in December 1994. Excluding this charge, the increase in 1994, as well as the 1993 increase of $41.7, or 20.0%, was due primarily to higher earnings at Telmex resulting from overall growth, including increases in access lines and rate increases. In both years, these factors were offset partially by increases in wages and benefit expenses, and other operating expenses related to the rehabilitation and modernization of the telephone network. SBC's investment in Telmex is recorded under U.S. generally accepted accounting principles, which exclude inflation adjustments and include adjustments for the purchase method of accounting. See Note 3 to the financial statements for additional information. SBC's earnings from Telmex are sensitive to changes in the value of the peso. As a result of the significant devaluation of the peso in December 1994 and January 1995, it is anticipated there will be a decline in SBC's expected earnings from Telmex in 1995, absent further changes in the value of the peso and results of Telmex's operations. The magnitude of the effect is partially mitigated by the fact that a portion of Telmex's revenues are denominated in U.S. dollars and are unaffected by the decline. Other Expense - Net increased $26.5 in 1994 and $67.2 in 1993. Expenses for 1994 reflect increases in contributions to the SBC Foundation and in legislative advocacy expenses. Expenses in 1993 include a nonrecurring charge for the write-off of analog cellular equipment and an increase in legislative advocacy expenses, partially offset by the gain on the sale of paging operations. Other expense - net in 1992 includes interest income associated with the settlement of federal income tax audit issues. Federal Income Tax expense increased $133.3, or 24.2%, in 1994 and $62.5, or 12.8%, in 1993, primarily due to higher income before income taxes. Federal income taxes in 1993 as compared to 1992 were also affected by the increase in federal income tax rates from 34% to 35% in 1993. Extraordinary Item The Telephone Company recorded extraordinary charges of $153.2 in 1993 as a result of refinancing $2,100 of long- term debt. See Note 4 to the financial statements for additional information. Operating Environment and Trends of the Business Regulatory Environment The Telephone Company's intrastate telecommunications operations in Texas, Missouri and Kansas are presently operating under incentive regulation plans, while operations in Oklahoma and Arkansas are regulated under traditional rate-of-return methodology. The Telephone Company's interstate telecommunications operations in the five states are regulated by the FCC, using a price cap system. The FCC is in the process of reviewing the current price cap plan, in order to evaluate issues related to price cap methodology, the goals of price cap regulation and transition to a fully competitive market. It is expected that the FCC will complete their review during the first half of 1995. Regulatory jurisdictions may require that adjustments be made to reported earnings in order to compute earnings subject to sharing or regulatory returns, as applicable, according to its regulatory plan. As a result, differences may exist between the returns reported to these regulatory bodies and those computed from Telephone Company financial information included in the consolidated financial statements. Following is a summary of significant regulatory proceedings. Texas In 1994, the Telephone Company completed the final year of its four-year incentive regulation agreement. 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. Rate reductions and customer benefits for 1992 were $34. The agreement also provided an earnings-sharing mechanism designed to encourage efficiency and innovation by the Telephone Company. Revenue sharing amounts for 1992 were not significant, and there will be no sharing of 1993 revenues. Sharing amounts for 1994 have not been approved by the Texas Public Utility Commission (TPUC), but are estimated to be approximately $30. The Telephone Company has offered to extend the agreement until September 1, 1995. This extension was offered because of the possibility that new legislation concerning utility regulation may be written during the 1995 session of the Texas legislature. Such legislation, if enacted, would become effective in September 1995. Although no formal reply regarding the extension has been received from the TPUC, no objections have been raised by the TPUC and the Telephone Company is continuing to operate under the provisions of the original agreement. Missouri In response to a Missouri Public Service Commission (MPSC) staff complaint, the MPSC issued an order in December 1993 requiring rate reductions of $84.6 annually, beginning January 1994. The Telephone Company appealed the order and, in August 1994, reached a settlement agreement with the MPSC and Office of Public Counsel (OPC). Under the terms of the settlement agreement, the Telephone Company implemented annual rate reductions of $69.6 effective October 1, 1994, representing the original $84.6 reduction ordered by the MPSC, offset by $15 for recovery of a portion of the costs associated with postretirement benefit accruals, allowed by legislation enacted in 1994. In addition, customers were given one-time credits totaling $64 for rate reductions which were accrued under the original order and paid to the court beginning in 1994. The Telephone Company has also committed to invest an average of $275 annually in capital expenditures during the term of the agreement. The agreement extends through December 31, 1998. During this period, the agreement provides that the Telephone Company will not file a general rate case or raise local service rates and there will be no sharing of earnings. In addition, the MPSC and the OPC have agreed not to file complaints about the level of Telephone Company earnings during the term of the agreement. The agreement does not preclude the Telephone Company from increasing its revenues through the introduction of new or additional services or features during this period. Two interexchange carriers and the Missouri Cable TV Association have challenged the legality of the agreement in a case currently pending in the Cole County Circuit Court. Oklahoma In January 1989, the Oklahoma Corporation Commission (OCC) ordered an investigation into the reasonableness of the Telephone Company's intrastate rates. In August 1992, a final order was issued requiring the Telephone Company to refund revenues in excess of an 11.41% return on equity, effective April 1991 through the date of the final order. The ordered refund obligation is $148.4. The OCC order also would reduce annual revenues by $100.6 effective September 1992 (of which $44.6 relates to plans already implemented), partially offset by a positive annual revenue adjustment of $7.8 to compensate the Telephone Company for its investment of $84 for network modernization over five years following the date the order becomes effective. The order would also lower the allowed return on equity from 14.25% to 12.20%. In September 1992, the Telephone Company appealed to the Oklahoma Supreme Court (Court), which suspended the effectiveness of the entire order pending final disposition. This appeal is still pending. The Telephone Company is contesting all aspects of the OCC's actions. Management believes that the OCC-ordered refund of revenues collected before the date of the OCC's August 1992 order is illegal under Oklahoma law and will be overturned by the Court. The Court may require the Telephone Company to implement some portion of the annual rate reductions indicated in the OCC order. Management is unable to determine the outcome of the remaining portions of the OCC order. Future effects arising from an unfavorable ruling would not be expected to have a material impact on SBC's financial results. Competition Competition is growing in the telecommunications industry. Regulatory and court decisions have expanded the number of alternative service providers offering telecommunications services. Technological advances have expanded the types and uses of services and products available. Accordingly, SBC faces increasing competition in significant portions of its business. Domestic The Telephone Company currently faces competition principally from competitive access providers (CAPs), private networks, shared tenant services, providers of telecommunications equipment, interexchange carriers, resellers and cellular providers. CAPs typically build 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 to mitigate the effect of system bypass. The FCC has adopted rules requiring large local exchange carriers, 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 local exchange carrier central office. Switched access refers to the link between local exchange carriers' switching facilities and long- distance carriers' networks; switched access transport is one component of this process.) A July 1994 FCC order requires that local exchange carriers provide equipment and establish a set of technical and pricing rules intended to position alternate providers as if their equipment were located in the central office (referred to as virtual collocation). Alternatively, the local exchange carrier may, at its discretion, allow alternate providers to physically collocate their equipment within its central office. This order followed a June 1994 judicial remand which vacated the FCC's previous order requiring physical collocation. Various aspects of the FCC rules are being contested by a number of local exchange carriers, including the Telephone Company. Collocation for access services is also being addressed at the state regulatory level. In general, collocation requirements in Texas and Oklahoma follow terms similar to those of interstate requirements. Proceedings in Missouri and Arkansas have been delayed awaiting the outcome of pending FCC collocation issues. The Kansas Corporation Commission presently does not authorize intrastate collocation. Competition exists in all of 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. Pending regulatory and legislative proceedings could allow increased competition for local exchange services in the future. In Texas, three companies have filed applications with the TPUC seeking authority to provide local exchange services in selected metropolitan areas within the Telephone Company's service territory. Hearings on these applications are scheduled to begin in mid 1995. In Missouri, a commission appointed by the Governor recommended in January 1995 that legislation be adopted to open the Telephone Company's local exchange market to competition. The report also recommended an end to earnings regulation for the Telephone Company, but provided only limited pricing flexibility for its services. It is not known whether such legislation will be passed in the 1995 legislative session. In Oklahoma and Kansas, there are generic competition dockets pending which address competitive issues related to the provision and regulation of intrastate telecommunications services. Wireless telecommunications services, such as cellular, increasingly compete with landline services. Furthermore, the FCC adopted an order in 1993 allocating radio spectrum and outlining development of licenses for new personal communications services (PCS). PCS utilizes wireless telecommunications technology using radio spectrum different from cellular. Like cellular, it is designed to permit access to a variety of communications services regardless of subscriber location. Under an auction process, up to seven PCS licenses could be awarded in each of 51 geographic areas. Licenses may be combined by spectrum amounts and geographically, including creation of a nationwide service. Though a potential source of competition for landline services, PCS also represents a competitive opportunity for SBC, which is allowed to participate fully in bidding for licenses in areas outside its cellular service areas, and may bid on a smaller license in areas where it has a cellular presence. SBC is participating in the auctions, which began in December 1994, and is pursuing licenses in a number of markets that would complement its existing cellular service territories. 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 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 over their transport mediums 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. Competitive opportunities may arise as a result of pending and anticipated legislative and legal proceedings. Federal policymakers have indicated strong interest in telecommunications reform - namely, lowering regulatory and legislative barriers to competition. Legislation was introduced in the 1994 United States Congress which, had it been adopted, would have allowed SBC to enter previously restricted lines of business, including interLATA telecommunications services, electronic publishing and telecommunications equipment manufacturing, and would have allowed local exchange carriers to compete in the cable television business in their own areas. Legislation achieving these goals will be advocated by SBC during the 1995 Congressional session; however, no assurance can be given as to whether or in what form such legislation might be enacted. SBC and two other Regional Holding Companies (RHCs) are asking the United States District Court for the District of Columbia, in a joint petition filed in July 1994, to vacate the consent decree issued at the time of AT&T Corp.'s (AT&T) divestiture of the RHCs. Among other items, the consent decree prevents the RHCs from providing interLATA telecommunications service and manufacturing telecommunications equipment. This matter is pending and the outcome cannot be predicted. Also in 1994, SBC filed a lawsuit in the United States District Court in Dallas, seeking to overturn provisions of the Cable Communications Policy Act of 1984, in order to provide cable television service in the Telephone Company's five-state area. While there can be no assurance of a favorable ruling to SBC, three Circuit Courts of Appeals have held this statute to be unconstitutional in similar factual circumstances. SBC is aggressively representing its interests regarding competition before federal and state regulatory bodies and courts, and before Congress and state legislatures, and will continue to evaluate the increasingly competitive nature of its business and the appropriate regulatory, legislative and industry solutions needed to respond effectively to competition. International Telmex was granted a concession in 1990 to continue as the sole provider of long-distance services in Mexico until August 1996. In July 1994, the Mexican Secretary of Communication and Transportation issued the first in a series of rules for the introduction of competition into the Mexican long-distance market. It specified that there would be an unlimited number of long-distance concessions and that Telmex must provide 60 interconnection points by January 1, 1997, and over 200 interconnection points by the year 2000. In addition, customers will be able to presubscribe to their choice of long- distance carrier by January 1, 1997. Several large competitors have announced their intention to compete with Telmex, including AT&T and MCI Communications Corporation. Regulatory Accounting SBC currently accounts for the economic effects of regulation in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (Statement No. 71). Statement No. 71 requires deferral of certain costs and obligations based on regulatory actions (regulatory assets and liabilities). In addition, under Statement No. 71, telephone plant is depreciated using rates set by regulators in a joint federal and state triennial review process. These rates are usually lower than those used by unregulated companies. SBC will present proposed depreciation rates for 1995 through 1997 to federal and state regulators in triennial review meetings scheduled for mid 1995. Continued application of Statement No. 71 is appropriate only if it is reasonable to assume that rates which are adequate to recover costs can be charged to and collected from customers. This assumption requires, among other things, consideration of anticipated changes in levels of demand or competition during the recovery period for any capitalized costs. It is management's opinion that application of Statement No. 71 to SBC remains appropriate at this time. However, due to the rapid pace of change in the telecommunications industry, SBC must continually assess its position with respect to Statement No. 71. If, as a result of actual and anticipated increases in competition, technological development and other changes in the telecommunications industry including the manner of determining rates, SBC determines that it no longer qualifies for the provisions of Statement No. 71, SBC would be required to eliminate its regulatory assets and liabilities, and to adjust the carrying amount of its telephone plant to the extent that it determines that such amount is not recoverable. The net effect would be reflected in the financial statements as a non-cash, extraordinary charge to income. Because of the uncertainties regarding the timing, extent and potential combination of circumstances which would cause SBC to discontinue application of Statement No. 71, management cannot estimate a specific amount of the charge at this time, but under most combinations of circumstances would anticipate the after-tax amount of the charge to be between $2.0 billion and $3.0 billion. Other Business Matters Name Change In order to better reflect SBC's position as a diversified global communications company, SBC's Board of Directors approved in September 1994 a change in the corporate name to SBC Communications Inc., subject to shareowner approval at the 1995 Annual Meeting of Shareowners scheduled for April 1995. Acquisitions In January 1994, SBC purchased two cable television systems from Hauser located in Montgomery County, Maryland, and Arlington County, Virginia, for $650. In December 1994, SBC acquired the domestic cellular business of Associated Communications Corporation (Associated) for $705, including cellular systems in Buffalo, Rochester, Albany and Glens Falls, New York. In addition, during the second quarter of 1994, SBC purchased smaller cellular systems in Syracuse, Utica and Ithaca, New York, which are adjacent to the Associated properties. In October 1994, SBC formed a strategic alliance with Compagnie Generale des Eaux (CGE), a French diversified public company. In December 1994, SBC invested $615 through this alliance to acquire an indirect 10% ownership of Societe Francaise du Radiotelephone S.A. (SFR), a French national cellular company, and minority ownership interests in other communications businesses controlled by CGE. This investment is accounted for as an equity investment. As part of this alliance, CGE is expected to invest $247 to attain a 10% interest in SBC's Washington-Baltimore wireless operations. This investment is expected to occur during the first half of 1995. In April 1994, SBC terminated plans to form a $4.9 billion cable television partnership with Cox Cable Communications (Cox) in the United States. In February 1995, SBC purchased 40% of VTR S.A. (VTR), a privately owned telecommunications holding company in Chile, for $317. Through its subsidiaries, VTR provides local, long-distance, wireless and cable television services in Chile. VTR is 51% owned by Grupo Luksic, a large Chilean conglomerate. Management does not expect these acquisitions to have a material effect on SBC's financial position or results of operations in 1995. Dispositions In October 1994, SBC sold an additional 25% of its United Kingdom cable television operations to Cox. SBC and Cox each own 50% and share management of the cable operations. Subsequent to the sale, SBC's remaining investment is accounted for under the equity method of accounting. During 1993, SBC sold Paging, sold portions of its commercial printing operations, and entered into an agreement which exclusively licensed sales under its residential equipment trademark. None of these transactions had a material effect on SBC's financial results in 1993. Operational Restructuring During the third quarter of 1993, the Telephone Company announced a restructuring of its operations. The restructuring realigns the Telephone Company into two operating divisions, Customer Services, comprised of nine geographic market areas, and Network Services, which focuses on technology planning and deployment. As part of the restructuring, approximately 800 management positions were eliminated during 1993. Costs for severance, relocation and benefits associated with the positions eliminated were accrued during 1993, reducing net income by approximately $35. Pending Litigation The Telephone Company is presently engaged in litigation with 57 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. In November 1992, City of Port Arthur, et al., v. Southwestern Bell Telephone Company, et al., in the 136th Judicial District Court of Jefferson County, Texas, was certified as a class action. Trial is set for 1995. In addition, three municipalities participating in the class action had filed separate lawsuits, which have been suspended pending the outcome of the class action. 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 vary, they all allege that the Telephone Company should have included revenues received from other services in calculating the compensation described in the ordinances. The Telephone Company believes it has several meritorious defenses to the claims and intends to vigorously pursue these defenses. The Telephone Company further believes that it will either be successful on the merits of the cases or that any unfavorable result will not have a material impact on SBC's results of operations. Liquidity and Capital Resources Capital Expenditures and Other Commitments To provide high-quality communications services to its customers, SBC, particularly the Telephone Company and Mobile Systems, must make significant investments in property, plant and equipment. The amount of capital investment is influenced by regulatory commitments and demand. SBC's capital expenditures totaled $2,350.2, $2,221.1 and $2,144.3 for 1994, 1993 and 1992, respectively. The 1994 increase in capital expenditures was due primarily to growth at Mobile Systems, while expenditures at the Telephone Company were flat compared to 1993. The 1993 increase in capital expenditures was primarily due to increases in Telephone Company expenditures on broadband infrastructure and customer-contracted requirements, continued build-out of cable television and telephone network facilities in the United Kingdom, and growth and digital conversion at Mobile Systems. In 1994, the Telephone Company committed to make network upgrades estimated to cost approximately $570 in Missouri, Arkansas and Kansas over various periods ranging from two to four years. At December 31, 1994, the Telephone Company had invested $91 under these commitments. During 1994, the Telephone Company continued to make network upgrades under previous commitments in Texas, Missouri and Kansas. At December 31, 1994, amounts remaining under these previous commitments were not significant. In 1995, management expects capital spending in total and at the Telephone Company to be relatively unchanged from 1994 levels, between $2,200 and $2,400. Capital expenditures in 1995 will relate primarily to the continued evolution of the Telephone Company's network, including amounts agreed to under improved regulation plans, and continued build-out of Mobile Systems' markets. SBC expects to fund ongoing capital expenditures with cash provided by operations. With the change in accounting for SBC's United Kingdom cable operations to the equity method of accounting, funding provided by SBC in 1995 for the continued expansion of the cable television and telephone network in the United Kingdom will not be classified as capital expenditures, but will appear in the Consolidated Statements of Cash Flows as investments in existing equity affiliates. In addition to payments shown in the Consolidated Statements of Cash Flows, 1994 acquisitions were also financed through the issuance of approximately $660 in new and treasury shares and the issuance of approximately $360 of long-term debt. Dividends Declared Dividends declared by SBC totaled $953.6 ($1.58 per share) in 1994, $905.3 ($1.51 per share) in 1993 and $876.2 ($1.46 per share) in 1992. Management's dividend policy considers both the expectations and requirements of shareowners, internal requirements of SBC, and long- term growth opportunities. Cash, Lines of Credit and Cash Flows SBC had $364.6 of cash and cash equivalents available at December 31, 1994. Commercial paper borrowings as of December 31, 1994, totaled $1,348.5. SBC has entered into agreements with several banks for lines of credit totaling $1,020.0, all of which may be used to support commercial paper borrowings. SBC had no borrowings outstanding under these lines of credit as of December 31, 1994. During 1994, as in 1993 and 1992, SBC's primary source of funds continued to be cash generated from operations, as shown in the Consolidated Statements of Cash Flows. In 1994 and 1993, cash provided by operating activities was reduced by the contribution of $133.6 and $135.5, respectively, to the collectively bargained Voluntary Employee Beneficiary Association trusts. Cash provided by operating activities in 1992 also included refunds associated with the settlement of federal income tax audit issues. Net cash provided by operating activities exceeded SBC's construction and capital expenditures during 1994, as in 1993 and 1992; this excess is referred to as free cash flow, a supplemental measure of liquidity. SBC generated free cash flow of $1,616.4, $1,219.7 and $1,470.4 in 1994, 1993 and 1992, respectively. During 1993, long-term debt of $2,207 was issued, principally to refinance Telephone Company long-term debt with an aggregate principal amount of $2,100. Since June 1991, the Telephone Company has refinanced $3,182 in long-term debt. Total Capital SBC's total capital consists of debt (long-term debt and debt maturing within one year) and shareowners' equity. Total capital increased $1,459.0 in 1994 and decreased in 1993 by $1,858.3. The increase in 1994 was due to reinvestment of earnings and the issuance of common stock and long-term debt in acquisitions, partially offset by the foreign currency translation adjustment resulting from the devaluation of the peso and the acquisition of treasury shares. The decrease in 1993 was due to the effects of adopting new accounting standards and the extraordinary loss on early extinguishment of debt. Absent these factors, total capital increased by $422.1 in 1993 due primarily to reinvestment of earnings. Debt Ratio SBC's debt ratio (long-term debt and debt maturing within one year, as a percentage of total capital) was 47.4%, 47.5% and 43.0% at December 31, 1994, 1993 and 1992, respectively. The debt ratio is affected by the same factors that affect total capital. For 1993, the decrease in equity caused by changes in accounting standards increased the debt ratio by 6.1%. Share Repurchases See Note 9 to the financial statements. Employee Stock Ownership Plans See Note 7 to the financial statements. Report of Management The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The integrity and objectivity of the data in these financial statements, including estimates and judgments relating to matters not concluded by year end, are the responsibility of management, as is all other information included in the Annual Report, unless otherwise indicated. The financial statements of Southwestern Bell Corporation (SBC) have been audited by Ernst & Young LLP, independent auditors. Management has made available to Ernst & Young LLP all of SBC's financial records and related data, as well as the minutes of shareowners' and directors' meetings. Furthermore, management believes that all representations made to Ernst & Young LLP during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the costs of an internal accounting controls system should not exceed, in management's judgment, the benefits to be derived. Management also seeks to ensure the objectivity and integrity of its financial data by the careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communication programs aimed at ensuring that its policies, standards and managerial authorities are understood throughout the organization. Management continually monitors the system of internal accounting controls for compliance. SBC maintains an internal auditing program that independently assesses the effectiveness of the internal accounting controls and recommends improvements thereto. The Audit Committee of the Board of Directors, which consists of seven directors who are not employees, meets periodically with management, the internal auditors and the independent auditors to review the manner in which they are performing their responsibilities and to discuss auditing, internal accounting controls and financial reporting matters. Both the internal auditors and the independent auditors periodically meet alone with the Audit Committee and have access to the Audit Committee at any time. /s/ Edward E. Whitacre Jr. Edward E. Whitacre Jr. Chairman of the Board and Chief Executive Officer /s/ Donald E. Kiernan Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer Report of Independent Auditors The Board of Directors and Shareowners Southwestern Bell Corporation We have audited the accompanying consolidated balance sheets of Southwestern Bell Corporation as of December 31, 1994 and 1993, and the related consolidated statements of income, shareowners' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southwestern Bell Corporation at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes 6 and 7 to the consolidated financial statements, in 1993 the Corporation changed its method of accounting for income taxes, postretirement benefits other than pensions, and postemployment benefits. ERNST & YOUNG LLP San Antonio, Texas February 10, 1995 Consolidated Statements of Income Dollars in millions except per share amounts
1994 1993 1992 Operating Revenues Local service $ 5,787.8 $ 5,187.4 $ 4,668.4 Network access 2,857.0 2,685.4 2,547.8 Long-distance service 917.1 977.3 1,011.7 Directory advertising 946.8 869.0 847.9 Other 1,109.8 971.2 939.6 Total operating revenues 11,618.5 10,690.3 10,015.4 Operating Expenses Cost of services and products 3,746.9 3,387.6 3,423.4 Selling, general and administrative 3,043.5 2,916.1 2,552.4 Depreciation and amortization 2,037.8 2,007.0 1,842.2 Total operating expenses 8,828.2 8,310.7 7,818.0 Operating Income 2,790.3 2,379.6 2,197.4 Other Income (Expense) Interest expense (480.2) (496.2) (530.0) Equity in net income of affiliates 223.1 249.7 208.0 Other expense - net (99.4) (72.9) (5.7) Total other income (expense) (356.5) (319.4) (327.7) Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles 2,433.8 2,060.2 1,869.7 Income Taxes Federal 684.0 550.7 488.2 State and local 101.1 74.3 79.8 Total income taxes 785.1 625.0 568.0 Income Before Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles 1,648.7 1,435.2 1,301.7 Extraordinary Loss on Early Extinguishment of Debt, net of tax - (153.2) - Cumulative Effect of Changes in Accounting Principles, net of tax - (2,127.2) - Net Income (Loss) $ 1,648.7 $ (845.2) $ 1,301.7 Earnings Per Common Share: Income Before Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles $ 2.74 $ 2.39 $ 2.17 Extraordinary Loss on Early Extinguishment of Debt, net of tax - (0.25) - Cumulative Effect of Changes in Accounting Principles, net of tax - (3.55) - Net Income (Loss) $ 2.74 $ (1.41) $ 2.17 Weighted Average Number of Common Shares Outstanding (in millions) 601.4 599.8 600.2 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Balance Sheets Dollars in millions except per share amounts
December 31, 1994 1993 Assets Current Assets Cash and cash equivalents $ 364.6 $ 618.4 Accounts receivable - net of allowances for uncollectibles of $130.4 and $111.2 2,204.6 2,055.2 Material and supplies 141.8 148.9 Prepaid expenses 162.0 126.5 Deferred charges 240.1 192.0 Deferred income taxes 180.7 197.0 Other 199.5 281.8 Total current assets 3,493.3 3,619.8 Property, Plant and Equipment - Net 17,316.6 17,091.5 Intangible Assets - Net of Accumulated Amortization of $427.6 and $368.2 2,648.9 1,147.4 Investments in Equity Affiliates 1,748.0 1,420.8 Other Assets 798.5 1,028.0 Total Assets $ 26,005.3 $ 24,307.5 Liabilities and Shareowners' Equity Current Liabilities Debt maturing within one year $ 1,668.6 $ 1,385.7 Accounts payable and accrued liabilities 3,281.4 2,876.2 Dividends payable 240.8 226.6 Total current liabilities 5,190.8 4,488.5 Long-Term Debt 5,848.3 5,459.4 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 2,319.7 2,387.0 Postemployment benefit obligation 2,707.2 2,897.0 Unamortized investment tax credits 369.8 430.4 Other noncurrent liabilities 1,213.9 1,076.8 Total deferred credits and other noncurrent liabilities 6,610.6 6,791.2 Commitments (Notes 2, 10) Shareowners' Equity Preferred shares ($1 par value, 10,000,000 authorized: none issued) - - Common shares ($1 par value, 1,100,000,000 authorized: issued 620,483,301 at December 31, 1994 and 602,744,484 at December 31, 1993) 620.5 602.7 Capital in excess of par value 6,286.1 5,577.0 Retained earnings 2,593.5 1,891.4 Guaranteed obligations of employee stock ownership plans (314.7) (352.9) Foreign currency translation adjustment (366.5) (40.2) Treasury shares (11,401,628 at December 31, 1994 and 2,510,404 at December 31, 1993, at cost) (463.3) (109.6) Total shareowners' equity 8,355.6 7,568.4 Total Liabilities and Shareowners' Equity $ 26,005.3 $ 24,307.5 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows Dollars in millions, increase (decrease) in cash and cash equivalents
1994 1993 1992 Operating Activities Net income (loss) $ 1,648.7 $ (845.2) $ 1,301.7 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,037.8 2,007.0 1,842.2 Undistributed earnings from investments in equity affiliates (133.8) (177.3) (168.5) Provision for uncollectible accounts 153.3 149.9 134.9 Amortization of investment tax credits (60.6) (65.8) (72.9) Pensions and other postemployment expenses 201.6 148.8 193.1 Deferred income tax expense (124.0) (123.8) 19.4 Extraordinary loss, net of tax - 153.2 - Cumulative effect of accounting changes, net of tax - 2,127.2 - Changes in operating assets and liabilities: Accounts receivable (302.7) (275.5) (284.9) Other current assets (90.5) (5.7) (134.0) Accounts payable and accrued liabilities 429.9 303.3 353.8 Other - net 206.9 44.7 429.9 Total adjustments 2,317.9 4,286.0 2,313.0 Net Cash Provided by Operating Activities 3,966.6 3,440.8 3,614.7 Investing Activities Construction and capital expenditures (2,350.2) (2,221.1) (2,144.3) Investments in existing equity affiliates (22.3) - - Purchase of short-term investments (324.6) (419.7) (195.0) Proceeds from short-term investments 390.1 315.5 120.4 Dispositions 140.9 378.3 - Acquisitions (1,181.6) (120.9) (60.9) Net Cash Used in Investing Activities (3,347.7) (2,067.9) (2,279.8) Financing Activities Net change in short-term borrowings with original maturities of three months or less 463.1 (11.0) (332.2) Issuance of other short-term borrowings 35.5 16.0 521.4 Repayment of other short-term borrowings (40.5) (137.7) (394.8) Issuance of long-term debt 344.5 2,178.1 556.6 Repayment of long-term debt (449.6) (215.8) (245.7) Early extinguishment of debt and related call premiums - (2,190.3) (355.6) Issuance of common shares 40.2 18.0 - Purchase of treasury shares (446.8) (191.1) (161.5) Issuance of treasury shares 17.9 77.6 35.0 Dividends paid (837.0) (803.5) (780.4) Net Cash Used in Financing Activities (872.7) (1,259.7) (1,157.2) Net increase (decrease) in cash and cash equivalents (253.8) 113.2 177.7 Cash and cash equivalents beginning of year 618.4 505.2 327.5 Cash and Cash Equivalents End of Year $ 364.6 $ 618.4 $ 505.2 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Shareowners' Equity Dollars in millions except per share amounts
Guaranteed Foreign Obligations Curren- of Employee cy Tra- Common Shares Capital in Stock nslation Treasury Shares ------------- Excess of Retained Ownership Adjust- ---------------- Shares Amount Par Value Earnings Plans ment Shares Amount Total Balance, December 31, 1991 300,889,089 $300.9 $5,829.1 $3,209.3 ($438.7) $4.4 (731,199) ($41.4) $8,863.6 Net income for the year ($2.17 per share) - - - 1,301.7 - - - - Dividends to shareowners ($1.46 per share) - - - (876.2) - - - - Reduction of debt associated with Employee Stock Ownership Plans - - - - 41.4 - - - Foreign currency translation adjustment - - - - - (32.3) - - Purchase of treasury shares - - - - - - (2,514,092) (161.5) Issuance of treasury shares: Dividend Reinvestment Plan - - 5.5 - - - 1,799,731 108.6 Other issuances - - 0.2 - - - 429,768 25.4 Balance, December 31, 1992 300,889,089 300.9 5,834.8 3,634.8 (397.3) (27.9) (1,015,792) (68.9) 9,276.4 Net income (loss) for the year ($(1.41) per share) - - - (845.2) - - - - Dividends to shareowners ($1.51 per share) - - - (905.3) - - - - Two-for-one stock split 300,889,089 300.9 (300.9) - - - (731,569) - Reduction of debt associated with Employee Stock Ownership Plans - - - - 44.4 - - - Foreign currency translation adjustment - - - - - (12.3) - - Issuance of common shares 966,306 0.9 41.2 - - - - Purchase of treasury shares - - - - - - (3,660,698) (192.9) Issuance of treasury shares: Dividend Reinvestment Plan - - 4.0 - - - 1,889,232 103.2 Other issuances - - (2.1) - - - 1,008,423 49.0 Other - - - 7.1 - - - - Balance, December 31, 1993 602,744,484 602.7 5,577.0 1,891.4 (352.9) (40.2) (2,510,404) (109.6) 7,568.4 Net income for the year ($2.74 per share) - - - 1,648.7 - - - - Dividends to shareowners ($1.58 per share) - - - (953.6) - - - - Reduction of debt associated with Employee Stock Ownership Plans - - - - 38.2 - - - Foreign currency translation adjustment, net of income tax benefit of $197.3 - - - - - (326.3) - - Issuance of common shares: Dividend Reinvestment Plan 3,334,668 3.3 134.4 - - - - - Other issuances 14,404,149 14.5 570.7 - - - - - Purchase of treasury shares - - - - - - (11,301,550) (447.0) Issuance of treasury shares - - 4.0 - - - 2,410,326 93.3 Other - - - 7.0 - - - - Balance, December 31, 1994 620,483,301 $620.5 $6,286.1 $2,593.5 ($314.7) ($366.5) (11,401,628) ($463.3) $8,355.6 The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements Dollars in millions except per share amounts 1. Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of Southwestern Bell Corporation and its majority-owned subsidiaries (SBC) which operate predominantly in the communications service industry. Southwestern Bell Telephone Company (Telephone Company) is SBC's largest subsidiary. All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships, joint ventures and less than majority-owned subsidiaries are principally accounted for under the equity method. Earnings from certain foreign investments accounted for under the equity method are included for periods ended within three months of SBC's year end. Certain amounts in prior period financial statements have been reclassified to conform to the current year's presentation. Regulatory Accounting - SBC prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (Statement No. 71). The provisions of Statement No. 71 require, among other things, that regulated enterprises reflect rate actions of regulators in their financial statements when certain criteria are met. These rate actions can provide reasonable assurance of the existence of an asset, reduce or eliminate the value of an asset, or impose a liability on a regulated enterprise. SBC continually assesses its position as to the applicability of Statement No. 71 based upon the current regulatory and competitive environment. Allowance for Funds Used During Construction - Where capital invested by the Telephone Company in construction projects is not allowed in the rate base upon which revenue requirements are determined, it is the practice of regulatory authorities to allow, in lieu thereof, a capitalization of interest and equity costs during periods of construction. These capitalized costs are reflected as income during the construction period and as an addition to the cost of plant constructed, and are included in other expense - net on SBC's Consolidated Statements of Income. Income Taxes - Deferred income taxes are provided for certain 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. Deferred Charges - Certain cellular service sales commissions are deferred and amortized over 12 months. Directory advertising costs are deferred until the directory is published and advertising revenues related to these costs are recognized. 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. The Telephone Company computes depreciation using certain straight-line methods and rates as prescribed by the Federal Communications Commission (FCC) and the applicable state regulatory authorities. The Telephone Company's provision for depreciation includes the amortization of interstate and certain intrastate accumulated depreciation deficiencies (reserve deficiency amortization). Reserve deficiency amortization allows additional depreciation to be recognized currently in an attempt to reflect more accurately prior years' actual consumption of telephone plant. When a portion of the Telephone Company's depreciable property, plant and equipment is retired, the gross book value is charged to accumulated depreciation. Property, plant and equipment of SBC, other than the Telephone Company, is depreciated on a straight-line method over their estimated useful lives, generally ranging from 3 to 40 years. Intangible Assets - Intangible assets consist primarily of cellular and cable television licenses, customer lists and the excess of consideration paid over net assets acquired in business combinations. These assets are being amortized using the straight-line method, over periods generally ranging from 5 to 40 years. At December 31, 1994 and 1993, amounts included in net intangible assets for licenses were $2,007.1 and $871.9, respectively. Management periodically reviews the carrying value and lives of all intangible assets based on expected future operating results. Currency Translation Adjustments - The assets and liabilities relating to SBC's share of foreign operations are translated at current exchange rates. Revenues and expenses are translated using average rates during the year. The ensuing foreign currency translation adjustments are recorded as a separate component of Shareowners' Equity. Other transaction gains and losses resulting from exchange rate changes on transactions denominated in a currency other than the local currency are included in earnings as incurred. Earnings Per Common Share - The earnings per common share computation uses the weighted average number of common shares outstanding, including shares held by employee stock ownership plans. Common stock equivalents outstanding are not considered dilutive. 2. Property, Plant and Equipment Property, plant and equipment, which is stated at cost, is summarized as follows at December 31: 1994 1993 Telephone Company plant In service $ 26,731.6 $ 25,970.0 Under construction 231.5 261.3 26,963.1 26,231.3 Accumulated depreciation and (11,227.1) (10,532.2) amortization Total Telephone Company 15,736.0 15,699.1 Other 2,293.3 1,939.3 Accumulated depreciation and (712.7) (546.9) amortization Total Other 1,580.6 1,392.4 Property, plant and equipment--net $ 17,316.6 $ 17,091.5 For 1994, 1993 and 1992, SBC's depreciation as a percentage of average depreciable plant was 6.9%, 7.0% and 6.8%, respectively. Certain facilities and equipment used in operations are under operating or capital leases. Rental expenses under operating leases for 1994, 1993 and 1992 were $125.5, $122.9 and $135.2, respectively. At December 31, 1994, the aggregate minimum rental commitments under noncancelable operating leases for the years 1995 through 1999 were $81.9, $69.1, $53.3, $45.1 and $43.2, respectively, and $171.4 thereafter. Capital leases were not significant. 3. Equity Investments Investments in affiliates accounted for under the equity method consist principally of SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications company. A consortium consisting of SBC International, Inc. (SBC International), a wholly-owned subsidiary of SBC, together with a subsidiary of France Telecom and a group of Mexican investors led by Grupo Carso, S.A. de C.V., has voting control of Telmex through its ownership of all of Telmex's Class AA shares. The Mexican investors have voting control of the consortium. The Class AA shares owned by SBC International represent approximately 5% of Telmex's total equity capitalization. SBC International's total interest in Telmex, including ownership of Class L shares with limited voting rights, represents approximately 10% of Telmex's total equity capitalization. In October 1994, SBC International sold an additional 25% of its United Kingdom cable television operations to Cox Cable Communications (Cox). SBC International and Cox each own 50% and share management of the cable operations. Subsequent to the sale, SBC's remaining investment is accounted for using the equity method of accounting. In December 1994, SBC made an equity investment in the French cellular market (see Note 10). Other equity investments include interests in Australian and Israeli operations which provide directory, cable television and other services. The following table is a reconciliation of SBC's investments in equity affiliates. The currency translation adjustment for 1994 primarily reflects the effect on SBC's investment resulting from the decline in the value of the Mexican peso relative to the U.S. dollar of approximately 38% during the year. In December 1994, SBC also recorded an after-tax charge of $34 to reflect its portion of Telmex's valuation loss on its foreign currency denominated debt. 1994 1993 1992 Beginning of year $ 1,420.8 $ 1,249.4 $ 1,081.3 Additional investments 626.2 - - Equity in net income 223.1 249.7 208.0 Dividends received (89.3) (72.4) (39.5) Currency translation and other (432.8) (5.9) (0.4) adjustments End of year $ 1,748.0 $ 1,420.8 $ 1,249.4 The following table presents summarized financial information obtained from filings with the Securities and Exchange Commission by Telmex at December 31, or for the year ended: 1994 1993 1992 Balance Sheets Current assets $ 3,024.7 $ 2,579.8 $ 2,052.8 Noncurrent assets 12,043.4 8,746.4 8,016.7 Current liabilities 1,079.8 834.9 753.5 Noncurrent liabilities 2,939.8 2,559.1 2,157.5 Shareowners' equity 11,048.5 7,932.2 7,158.5 Income Statements Operating revenues $ 5,842.6 $ 5,267.2 $ 4,787.9 Operating income 2,485.1 2,201.3 2,078.0 Net income 1,572.2 1,927.6 1,844.3 Such public information is based on Mexican generally accepted accounting principles and is adjusted to recognize the effects of inflation, including restatement of 1993 and 1992 financial information for the 1994 inflation effect. Translation to U.S. dollars was computed using the reported December 31, 1994 exchange rate of 5.0 pesos per dollar. Telmex also reported in such filings a reconciliation to U.S. generally accepted accounting principles (GAAP) which decreased shareowners' equity of Telmex at December 31, 1994, 1993 and 1992 by approximately $1,678, $1,051 and $1,192, respectively, and increased (decreased) net income for the 12 months ended December 31, 1994, 1993 and 1992, by approximately $196, $(127) and $(109), respectively. Earnings reported by Telmex are not directly comparable to SBC's equity in net income of Telmex, which is based on U.S. GAAP, includes adjustments made pursuant to the purchase method of accounting and does not recognize the effects of inflation. 4. Debt Long-term debt, including interest rates and maturities, is summarized as follows at December 31: 1994 1993 Telephone Company debentures 4.50%-5.88% 1995-2006 $ 700.0 $ 700.0 6.12%-6.88% 2000-2024 1,050.0 1,050.0 7.00%-7.75% 1994-2025 1,200.0 1,400.0 8.25%-8.30% 1996-2017 650.0 650.0 3,600.0 3,800.0 Unamortized discount-net of premium (31.2) (34.2) Total Telephone Company debentures 3,568.8 3,765.8 Telephone Company notes 5.04%-7.35% 1994-2010 815.9 900.0 Unamortized discount (5.2) (4.8) Total Telephone Company notes 810.7 895.2 Other notes 4.28%-6.95% 1994-2000 607.8 191.5 7.00%-9.00% 1994-2004 888.0 736.1 1,495.8 927.6 Unamortized discount (24.6) - Total other notes 1,471.2 927.6 Guaranteed obligations of employee stock ownership plans # 8.41%-9.40% 1994-2000 308.4 354.3 Capitalized leases 9.3 11.7 Total long-term debt, including current 6,168.4 5,954.6 maturities Current maturities (320.1) (495.2) Total long-term debt $ 5,848.3 $ 5,459.4 # See Note 7. SBC recorded an extraordinary loss on the refinancing of long- term debentures by the Telephone Company of $153.2 in 1993, net of related income tax benefits of $92.2. At December 31, 1994, the aggregate principal amounts of long-term debt scheduled for repayment for the years 1995 through 1999 were $320.1, $423.2, $705.7, $299.5 and $442.9, respectively. As of December 31, 1994, SBC 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: 1994 1993 Commercial paper $ 1,348.5 $ 890.5 Current maturities of long-term debt 320.1 495.2 Total $ 1,668.6 $ 1,385.7 The weighted average interest rate on commercial paper debt at December 31, 1994 and 1993 was 5.9% and 3.3%, respectively. SBC has entered into agreements with several banks for lines of credit totaling $1,020.0. All of these agreements may be used to support commercial paper borrowings. The majority of these lines are on a negotiated fee basis with interest rates negotiable at time of borrowing. There were no borrowings outstanding under these lines of credit at December 31, 1994. 5. Financial Instruments SBC does not have any financial instruments held or issued for trading purposes. The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, other short-term investments and commercial paper debt approximate fair values. The carrying amounts and fair values of SBC's long-term debt, including current maturities, are summarized as follows at December 31: 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value Telephone Company debentures $3,568.8 $3,169.3 $3,765.8 $3,830.8 Telephone Company notes 810.7 730.2 895.2 915.1 Other notes 1,471.2 1,450.9 927.6 983.6 Guaranteed obligations of employee stock ownership plans 308.4 321.0 354.3 398.5 The fair value of SBC's long-term debt was based on quoted market prices, where available, or on discounted future cash flows using current interest rates. 6. Income Taxes SBC adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement No. 109) effective January 1, 1993. In adopting Statement No. 109, SBC 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. Financial statements prior to January 1, 1993, have not been restated to apply the provisions of Statement No. 109. The cumulative effect of adopting Statement No. 109 as of January 1, 1993 was to decrease net income for 1993 by $213.9 or $.36 per share, resulting primarily from the establishment of a deferred tax liability associated with certain prior acquisitions not related to the Telephone Company. The adoption of Statement No. 109 had no material effect on pre-tax income for 1993. As a result of implementing Statement No. 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 in accordance with Statement No. 71, resulting in minimal effect on net income. The net regulatory liability recognizes the differences between the recording of income taxes for financial reporting purposes and recovery of those taxes through telephone service rates. Amounts comprising the net liability will be amortized over the regulatory lives of the associated assets. Future regulatory proceedings may affect the period in which these amounts are recognized in net income. Significant components of SBC's deferred tax liabilities and assets are as follows at December 31: 1994 1993 Depreciation and amortization $ 3,739.1 $ 3,439.1 Employee benefits 38.8 131.9 Other 295.4 423.1 Gross deferred tax liabilities 4,073.3 3,994.1 Employee benefits 1,304.5 1,281.6 Unamortized investment tax credits 134.8 156.9 Other 561.0 462.7 Gross deferred tax assets 2,000.3 1,901.2 Deferred tax assets valuation allowance 66.0 70.0 Net deferred tax liabilities $ 2,139.0 $ 2,162.9 The components of income tax expense are as follows: 1994 1993 1992 Federal Current $ 866.8 $ 727.3 $ 560.4 Deferred--net (122.2) (110.8) 0.7 Amortization of investment tax (60.6) (65.8) (72.9) credits 684.0 550.7 488.2 State and local Current 102.9 87.3 61.1 Deferred--net (1.8) (13.0) 18.7 101.1 74.3 79.8 Total $ 785.1 $ 625.0 $ 568.0 The components of deferred federal income tax expense for 1992 as recorded prior to the adoption of Statement No. 109 were as follows: 1992 Depreciation and amortization $ 29.6 Employee benefits (93.7) Undistributed earnings from investments in equity 60.7 affiliates Other--net 4.1 Total $ 0.7 A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate (35% for 1994 and 1993, 34% for 1992) to income before income taxes, extraordinary loss and cumulative effect of changes in accounting principles is as follows: 1994 1993 1992 Taxes computed at federal statutory $ 851.8 $ 721.1 $ 635.7 rate Increases (decreases) in taxes resulting from: Amortization of investment tax (60.6) (65.8) (72.9) credits over the life of the plant that gave rise to the credits Excess deferred taxes due to rate (34.6) (43.2) (74.3) change Depreciation of telephone plant 18.3 22.5 21.7 construction costs previously deducted for tax purposes--net State and local income taxes--net 65.7 48.3 52.7 of federal tax benefit Other--net (55.5) (57.9) 5.1 Total $ 785.1 $ 625.0 $ 568.0 7. Employee Benefits Pensions - Substantially all employees of SBC are covered by noncontributory pension and death benefit plans. 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. Net pension cost is composed of the following: 1994 1993 1992 Service cost--benefits earned $ 157.0 $ 131.1 $ 126.5 during the period Interest cost on projected benefit 463.8 428.3 399.5 obligation Actual return on plan assets 149.3 (1,019.9) (312.0) Other--net (670.4) 498.7 (139.8) Net pension cost $ 99.7 $ 38.2 $ 74.2 The following table sets forth the pension plans' funded status and amounts recognized as other assets in SBC's Consolidated Balance Sheets at December 31: 1994 1993 Fair value of plan assets $ 6,877.2 $ 7,507.9 Less: Actuarial present value of projected 6,600.3 6,319.5 benefit obligation Plan assets in excess of projected benefit 276.9 1,188.4 obligation Unrecognized prior service cost 976.0 785.5 Unrecognized net gain (450.4) (867.4) Unamortized transition asset (768.0) (849.3) Prepaid pension cost $ 34.5 $ 257.2 Significant assumptions used in developing pension information include: 1994 1993 1992 Assumed discount rate for determining 7.5% 7.25% 7.5% projected benefit obligation Assumed long-term rate of return on plan 8.0% 8.0% 8.0% assets Assumed composite rate of compensation 4.6% 4.6% 4.6% increase The projected benefit obligation is the actuarial present value of all benefits attributed by the pension benefit formula to previously rendered employee service. It is measured based on assumptions concerning future interest rates and employee compensation levels. Should actual experience differ from the actuarial assumptions, the benefit obligation will be affected. The actuarial estimate of the accumulated benefit obligation does not include assumptions about future compensation levels. The accumulated benefit obligation as of December 31, 1994, was $5,807.7, of which $5,128.5 was vested. At December 31, 1993, these amounts were $5,815.0 and $5,197.8, respectively. In December 1994 and 1993, under the provisions of Section 420 of the Internal Revenue Code, SBC transferred $121.8 and $123.9, respectively, in pension assets to a health care benefit account for the reimbursement of retiree health care benefits paid by SBC. Supplemental Retirement Plans - SBC also provides senior and middle management employees with nonqualified, unfunded supplemental retirement and savings plans. The plans allow employees to defer and invest portions of their current compensation for later payment, and SBC matches a percentage of the compensation deferral according to thresholds specified in the plans. Expenses related to these plans were $67.7, $66.8 and $63.1 in 1994, 1993 and 1992, respectively. Liabilities of $509.9 and $483.4 related to these plans have been included in other noncurrent liabilities in SBC's Consolidated Balance Sheets at December 31, 1994 and 1993, respectively. Voluntary Retirement Program - As a result of a March 1992 agreement with the Communications Workers of America, the Telephone Company offered a limited early retirement plan to designated nonmanagement employees which included incentives affecting service pension eligibility and amounts. Approximately 1,200 nonmanagement employees participated in this offer. The plan resulted in a charge to 1992 net income of approximately $24. Postretirement Benefits - SBC provides certain medical, dental and life insurance benefits to substantially all retired employees. Effective January 1, 1993, SBC adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (Statement No. 106), which requires accrual of actuarially determined postretirement benefit costs as active employees earn these benefits. Prior to the adoption of Statement No. 106, SBC expensed retiree medical benefits when claims were incurred. In implementing Statement No. 106, SBC immediately recognized an accumulated obligation for postretirement benefits (transition obligation) in the amount of $2,861.2 and a related deferred income tax benefit of $1,013.4. The resulting charge to net income of $1,847.8, or $3.08 per share, is included in the cumulative effect of changes in accounting principles in the 1993 Consolidated Statement of Income. Most of the Telephone Company's state regulatory jurisdictions have addressed the adoption of Statement No. 106 for ratemaking purposes, recognizing all or a portion of accrued expenses, with some funding requirements. The FCC has allowed increases to the interstate price caps for all postretirement benefit expenses, including the transition obligation, subject to further proceedings. Because of the uncertainty surrounding the interstate treatment and the conditional nature of the intrastate recovery, the Telephone Company does not meet the requirements to establish a regulatory asset in accordance with Statement No. 71. Postretirement benefit cost is composed of the following: 1994 1993 Service cost--benefits earned during the $ 49.0 $ 48.1 period Interest cost on accumulated postretirement benefit obligation (APBO) 224.5 231.6 Actual return on assets (15.6) (28.2) Other--net (24.3) (3.6) Postretirement benefit cost $ 233.6 $ 247.9 Expense recognized under the claims incurred method for providing postretirement benefits was $104.9 for 1992 and would have been approximately $129.5 for 1993. In connection with 1992 collective bargaining agreements, SBC established collectively bargained Voluntary Employee Beneficiary Association (CBVEBA) trusts to fund postretirement benefits. During 1994 and 1993, SBC contributed $133.6 and $135.5, respectively, into the CBVEBA trusts to be ultimately used for the payment of postretirement benefits. SBC also funds postretirement life insurance benefits at an actuarially determined rate. Assets consist principally of stocks and U.S. government and corporate bonds. The following table sets forth the plans' funded status and the amount included in SBC's Consolidated Balance Sheets at December 31: 1994 1993 Retirees $ 1,873.4 $ 1,952.8 Fully eligible active plan participants 273.2 261.4 Other active plan participants 938.0 886.3 Total APBO 3,084.6 3,100.5 Less: Fair value of plan assets 580.8 442.5 APBO in excess of plan assets 2,503.8 2,658.0 Unrecognized net gain 263.5 134.8 Accrued postretirement benefit obligation $ 2,767.3 $ 2,792.8 The fair value of plan assets includes assets relating to life insurance benefits of $298.8 and $296.6 at December 31, 1994 and 1993, respectively. At December 31, 1994 and 1993, the prepaid life insurance benefits included in the accrued postretirement benefit obligation were $26.8 and $31.1, respectively. Significant assumptions used in developing the APBO information include: 1994 1993 Assumed discount rate 7.5% 7.25% Assumed long-term rate of return on plan assets 8.0% 8.0% Assumed composite rate of compensation increase 4.6% 4.6% The assumed medical cost trend rate in 1995 is 10.0%, 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 rate in 1995 is 6.75%, reducing to 5.0% in 2002. The discount rate used in determining the postretirement benefit cost for 1993 was 7.5%. Raising the annual medical and dental cost trend rates by one percentage point increases the APBO as of December 31, 1994 by $208.1 and the net periodic postretirement benefit cost for the year ended December 31, 1994 by approximately $17.7. Postemployment Benefits - Under its benefit plans, SBC provides employees varying levels of disability pay, workers' compensation and medical benefits under specified circumstances. Effective January 1, 1993, SBC adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (Statement No. 112). Statement No. 112 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 $65.5, or $.11 per share, after a deferred tax benefit of $36.1, is included in the cumulative effect of changes in accounting principles in the 1993 Consolidated Statement of Income. Statement No. 112 has not materially affected postemployment benefit expense. Employee Stock Ownership Plans - SBC maintains contributory savings plans which cover substantially all employees. Under the savings plans, SBC matches a stated percentage of eligible employee contributions, subject to a specified ceiling. SBC has two leveraged Employee Stock Ownership Plans (ESOPs) as part of the existing savings plans. The ESOPs were funded with notes issued by the savings plans, the proceeds of which were used to purchase shares of SBC's common stock in the open market. The notes are unconditionally guaranteed by SBC and will be repaid with SBC contributions to the savings plans, dividends paid on SBC shares and interest earned on funds held by the ESOPs. Since 1990, SBC's match of employee contributions to the savings plans has been fulfilled with shares of stock allocated from the ESOPs and with purchases of SBC's stock in the open market. Benefit cost is based on a combination of the contributions to the savings plans and the cost of shares allocated to participating employees' accounts. Both benefit cost and interest expense on the notes are reduced by dividends on SBC's shares held by the ESOPs and interest earned on the ESOPs' funds. Information related to the ESOPs and the savings plans is summarized below: 1994 1993 1992 Benefit expense - net of dividends $ 25.9 $ 29.0 $ 27.7 and interest income Interest expense - net of dividends 17.1 19.9 22.6 and interest income Net ESOP expense 43.0 48.9 50.3 Additional savings plans stock (0.5) 0.5 4.7 purchases Total expense $ 42.5 $ 49.4 $ 55.0 Company contributions for ESOPs $ 39.8 $ 50.3 $ 50.4 Dividends and interest income for $ 27.1 $ 26.3 $ 26.0 debt service SBC shares held by the ESOPs (in millions) is summarized as follows at December 31: 1994 1993 Unallocated 9.5 11.1 Committed to be allocated 0.1 0.3 Allocated to participants 8.8 7.3 Total 18.4 18.7 8. Stock Option Plans Under various plans, SBC is authorized to issue to senior and middle management employees up to 28.5 million options to purchase shares of SBC's common stock. Options become exercisable in periods of one year to three years after the date of grant and expire ten years after the date of grant. All options issued through December 31, 1994 have been issued with exercise prices equal to the market price of the stock at the date of grant. Information related to outstanding options is summarized below: Weighted Number of Average Exercise Options Price Per Option Outstanding December 31, 1991 438,634 $27.00 Granted 5,192,742 32.73 Exercised (24,782) 27.00 Cancelled (23,648) 32.36 Outstanding December 31, 1992 5,582,946 $32.31 Granted 5,062,285 40.25 Exercised (368,053) 30.72 Cancelled (482,513) 35.89 Outstanding December 31, 1993 9,794,665 $36.30 Granted 5,226,551 41.71 Exercised (386,331) 31.34 Cancelled (498,315) 38.09 Outstanding December 31, 1994 14,136,570 $38.37 Options to purchase 5,352,273 shares of SBC stock were exercisable at December 31, 1994. 9. Shareowners' Equity Common Stock Split - In 1993, the Board of Directors of SBC (Board) declared a two-for-one stock split effected in the form of a stock dividend on shares of SBC's common stock to holders of record on May 7, 1993. SBC issued 300,889,089 additional shares of common stock in connection with the stock split and retained the current par value of $1.00 per share for all outstanding shares of common stock. An amount equal to the aggregate par value of the additional shares of common stock issued was transferred from capital in excess of par value to common shares. Weighted average common share amounts for periods prior to May 25, 1993 have been restated to reflect the effects of the stock split. Share Repurchases - From time to time SBC repurchases shares of common stock to distribute, or to offset shares distributed, through its employee benefit plans and the Southwestern Bell Corporation Dividend Reinvestment Plan, or in connection with certain acquisitions. In addition, the Board has authorized the repurchase of up to 30 million shares of SBC's outstanding common stock. As of December 31, 1994, no shares had been repurchased pursuant to this authorization. Guaranteed Obligations of Employee Stock Ownership Plans - SBC's guarantee of the ESOPs notes issued by the savings plans (see Note 7) is presented as a reduction to shareowners' equity and an increase in long-term debt. The amount of debt guaranteed decreases as the notes are repaid. Shareowners' Rights Plan - In 1989, SBC adopted the Shareowners' Rights Plan (Plan). The Plan becomes operative in certain events involving the acquisition of 20% or more of SBC's common stock by any person or group in a transaction not approved by the Board, or the designation by the Board of a person or group owning more than 10% of the outstanding stock as an adverse person, as provided in the Plan. Upon the occurrence of these events, each right, unless redeemed by the Board, generally entitles the holder (other than the holder triggering the right) to purchase an amount of common stock of SBC (or, in certain circumstances, of the potential acquiror) having a value equal to two times the exercise price of $160. The rights expire in January 1999. The rights have certain antitakeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire SBC on terms not approved by the Board. The rights should not interfere with any merger or other business combination approved by the Board since the rights may be redeemed. 10. Acquisitions SBC completed several acquisitions of communications properties during 1994. In January, SBC purchased two cable television systems located in Montgomery County, Maryland, and Arlington County, Virginia, for $650. In December, SBC acquired the domestic cellular business of Associated Communications Corporation (Associated) for $705, including cellular systems in Buffalo, Rochester, Albany and Glens Falls, New York. In addition, during the second quarter of 1994, SBC purchased smaller cellular systems in Syracuse, Utica and Ithaca, New York, which are adjacent to the Associated properties. In October 1994, SBC formed a strategic alliance with Compagnie Generale des Eaux (CGE), a French diversified public company. In December 1994, SBC invested $615 through this alliance to acquire an indirect 10% ownership of Societe Francaise du Radiotelephone S.A. (SFR), a French national cellular company, and minority ownership interests in other communications businesses controlled by CGE. This investment is accounted for under the equity method of accounting. As part of this alliance, CGE is expected to invest $247 to attain a 10% interest in SBC's Washington- Baltimore wireless operations. This investment is expected to occur during the first half of 1995. In April 1994, SBC terminated plans to form a $4.9 billion cable television partnership with Cox in the United States. In addition to payments shown in the Consolidated Statements of Cash Flows, the above acquisitions were also financed through the issuance of 16.1 million new and treasury shares, valued at approximately $660, and the issuance of approximately $360 of long-term debt. All of the acquisitions were accounted for under the purchase method of accounting. The purchase prices in excess of the underlying fair value of identifiable net assets acquired will be amortized over periods not to exceed 40 years. Results of operations of the properties acquired have been included in the consolidated financial statements from their respective dates of acquisition. The above developments did not have a significant impact on consolidated results of operations for 1994 and 1993, nor would they had the acquisitions occurred on January 1 of the respective periods. 11. Additional Financial Information December 31, Balance Sheets 1994 1993 Accounts payable and accrued liabilities Accounts payable $ 1,001.7 $ 893.1 Accrued taxes 566.7 554.5 Advance billing and customer 315.2 278.6 deposits Compensated future absences 191.6 202.7 Accrued interest 129.7 130.9 Accrued payroll 119.0 117.7 Other 957.5 698.7 Total $ 3,281.4 $ 2,876.2 Statements of Income 1994 1993 1992 Interest expense Long-term debt $ 401.2 $ 448.0 $ 476.7 Notes payable 57.2 36.8 50.1 Other 21.8 11.4 3.2 Total $ 480.2 $ 496.2 $ 530.0 Allowance for funds used during $ 19.3 $ 21.5 $ 30.7 construction Statements of Cash Flows 1994 1993 1992 Cash paid during the year for: Interest $ 481.4 $ 502.0 $ 538.4 Income taxes $ 927.9 $ 592.3 $ 605.9 Approximately 10% in 1994, and 12% in 1993 and 1992, of SBC's consolidated revenues were from services provided to AT&T Corp. No other customer accounted for more than 10% of consolidated revenues. 12. Quarterly Financial Information (Unaudited)
Stock Price Total Earnings per Calendar Operating Operating Net Income Common Share ------------------------ Quarter Revenues Income (Loss) High Low Close 1994 First $ 2,646.2 $ 598.4 $ 357.7 $ 0.59 $ 42.000 $ 36.750 $ 40.375 Second 2,764.6 653.8 385.5 0.64 44.375 38.500 43.500 Third 3,000.1 770.4 480.8 0.80 44.250 40.250 42.500 Fourth 3,207.6 767.7 424.7 0.71 43.125 39.250 40.375 Annual $ 11,618.5 $ 2,790.3 $ 1,648.7 $ 2.74 1993 First $ 2,457.8 $ 520.7 $ (1,914.1)# $ (3.19)# $ 39.063 $ 34.188 $ 39.063 Second 2,539.3 574.9 294.4 # 0.49 # 40.750 37.000 38.750 Third 2,795.1 655.3 388.6 # 0.65 # 47.000 38.625 43.000 Fourth 2,898.1 628.7 385.9 0.64 45.250 39.625 41.500 Annual $ 10,690.3 $ 2,379.6 $ (845.2) $ (1.41) # Includes extraordinary losses of $89.4 or $.15 per share, $43.6 or $.07 per share and $20.2 or $.03 per share for the first, second and third quarters of 1993, respectively. The first quarter of 1993 also includes a charge of $2,127.2 or $3.55 per share for cumulative effect of changes in accounting principles.
Stock Data Trading: SBC is listed on the New York, Chicago and Pacific stock exchanges, as well as international exchanges in London, Zurich, Geneva and Basel. Ticker symbol (NYSE): SBC The above information appears on the back cover of the printed Annual Report. APPENDIX All page numbers referenced in this Exhibit and the Form 10-K relate to the printed Annual Report. The order of the sections is as they appear in the printed Annual Report. The colored graphs and related footnotes that appear in the printed document are approximately 1-1/2 inches by 3-1/2 inches. Information on the number of shareowners is contained in the "1994 Financial Highlights-Number of Shareowners" line on page 1. The Stock Data section appears on the back cover. The section titled "Selected Financial and Operating Data" (shown on pages 22 and 23), details 11 year financial information for the Corporation. In the printed document, the information is spread horizontally across two pages with just one set of headings on page 22. Due to constraints in the EDGAR system for page width, the EDGAR version contains three sets of headings. The section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appears on pages 24-32. The text of this section appears in two columns. A bar graph titled "Income Before Extraordinary Loss and Accounting Changes (dollars in billions)" appears in the right column on page 24 and to the right side of the subsection titled "Results of Operations - Summary". The graph shows Income Before Extraordinary Loss and Accounting Changes for the past five years. The actual figures are listed on the graph. Listed below are the plot points: 1990 1.10 1991 1.16 1992 1.30 1993 1.44 1994 1.65 The following footnote appears at the base of the graph: SBC had double-digit percentage earnings growth for the third consecutive year in 1994. A stacked bar graph titled "Local Service (dollars in billions)" appears in the left column on page 25 and to the right of the subsection titled "Local Service". The graph shows local service revenues by categories for the past five years. Listed below are the plot points: Year Total Wireless Landline 1990 3.9 0.5 3.4 1991 4.2 0.7 3.5 1992 4.7 1.0 3.7 1993 5.2 1.3 3.9 1994 5.8 1.8 4.0 The following footnote appears at the base of the graph: Wireless local service revenues have more than tripled in the last five years. A stacked bar graph titled "Distribution of Revenues (dollars in billions)" appears in the right column on page 26 and to the right side of the subsection titled "Other". The graph shows various categories of revenue distribution for the past five years. The actual figures are listed on the graph. Listed below are the plot points by category: Year Total Local Network Long- Directory Other service access distance advertising 1990 9.1 3.9 2.6 1.1 0.8 0.7 1991 9.3 4.2 2.4 1.0 0.9 0.8 1992 10.0 4.7 2.5 1.0 0.9 0.9 1993 10.7 5.2 2.7 1.0 0.9 0.9 1994 11.6 5.8 2.9 0.9 0.9 1.1 The following footnote appears at the base of the graph: Revenues grew at a compound annual growth rate of 6.3% from 1990 to 1994. A stacked bar graph titled "Distribution of Expenses (dollars in billions)" appears in the right column on page 26 and to the right side of the subsection titled "Selling, General and Administrataive". The graph shows the categories of expenses for the past five years. The actual figures are listed on the graph. Listed below are the plot points: Year Total Cost of Selling, Depreciation services general and and and administrative amortization products 1990 7.1 3.2 2.2 1.7 1991 7.2 3.1 2.3 1.8 1992 7.8 3.4 2.6 1.8 1993 8.3 3.4 2.9 2.0 1994 8.8 3.8 3.0 2.0 The following footnote appears at the base of the graph: Operating expenses increased at a compound annual rate of 5.7% from 1990 to 1994. In the section titled "Operating Environment and Trends of the Business", on pages 27 and 28 icons (approximately one inch) of the states of Texas, Missouri and Oklahoma appear to the right side of the subsections of the respective state discussion. A stacked bar graph titled "Access Lines (in millions)" appears in the left column on page 29 and to the right side of the subsection titled "Domestic". The graph shows access lines in total and by state for the past five years. The actual figures are listed on the graph. Listed below are the plot points: Year Total Texas Missouri Oklahoma Kansas Arkansas 1990 12.0 6.9 2.0 1.3 1.1 0.7 1991 12.3 7.1 2.1 1.3 1.1 0.7 1992 12.7 7.3 2.1 1.4 1.1 0.8 1993 13.1 7.6 2.2 1.4 1.1 0.8 1994 13.6 7.9 2.2 1.4 1.2 0.9 The following footnote appears at the base of the graph: Nearly two- thirds of access line growth since 1990 has occurred in Texas. In the subsection titled "International", on page 30 an icon (approximately one inch) of the country of Mexico appears to the right side. A bar graph titled "Capital Expenditures (dollars in billions)" appears in the right column on page 31 and to the left side of the section titled "Liquidity and Capital Resources" and the subsection titled "Capital Expenditures and Other Commitments". The graph shows Capital Expenditures for the past five years. The actual figures are listed on the graph. Listed below are the plot points: 1990 1.78 1991 1.83 1992 2.14 1993 2.22 1994 2.35 The following footnote appears at the base of the graph: Capital expenditures primarily reflect growth and modernization of networks at Mobile Systems and the Telephone Company. A bar graph titled "Dividends per Share (dollars-adjusted for stock splits)" appears in the left column on page 32 and to the right side of the subsection titled "Dividends Declared". The graph shows Dividends for the past five years. The actual figures are listed on the graph. Listed below are the plot points: 1990 1.38 1991 1.42 1992 1.46 1993 1.51 1994 1.58 The following footnote appears at the base of the graph: Dividends per share increased 4.6% in 1994. EX-21 4 EXHIBIT 21 SUBSIDIARIES OF SOUTHWESTERN BELL CORPORATION AS OF JANUARY 1, 1995 State of Conducts Name Incorporation Business Under Southwestern Bell Missouri Same Telephone Company Southwestern Bell Dually Same Mobile Systems, Inc. incorporated in Delaware and Virginia SBC International, Inc. Delaware Same Southwestern Bell Missouri Same Yellow Pages, Inc. Southwestern Bell Delaware Same Telecommunications, Inc. EX-23 5 EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Southwestern Bell Corporation of our report dated February 10, 1995, included in the 1994 Annual Report to Shareowners of Southwestern Bell Corporation. Our audits also included the financial statement schedules of Southwestern Bell Corporation listed in Item 14(a). These schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8) pertaining to the Southwestern Bell Corporation Savings Plan for Salaried Employees and Savings and Security Plan (Non- Salaried Employees) (Nos. 33-38706 and 33-54309), the Stock Savings Plan, Management Stock Savings Plan and Stock Based Savings Plan (Nos. 33-37451 and 33-54291) and the Southwestern Bell Corporation 1992 Stock Option Plan (No. 33-49855), and in the Registration Statements (Form S-3) pertaining to the Southwestern Bell Corporation Dividend Reinvestment Plan (Nos. 2-99261 and 33-49893), and Southwestern Bell Capital Corporation and Southwestern Bell Corporation (Nos. 33-45490 and 33-56909), and in the related Prospectuses of our report dated February 10, 1995, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (From 10-K) for the year ended December 31, 1994. ERNST & YOUNG LLP San Antonio, Texas March 10, 1995 EX-24 6 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SOUTHWESTERN BELL CORPORATION, a Delaware corporation, hereinafter referred to as the "Corporation," 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, the undersigned is an officer and a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints James D. Ellis, Donald E. Kiernan, Liam S. Coonan, Judith M. Sahm, or any one of them, his attorney, for him and in his name, place and stead, and in his office and capacity in the Corporation as an officer and a director, 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, the undersigned executed this Power of Attorney the 27th day of January, 1995. /s/ Edward E. Whitacre, Jr. Edward E. Whitacre, Jr. Director and Chairman of the Board and Chief Executive Officer Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SOUTHWESTERN BELL CORPORATION, a Delaware corporation, hereinafter referred to as the "Corporation," 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, the undersigned is an officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Liam S. Coonan, Judith M. Sahm, or any one of them, his attorney, for him and in his name, place and stead, and in his office and capacity in the Corporation as an officer, 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, the undersigned executed this Power of Attorney the 27th day of January, 1995. /s/ D. E. Kiernan D. E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SOUTHWESTERN BELL CORPORATION, a Delaware corporation, hereinafter referred to as the "Corporation," 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, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Liam S. Coonan, Judith M. Sahm, or any one of them, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, 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 the undersigned 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, the undersigned executed this Power of Attorney the 27th day of January, 1995. /s/ Clarence C. /s/ James E. Barnes Barksdale Clarence C. Barksdale James E. Barnes Director Director /s/ Jack S. Blanton /s/ August A. Busch III Jack S. Blanton August A. Busch III Director Director /s/ Ruben R. Cardenas /s/ Martin K. Eby, Jr. Ruben R. Cardenas Martin K. Eby, Jr. Director Director /s/ Tom C. Frost /s/ Jess Hay Tom C. Frost Jess Hay Director Director /s/ B. R. Inman /s/ Charles F. Knight B. R. Inman Charles F. Knight Director Director /s/ Sybil C. Mobley /s/Haskell M. Monroe, Jr. Sybil C. Mobley Haskell M. Monroe, Jr. Director Director /s/ Carlos Slim Helu /s/ Patricia P. Upton Carlos Slim Helu Patricia P. Upton Director Director EX-27 7
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN BELL CORPORATION'S DECEMBER 31, 1994 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 DEC-31-1994 364,600 0 2,335,000 130,400 0 3,493,300 29,256,400 11,939,800 26,005,300 5,190,800 5,848,300 620,500 0 0 7,735,100 26,005,300 0 11,618,500 0 3,746,900 2,037,800 153,300 480,200 2,433,800 785,100 1,648,700 0 0 0 1,648,700 2.74 0 THIS AMOUNT IS IMMATERIAL. 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. 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).