-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KI92LNrEKZM6VTYT5lC0W+3rWruIfOFf/Vaq3+F2oB0wcxiY5v/UgnBSYBjM+iu8 8oETvo93jOYvM4sX/QBmJg== 0000075641-97-000005.txt : 19970513 0000075641-97-000005.hdr.sgml : 19970513 ACCESSION NUMBER: 0000075641-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC BELL CENTRAL INDEX KEY: 0000075641 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 940745535 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01414 FILM NUMBER: 97600014 BUSINESS ADDRESS: STREET 1: 140 NEW MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4155429000 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19840115 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 1997 or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-1414 PACIFIC BELL A California Corporation I.R.S. Employer Identification Number 94-0745535 140 New Montgomery Street, San Francisco, California 94105 Telephone Number: (415) 542-9000 THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF PACIFIC TELESIS GROUP, WHICH IS A WHOLLY-OWNED SUBSIDIARY OF SBC COMMUNICATIONS INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I - FINANCIAL INFORMATION Item 1. Financial Statements PACIFIC BELL - ------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF INCOME Dollars in millions (Unaudited)
- ------------------------------------------------------------------------------------ Three months ended March 31, -------------------------------- 1997 1996 - ------------------------------------------------------------------------------------ Operating Revenues Local service $ 1,019 $ 960 Network access 645 622 Long-distance service 305 312 Directory advertising 358 302 Other 162 131 - ------------------------------------------------------------------------------------ Total operating revenues 2,489 2,327 - ------------------------------------------------------------------------------------ Operating Expenses Cost of services and products 866 879 Selling, general and administrative 451 388 Depreciation and amortization 478 455 - ------------------------------------------------------------------------------------ Total operating expenses 1,795 1,722 - ------------------------------------------------------------------------------------ Operating Income 694 605 - ------------------------------------------------------------------------------------ Other Income (Expense) Interest expense (98) (88) Other income (expense) - net 3 3 - ------------------------------------------------------------------------------------ Total other income (expense) (95) (85) - ------------------------------------------------------------------------------------ Income Before Income Taxes and Cumulative Effect of Accounting Change 599 520 Income taxes 239 212 - ------------------------------------------------------------------------------------ Income Before Cumulative Effect of Accounting Change 360 308 Cumulative Effect of Accounting Change, net of tax 85 - - ------------------------------------------------------------------------------------ Net Income $ 360 $ 393 - ------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements.
PACIFIC BELL - ------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS Dollars in millions
- ------------------------------------------------------------------------------------- March 31, December 31, ------------------------ 1997 1996 - ------------------------------------------------------------------------------------- Assets (Unaudited) Current Assets Cash and cash equivalents $ 90 $ 58 of $175 and $161 2,200 2,133 Prepaid expenses 55 37 Deferred charges 26 45 Other current assets 103 156 - ------------------------------------------------------------------------------------- Total current assets 2,474 2,429 - ------------------------------------------------------------------------------------- Property, Plant and Equipment-at cost 28,840 28,372 Less: Accumulated depreciation and amortization 16,979 16,699 - ------------------------------------------------------------------------------------- Property, Plant and Equipment-Net 11,861 11,673 - ------------------------------------------------------------------------------------- Other Assets 422 547 - ------------------------------------------------------------------------------------- Total Assets $ 14,757 $ 14,649 - ------------------------------------------------------------------------------------- Liabilities and Shareowner's Equity Current Liabilities Debt maturing within one year $ 714 $ 287 Accounts payable and accrued liabilities 2,266 2,546 - ------------------------------------------------------------------------------------- Total current liabilities 2,980 2,833 - ------------------------------------------------------------------------------------- Long-Term Debt 5,370 5,364 - ------------------------------------------------------------------------------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 494 476 Postemployment benefit obligation 900 671 Unamortized investment tax credits 225 236 Other noncurrent liabilities 669 1,142 - ------------------------------------------------------------------------------------- Total deferred credits and other noncurrent liabilities 2,288 2,525 - ------------------------------------------------------------------------------------- Commitments and contingencies - ------------------------------------------------------------------------------------- Shareowner's Equity Common shares ($1 par value) 225 225 Capital in excess of par value 6,256 6,100 Accumulated deficit (2,362) (2,398) - ------------------------------------------------------------------------------------- Total shareowner's equity 4,119 3,927 - ------------------------------------------------------------------------------------- Total Liabilities and Shareowner's Equity $ 14,757 $ 14,649 - ------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
PACIFIC BELL - ------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in millions, increase (decrease) in cash and cash equivalents (Unaudited) - ------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------- Three months ended March 31, --------------------- 1997 1996 - ---------------------------------------------------------------------------- Operating Activities Net income $ 360 $ 393 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and 478 455 amortization Provision for uncollectible 57 48 accounts Amortization of investment tax (11) (11) credits Deferred income tax 100 21 expense Cumulative effect of accounting - (85) change Other - net (633) (301) - ---------------------------------------------------------------------------- Total adjustments (9) 127 - ---------------------------------------------------------------------------- Net Cash Provided by Operating Activities 351 520 - ---------------------------------------------------------------------------- Investing Activities Construction and capital expenditures (583) (469) Other - (7) - ---------------------------------------------------------------------------- Net Cash Used in Investing Activities (583) (476) - ---------------------------------------------------------------------------- Financing Activities Net change in short-term borrowings with original maturities of three months or less 424 (244) Issuance of long-term debt 8 346 Dividends paid (324) (231) Equity from parent 156 70 - ---------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 264 (59) - ---------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 32 (15) - ---------------------------------------------------------------------------- Cash and cash equivalents beginning of year 58 68 - ---------------------------------------------------------------------------- Cash and Cash Equivalents End of Period $ 90 $ 53 - ---------------------------------------------------------------------------- Cash paid during the three months ended March 31 for: Interest $ 158 $ 120 Income taxes $ 36 $ 6 See Notes to Consolidated Financial Statements.
PACIFIC BELL - ---------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY Dollars in millions (Unaudited)
- ---------------------------------------------------------------------------------- Capital in Common Excess Accumulated of Shares Par Deficit Value - ---------------------------------------------------------------------------------- Balance, December 31, 1995 $ 225 $ 5,387 $ (2,501) Net income - - 393 Dividends to shareowner - - (231) Equity from parent - 70 - Other - 1 (1) - ---------------------------------------------------------------------------------- Balance, March 31, 1996 $ 225 $ 5,458 $ (2,340) - ---------------------------------------------------------------------------------- Balance, December 31, 1996 $ 225 $ 6,100 $ (2,398) Net income - - 360 Dividends to shareowner - - (324) Equity from parent - 156 - Balance, March 31, 1997 $ 225 $ 6,256 $ (2,362) - ---------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
* * * * SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months then ended: 1997 1996 --------------------- Return on weighted average shareowners' equity . . . . . 36.94% 37.80% Debt ratio . . . . . . . . . . . . . . . . . . . . . . . 59.63% 62.16% Network access lines in service (000) . . . . . . . . . 16,273 15,674 Access minutes of use (000,000) . . . . . . . . . . . . . 17,519 16,166 Number of employees . . . . . . . . . . . . . . . . . . . 47,980 46,820
PACIFIC BELL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Dollars in millions 1. BASIS OF PRESENTATION - The consolidated financial statements have been prepared by Pacific Bell (PacBell ) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the interim periods shown. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations. Certain reclassifications have been made to the 1996 consolidated financial statements to conform with the 1997 presentation. The results for the interim periods are not necessarily indicative of results for the full year. The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in PacBell's 1996 Annual Report on Form 10-K (the Form 10-K) filed with the Securities and Exchange Commission. Prior to January 1, 1996, Pacific Bell Directory (a subsidiary of PacBell) recognized revenues and expenses related to publishing directories in California using the "amortization" method, under which revenues and expenses were recognized over the lives of the directories, generally one year. Under the new "issue basis" method, revenues and expenses are recognized when the directories are issued. The change to the issue basis method was made because it is the method generally followed in the publishing industry and better reflects the operating activity of the business. The change was adopted during fourth quarter 1996. The cumulative after-tax effect of applying the change in method to prior years was recognized as of January 1, 1996 as a one-time, non-cash gain applicable to continuing operations of $85. The gain is net of deferred taxes of $58. The first three quarters of 1996 were restated in the Form 10-K to reflect the new method. In 1996, management amended the salaried pension plan, which changed from a final pay plan to a cash balance plan. Under the transition to the new plan, some retirees elected to receive lump-sum payments in settlement of the pension liability. These lump-sum payments in the first quarter of 1997 exceeded the projected service and interest cost. PacBell recognized a gain on these settlements in first quarter 1997 that increased net income by $87. 2. CONSOLIDATION - The consolidated financial statements include the accounts of PacBell and its majority-owned subsidiaries. PacBell is a wholly-owned subsidiary of Pacific Telesis Group (PAC). All significant intercompany transactions are eliminated in the consolidation process. 3. MERGER - On April 1, 1997, SBC Communications Inc. (SBC) and PAC completed the merger of an SBC subsidiary with PAC, in a transaction in which each share of PAC common stock was exchanged for 0.73145 of a share of SBC common stock (equivalent to approximately 313 million shares). With the merger, PAC became a wholly-owned subsidiary of SBC. The transaction was accounted for as a pooling of interests and a tax-free reorganization. PACIFIC BELL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued Dollars in millions PacBell's results will include merger transaction costs and the effects of changes applied retroactively to conform accounting methodologies between PacBell and SBC for, among other items, pensions and postretirement benefits. These changes will be recorded by PacBell in the second quarter of 1997, retroactive to January 1, 1997, as a cumulative effect of accounting changes of $342 net of tax. Had the merger occurred January 1, 1997, income before cumulative effect of accounting changes would have increased by $165. Among other costs relating to the close of the merger, PacBell will record the present value of amounts to be returned to California ratepayers as a condition of the merger of $274, $165 net of tax. 4. COMMITMENTS AND CONTINGENCIES Purchase Commitments - In December 1994, PacBell contracted for the purchase of up to $2,000 of Advanced Communications Network (ACN) facilities, which incorporated new technologies. During 1995, the ability to deploy the facilities outstripped the ACN vendor's ability to deliver necessary products and software. Accordingly, management decided to suspend construction at certain sites, which reduced the expected cost to less than $700. If ACN facilities meet certain quality and performance criteria (the Network Test), PacBell is committed to purchase the ACN facilities in 1998. If the ACN facilities are acquired, due to competition and other factors affecting PacBell's ability to recover its investment in these facilities, their value to PacBell could be materially impaired. If ACN facilities fail the Network Test, PacBell will not be committed to buy the ACN facilities but might be liable to reimburse the principal ACN vendor for some construction costs up to $300, which could also result in a material charge. As of March 31, 1997, PacBell had purchase commitments of about $176 remaining in connection with its previously announced program for deploying an all digital switching platform with ISDN and SS-7 capabilities. Property Tax Investigation - In 1992, a settlement agreement was reached between the State Board of Equalization, all California counties, the State Attorney General, and 28 utilities, including PacBell, on a specific methodology for valuing utility property for property tax purposes for a period of eight years. The California Public Utilities Commission (CPUC) opened an investigation to determine if any resulting property tax savings should be returned to customers. Intervenors have asserted that as much as $20 of annual property tax savings should be treated as an exogenous cost reduction in PacBell's annual price cap filings. These intervenors have also asserted that past property tax savings totaling as much as approximately $75 as of March 31, 1997, plus interest should be returned to customers. Management believes that, under the CPUC's regulatory framework, any property tax savings should be treated only as a component of the calculation of shareable earnings and not as an exogenous cost. In an Interim Opinion issued in June 1995, the CPUC decided to defer a final decision on this matter pending resolution in a separate proceeding of the criteria for exogenous cost treatment under its regulatory framework. PACIFIC BELL Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions RESULTS OF OPERATIONS Pacific Bell (PacBell) reported net income of $360 for the first quarter of 1997. Financial results for the first quarters of 1997 and 1996 are summarized as follows: - -------------------------------------------------------------------------------- First Quarter ------------------------------ Percent 1997 1996 Change - -------------------------------------------------------------------------------- Operating revenues $ 2,489 $ 2,327 7.0% Operating expenses $ 1,795 $ 1,722 4.2% Income before cumulative effect of accounting $ 360 $ 308 16.9% change Cumulative effect of accounting change - $ 85 - Net income $ 360 $ 393 (8.4)% - -------------------------------------------------------------------------------- The primary factors contributing to the increase in income before cumulative effect of accounting change during the first quarter of 1997 were an $87 after-tax settlement gain associated with lump-sum pension payments and growth in demand for services and products at PacBell. Excluding this gain and accounting changes, first quarter 1997 results decreased slightly due to increased expenses for start-up costs associated with new growth initiatives, primarily Personal Communications Systems (PCS) wireless, and expenses in the wireline business including preparation for increased competition and unusually high expenses associated with damage caused by winter storms. 1996 net income included a one-time, non-cash, after-tax gain of $85 associated with a change in accounting for directory publishing revenues and expenses. PacBell's operating revenues in the first quarter of 1997 increased $162, or 7.0%. Components of operating revenues for the first quarters of 1997 and 1996 are as follows: - -------------------------------------------------------------------------------- First Quarter ------------------------------ Percent 1997 1996 Change - -------------------------------------------------------------------------------- Local service $ 1,019 $ 960 6.1% Network access Interstate 459 444 3.4 Intrastate 186 178 4.5 Long-distance 305 312 (2.2) service Directory 358 302 18.5 advertising Other 162 131 23.7 Total $ 2,489 $ 2,327 7.0% - -------------------------------------------------------------------------------- PACIFIC BELL Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions RESULTS OF OPERATIONS-Continued Local service revenues increased in the first quarter of 1997 due primarily to increases in demand, including increases in access lines and vertical services revenues. The number of access lines increased by 3.8% since March 31, 1996, with approximately 13% of access line growth due to the sales of additional access lines to existing residential customers. Vertical services revenues, which include custom calling options, Caller ID and other enhanced services, increased by approximately 21%. Local service revenues also reflect the implementation of the California Universal Service Fund that went into effect February 1, 1997. This fund is intended to subsidize the provision of service to high cost areas. Amounts received from the fund resulted in a shift of equivalent revenues from intraLATA long-distance and intrastate network access revenues to local service revenues in the first quarter of 1997. This shift is subject to final California Public Utilities Commission (CPUC) approval, expected in second quarter 1997. Increases in revenues were slightly offset by rate reductions due to CPUC price cap orders. Network Access Interstate network access revenues increased in the first quarter of 1997 due primarily to an increase in demand for access services by interexchange carriers. Growth in revenues from end user charges attributable to an increasing access line base also contributed to the increase. Partially offsetting these increases in interstate network access revenues were sharing accrual adjustments from prior periods. Intrastate network access revenues increased in the first quarter of 1997 due primarily to increases in demand, including usage by alternative intraLATA toll carriers, partially offset by the effects of the California Universal Service Fund described above. Long-Distance Service revenues decreased slightly in the first quarter of 1997 primarily due to the effects of the California Universal Service Fund described above primarily offset by increases in demand resulting from California's growing economy. Directory advertising revenues increased in the first quarter of 1997 due mainly to the publication of books not published in 1996 and, to a lesser extent, increased demand and earlier directory publication. Other operating revenues increased in the first quarter of 1997 due primarily to increased demand for PacBell's non-regulated services and products. PACIFIC BELL Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions RESULTS OF OPERATIONS-Continued PacBell's operating expenses in the first quarter of 1997 increased $73 or 4.2%, over the first quarter of 1996. Components of operating expenses for the first quarters of 1997 and 1996 are as follows: - ------------------------------------------------------------------------------- First Quarter ----------------------- Percent 1997 1996 Change - -------------------------------------------------------------------------------- Cost of services and products $ 866$ 879 (1.5)% Selling, general and 451 388 administrative 16.2 Depreciation and amortization 478 455 5.1 ---------- Total $ 1,795$ 1,722 4.2% - -------------------------------------------------------------------------------- Total Operating Expenses Costs of services and products and selling, general and administrative costs increased on a combined basis $50, or 3.9% in the first quarter of 1997. The increase was due primarily to increases for employee compensation, costs incurred to prepare for local competition, and expenses associated with damage from winter storms and other increases related to new business initiatives for Personal Communications Services (PCS) and the Advanced Communications Network (ACN). These increases were partially offset by savings due to a $146 settlement gain associated with lump-sum pension payments, changes in plan assumptions and to changes in benefit plans made in 1996. Depreciation and amortization increased in the first quarter of 1997 due primarily to growth in plant levels. Interest Expense increased $10 in the first quarter of 1997 due to increased long term debt compared to the first quarter of 1996 and increased interest on capital leases. These increases were somewhat offset by increased capitalized interest during construction. Income taxes increased $27 in the first quarter of 1997 primarily due to higher income before income taxes. Cumulative Effect of Accounting Change As discussed in Note 1 to the financial statements, Pacific Bell Directory changed its method of recognizing directory publishing revenues and related expenses effective January 1, 1996. The cumulative after-tax effect of applying the new method to prior years was recognized as of January 1, 1996 as a one-time, non-cash gain applicable to continuing operations of $85. The gain is net of deferred taxes of $58. Management believes this change to the issue basis method is preferable because it is the method generally followed in the publishing industry, and better reflects the operating activity of the business. This accounting change is not expected to have a significant net income effect on future periods. PACIFIC BELL Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS OTHER BUSINESS MATTERS Restructuring Reserve -PacBell established a restructuring reserve at the end of 1993 to provide for the incremental cost of force reductions associated with restructuring business processes through 1997. A total of $22 in cash outlays was charged to the reserve in the first quarter of 1997. As of March 31, 1997, $72 remained in the restructuring reserve. Merger - On April 1, 1997, SBC Communications Inc. (SBC) and Pacific Telesis Group (PAC) completed the merger of an SBC subsidiary with PAC, in a transaction in which each share of PAC common stock was exchanged for 0.73145 of a share of SBC common stock (equivalent to approximately 313 million shares). With the merger, PAC became a wholly-owned subsidiary of SBC. The transaction will be accounted for as a pooling of interests and a tax-free reorganization. (See Note 3 to the financial statements.) Access Reform - On May 7, 1997, the FCC adopted orders on access charge reform and local exchange carrier price caps which will reduce access charges by, in part, adjusting the productivity factor to be used in interstate price cap calculations. In presenting the orders, the FCC estimated there would be a $1.7 billion reduction in industry-wide interstate access charges which are estimated to aggregate $23 billion. Management is evaluating the effect of and is its response to the orders. Interconnection Agreements - Companies seeking to connect to PacBell's network and provide local service must enter into interconnection agreements with PacBell which are then subject to approval by the CPUC. PacBell has entered into agreements, some of which have been approved by the CPUC. PacBell expects that it will experience local exchange competition both from current providers and other new entrants in 1997. PAC intends to use interconnection agreements to support its application to the FCC to provide interLATA long-distance service in California. FCC Apportionment of Sharing Obligations - The price cap rules require Local Exchange Carriers (LECs) to apportion sharing obligations among their price cap baskets based on "cost-causative" methods. The FCC concluded that proportionate revenues in each price cap basket could be used as a proxy for cost. For years when PacBell had a sharing obligation, it excluded interstate end user revenues from the sharing apportionment methodology. On April 17, 1997, the FCC ruled that end user revenues must be included in the base by which sharing is apportioned to the baskets. The Order requires PacBell to submit recalculated price cap indices reflecting its apportionment methodology and to revise its tariff rates as of July 1, 1997. Management estimates that the effect of this order could be up to approximately $30 plus interest. PACIFIC BELL 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS OTHER BUSINESS MATTERS (Continued) Revision of FCC 800 Data Base Access Tariffs - In October 1996, the FCC issued a Report & Order on the 800 Database Access Tariffs. The Order required tariff revisions and largely disallowed PacBell's request for exogenous treatment of 800 database costs. Rates were revised effective December 21, 1996. The original rates took effect May 1, 1993 pursuant to potential refund. On April 14, 1997, the FCC issued an Order that required refunds be made July 1, 1997. PacBell must file a refund plan on May 14, 1997. Currently, management assesses this refund to be approximately $22 plus interest. Other Billing and Collection Allocation Methodology Changes - The FCC adopted new separations rules effective May 1, 1997 that shift recovery of substantial other billing and collections costs to the interstate jurisdiction. This rule change could reduce PacBell's revenues by about $30 in 1997 and about $45 in each subsequent year. Management is evaluating options to mitigate this effect on net income. Revenues Subject to Refund - In 1992, the CPUC issued a decision adopting, with modification, Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" (FAS 106), for regulatory accounting purposes. Annual price cap decisions by the CPUC granted PacBell approximately $100 in each of the years 1993-1996 for partial recovery of higher costs under FAS 106. In October 1994 the CPUC reopened the proceeding to review the criteria for exogenous cost treatment and whether PacBell should continue to recover these costs. The CPUC's order also held that related revenues collected after October 12, 1994, were subject to refund plus interest pending future proceedings. These proceedings were concluded on April 9, 1997 when the CPUC reaffirmed that postretirement benefits costs are appropriately recoverable in PacBell's price cap filings. PACIFIC BELL PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 4 No instrument which defines the rights of holders of long- and intermediate-term debt of Pacific Bell is filed herewith pursuant to Regulation S-K, Item 601 (b) (4) (iii) (A). Pursuant to this regulation, Pacific Bell hereby agrees to furnish a copy of any such instrument to the SEC upon request. Exhibit 12 Computation of Ratios of Earnings to Fixed Charges. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the first quarter ended March 31, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pacific Bell /s/ Michael F.G. Ashby May 9, 1997 ------------------------------ Michael F.G. Ashby Vice President and Chief Financial Officer EX-12 2 EXHIBIT 12 PACIFIC BELL COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Dollars in Millions
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1997 1996 1996 1995 1994 1993* 1992 ------------------------------------------------------------------------- Income Before Income Taxes, $ 599 $ 520 $ 1,945 $ 1,538 $ 1,692 $ (39) $ 1,738 Extraordinary Loss and Cumulative Effect of Accounting Change Add:Interest Expense 98 88 363 410 439 429 460 1/3 Rental Expense 16 12 46 28 40 37 35 ------------------------------------------------------------------------- Adjusted Earnings $ 713 $ 620 $ 2,354 $ 1,976 $ 2,171 $ 427 $ 2,233 ------------------------------------------------------------------------- Total Interest Charges 115 98 $ $ 410 $ $ 429 $ 411 439 460 1/3 Rental Expense 16 12 46 28 40 37 35 ------------------------------------------------------------------------- Adjusted Fixed Charges $ $ 110 $ $ 438 $ $ 466 $ 131 457 479 495 ------------------------------------------------------------------------- Ratio of Earnings to Fixed Charges 5.44 5.64 5.15 4.51 4.53 0.92 4.51 ------------------------------------------------------------------------- * Results for 1993 reflect restructuring charges which totaled $924 after taxes.
EX-27 3
5 1,000,000 DEC-31-1997 JAN-01-1997 MAR-31-1997 3-MOS 90 0 2,375 175 0 2,474 28,840 16,979 14,757 2,980 5,370 225 0 0 4,119 14,757 0 2,489 0 1,795 0 0 98 599 239 360 0 0 0 360 0 0
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