FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1414
PACIFIC BELL
I.R.S. Employer No. 94-0745535
A California Corporation
140 New Montgomery Street, San Francisco, California 94105
Telephone - Area Code (415) 542-9000
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 .
--- ---
At April 30, 1994, 224,504,982 common shares were outstanding.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF PACIFIC TELESIS GROUP, 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).
PACIFIC BELL AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION Number
- - ------------------------------ ------
Item 1. Financial Statements
Review Report of Independent Accountants .............. 3
Condensed Consolidated Statements of Income ........... 4
Condensed Consolidated Balance Sheets ................. 5
Condensed Consolidated Statements of Shareowner's
Equity.............................................. 6
Condensed Consolidated Statements of Cash Flows ....... 7
Notes to Condensed Consolidated Financial Statements .. 8
Item 2. Management's Discussion and Analysis of Results of
Operations ............................................ 10
PART II. OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K ........................ 17
SIGNATURE ........................................................ 18
- - ---------
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowner of Pacific Bell:
We have reviewed the accompanying condensed consolidated balance sheet of
Pacific Bell and Subsidiaries as of March 31, 1994, and the related condensed
consolidated statements of income, shareowner's equity, and cash flows for the
three-month periods ended March 31, 1994 and 1993. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Pacific Bell and Subsidiaries as
of December 31, 1993, and the related consolidated statements of income,
shareowner's equity, and cash flows for the year then ended (not presented
herein); and in our report dated March 3, 1994, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1993, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Coopers & Lybrand
San Francisco, California
May 13, 1994
3
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months Ended
March 31,
-----------------------
(Dollars in millions) 1994 1993
- - ---------------------------------------------------------------------------
OPERATING REVENUES:
Local service ....................................... $ 840 $ 840
Network access
Interstate ........................................ 397 390
Intrastate ........................................ 174 167
Toll service ........................................ 493 511
Other ............................................... 343 332
Less: Provision for uncollectibles ................. 39 40
-------- --------
Total Operating Revenues ............................ 2,208 2,200
-------- --------
OPERATING EXPENSES:
Cost of products and services........................ 477 513
Customer operations and
selling expense ................................... 422 419
General, administrative, and
other expense ..................................... 304 289
Depreciation and amortization........................ 434 426
-------- --------
Total Operating Expenses ............................ 1,637 1,647
-------- --------
Net Operating Revenues .............................. 571 553
-------- --------
OPERATING TAXES:
Income taxes ........................................ 149 150
Other taxes ......................................... 45 47
-------- --------
Total Operating Taxes ............................... 194 197
-------- --------
OPERATING INCOME .................................... 377 356
-------- --------
Other Income (Expense)............................... 2 (2)
-------- --------
Income before interest expense and cumulative effect
of change in accounting principle.................. 379 354
Interest expense..................................... 103 110
-------- --------
Income before cumulative effect of change in
accounting principles.............................. 276 244
Cumulative effect of change in accounting principle.. - (148)
-------- --------
NET INCOME .......................................... $ 276 $ 96
======== ========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
4
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, Dec. 31,
(Dollars in millions) 1994 1993
- - ---------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and cash equivalents ..................... $ 52 $ 57
Accounts receivable - (net of allowances for
uncollectibles of $142 and $136 in 1994 and
1993, respectively) ......................... 1,505 1,518
Prepaid expenses and other current assets ..... 878 862
------------ ------------
Total current assets .......................... 2,435 2,437
------------ ------------
Property, plant, and equipment - at cost....... 25,654 25,660
Less: accumulated depreciation ............. 9,802 9,708
------------ ------------
Property, plant, and equipment - net .......... 15,852 15,952
------------ ------------
Deferred charges and other noncurrent assets .. 1,022 989
------------ ------------
TOTAL ASSETS .................................. $19,309 $19,378
============ ============
LIABILITIES AND SHAREOWNER'S EQUITY
Accounts payable .............................. 1,091 1,255
Debt maturing within one year ................. 345 542
Other current liabilities ..................... 1,279 1,136
------------ ------------
Total current liabilities ..................... 2,715 2,933
------------ ------------
Long-term obligations ......................... 4,756 4,753
------------ ------------
Deferred income taxes ......................... 2,262 2,280
------------ ------------
Other noncurrent liabilities and
deferred credits ............................ 3,312 3,258
------------ ------------
Commitments and Contingencies (Note B)
Total shareowner's equity ..................... 6,264 6,154
------------ ------------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY ..... $19,309 $19,378
============ ============
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
5
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
(Dollars in millions) 1994 1993
- - -------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of period ................. 225 225
--------- ---------
Balance at end of period ....................... 225 225
--------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period ................. 5,168 5,168
--------- ---------
Balance at end of period ....................... 5,168 5,168
--------- ---------
REINVESTED EARNINGS
Balance at beginning of period ................. 761 1,898
Net income ..................................... 276 96
Common dividends declared ...................... (166) (229)
--------- ---------
Balance at end of period ....................... 871 1,765
--------- ---------
TOTAL SHAREOWNER'S EQUITY ...................... $6,264 $7,158
========= =========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
6
PACIFIC BELL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
(Dollars in millions) 1994 1993
- - ---------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES
Net Income .......................................... $ 276 $ 96
Adjustments to reconcile net income for items
currently not affecting operating cash flows:
Cumulative effect of accounting change........... - 148
Depreciation and amortization ................... 434 426
Deferred income taxes ........................... (30) (16)
Unamortized investment tax credits .............. (14) (12)
Allowance for funds used during construction .... (8) (9)
Changes in operating assets and liabilities:
Accounts receivable ........................... 11 32
Prepaid expenses and other current assets ..... (5) 7
Deferred charges and other noncurrent assets... (27) 37
Accounts payable .............................. (147) (276)
Other current liabilities ..................... 174 146
Noncurrent liabilities and deferred credits ... 37 (43)
Other adjustments, net .......................... 3 8
---------- ----------
Cash from operating activities ...................... 704 544
---------- ----------
CASH FROM (USED FOR) INVESTING ACTIVITIES
Additions to property, plant, and equipment, net .... (341) (386)
Other investing activities, net ..................... (4) (2)
---------- ----------
Cash used for investing activities .................. (345) (388)
---------- ----------
CASH FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ............ - 1,350
Retirements of long-term debt ....................... - (300)
Dividends paid ...................................... (166) (229)
Increase (decrease) in short-term borrowings, net ... (197) (398)
Principal payments under capital lease obligations .. (1) (1)
Other financing activities, net ..................... - (86)
---------- ----------
Cash used for financing activities .................. (364) 336
---------- ----------
Increase(decrease) in cash and cash equivalents ..... (5) 492
Cash and cash equivalents at January 1 .............. 57 57
---------- ----------
Cash and cash equivalents at March 31 ............... $ 52 $ 549
========== ==========
- - ---------------------------------------------------------------------------
Cash payments for:
Interest ........................................ $ 127 $ 178
Income taxes .................................... $ 22 $ 127
- - ---------------------------------------------------------------------------
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
7
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
Pacific Bell, and its wholly owned subsidiaries, Pacific Bell Directory
("Directory") and Pacific Bell Information Services ("PBIS"), hereinafter
referred to as the "Company." All significant intercompany balances and
transactions have been eliminated.
The Condensed Consolidated Financial Statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (the "SEC") applicable to interim financial information.
Certain information and footnote disclosures included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in these interim statements
pursuant to such SEC rules and regulations. Management recommends that
these interim financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's 1993 annual report on Form 10-K.
In management's opinion, the Condensed Consolidated Financial Statements
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position and results of
operations for each interim period shown. The Condensed Consolidated
Financial Statements have been reviewed by Coopers & Lybrand, independent
accountants. Their report is on page 3.
B. PRIOR YEAR ACCOUNTING CHANGES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). This new rule requires a
change from the cash to accrual method of accounting for these costs.
Previously, the Company expensed these retiree benefits as they were paid.
The Company is amortizing the transition obligation over 20 years. The
transition obligation represents the unrecognized cost of benefits that
had already been earned by retirees and active employees when the new
standard was adopted.
This treatment is consistent with a CPUC decision which granted Pacific
Bell $108 million for partial recovery of 1993 SFAS 106 costs. The CPUC
requires that any recoveries granted be used solely to pay for future
postretirement benefits. Therefore, the Company contributes these
recoveries to Voluntary Employee Beneficiary Association trusts. The
Company is required to file annually for recovery in conjunction with the
price cap filing, and therefore such recovery will vary. The 1994 CPUC
price cap decision grants Pacific Bell $100 million for partial recovery
of SFAS 106 costs. Two ratepayer advocacy groups have each challenged
certain aspects of the original decision adopting SFAS 106 for ratemaking,
which could affect recovery. The Company is unable to predict the outcome
of these pending challenges.
8
PACIFIC BELL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
B. PRIOR YEAR ACCOUNTING CHANGES (Cont'd)
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employer's Accounting for
Postemployment Benefits." SFAS 112 establishes accounting standards for
benefits that are provided to former or inactive employees after
employment but before retirement. The new Statement requires immediate
recognition of the cumulative effect of applying the new rule to prior
years. The Company restated first quarter 1993 results to recognize a
postemployment benefit liability of $251 million. The net income impact
of adopting this accounting standard was $148 million, net of a deferred
income tax benefit of $103 million.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
RESULTS OF OPERATIONS
The following discussions and data compare the three-month period ended March
31, 1994 to the corresponding period in 1993. Results for the first three
months of 1994 may not be indicative of results for the full year. (See
discussions in "Pending Regulatory Issues" beginning on page 15.)
A summary of selected operating data is shown below:
For the 3 Months Ended
March 31, Change
---------------------- -----------------
Selected Operating Data 1994 1993 Amount Percent
- - ---------------------------------------------------------------------------
Operating ratio (%) 74.1 74.9 (0.8) -
Return on shareowner's equity (%) 17.6 5.4 12.2 -
Total employees 52,457 55,053 (2,596) (4.7)
Revenues per employee ($ thousands) 42.1 40.0 2.1 5.3
Employees per ten thousand access
lines* 34.1 36.5 (2.4) (6.6)
- - ---------------------------------------------------------------------------
*Excludes Directory Employees
Earnings
- - -------- For the 3 Months Ended
March 31, Change
---------------------- -----------------
($ Millions) 1994 1993 Amount Percent
- - ---------------------------------------------------------------------------
Net income 276 96 180 187.5
- - ---------------------------------------------------------------------------
Earnings increased primarily because first quarter 1993 results were restated
to reflect the adoption of SFAS 112 "Employers' Accounting for Postemployment
Benefits" effective January 1, 1993. Adoption of the new standard reduced
comparative 1993 net income by $148 million.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
Operating Revenues
- - ------------------
For the 3 Months Ended
March 31, Change
------------------------ -----------------
Volume Indicators 1994 1993 Amount Percent
- - ---------------------------------------------------------------------------
Customer switched access lines in
service at March 31 (thousands) 14,726 14,398 328 2.3
Interexchange Carrier access
minutes-of-use (millions) 12,923 11,766 1,157 9.8
Interstate 7,627 6,768 859 12.7
Intrastate 5,296 4,998 298 6.0
Toll messages (millions)* 1,084 1,031 53 5.1
- - ---------------------------------------------------------------------------
* Toll messages for 1993 have been restated to conform to the current
presentation.
For the 3 Months Ended
March 31, Change
------------------------ -----------------
($ millions) 1994 1993 Dollar Percent
- - ---------------------------------------------------------------------------
Total operating revenues 2,208 2,200 8 0.4
- - ---------------------------------------------------------------------------
Although revenues for first quarter 1994 increased only slightly, the Company
noted faster growth in access lines and carrier access minutes-of-use.
Revenue increases from customer demand were, however, largely offset by price
cap rate reductions. These rate reductions were ordered by the California
Public Utilities Commission (the "CPUC") and the Federal Communications
Commission (the "FCC") under incentive-based regulation. (See also "Pending
Regulatory Issues" beginning on Page 15.)
Factors affecting revenue growth are summarized in the following table.
Total
Misc. Change
Price Cap Rates Customer from
($ millions) Rates & Other Demand 1993
- - ---------------------------------------------------------------------------
Local service .................. (13) (10) 23 0
Network access
Interstate ................... (4) (17) 28 7
Intrastate ................... (4) (4) 15 7
Toll service ................... (10) (12) 4 (18)
Other revenues ................. - 3 8 11
Uncollectibles ................. - 1 - 1
-------- --------- -------- --------
Total operating revenues ....... (31) (39) 78 8
- - ---------------------------------------------------------------------------
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
The first quarter 1994 increase in local service revenues due to customer
demand in the above table reflects a 2.3 percent increase from a year ago in
customer access lines.
The increase in interstate network access revenues due to customer demand
reflects a 12.7 percent increase in minutes-of-use, as well as increased
access lines. However, the interstate revenue increase was partially offset
by net adjustments of $19 million to a provision for sharing earnings with
customers. The FCC requires sharing earnings above an authorized rate of
return under price cap regulation. The increase in intrastate network access
revenues due to customer demand reflects 6.0 percent growth in minutes-of-use.
Competition continues to constrain demand for the Company's toll services.
The increase in other revenues reflects the success of the Company's business
and residential voice mail products. The increase was partially offset by a
decrease in directory advertising revenues.
Operating Expenses
- - ------------------
For the 3 Months Ended
March 31, Change
------------------------ -----------------
($ millions) 1994 1993 Dollar Percent
- - ---------------------------------------------------------------------------
Total operating expenses $1,637 $1,647 (10) (.6)
- - ---------------------------------------------------------------------------
Total operating expenses decreased slightly when compared with 1993. As
displayed in the table below, salaries, wages and employee benefits decreased.
These decreases were largely offset by increases in contracted services and
software licensing fees relating to the Company's efforts to increase the
capabilities of the telecommunications network.
Total
Software Change
Salaries Contracted License Employee From
($ millions) & Wages Services Fees Benefits Other 1993
- - ----------------------------------------------------------------------------
Cost of products
& services ...... ($34) ($5) $19 ($15) ($1) ($36)
Customer operations
& selling expense. - 2 - 3 (2) 3
General, admin. &
other expense .... 5 23 - - (13) 15
Depreciation
& amortization.... - - - - 8 8
------- ------- ------- ------- ------ -----
Total operating
expenses ......... ($29) $20 $19 ($12) ($8) (10)
- - -----------------------------------------------------------------------------
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
Salary and wage expense declined primarily as a result of storm-related
overtime pay in Southern California in the comparable period last year.
Salary and wage expense also decreased a net $5 million due to a reduction in
the workforce which was partially offset by higher wage rates. In addition,
the December 1993 decision to defer management salary increases reduced upward
pressure on salary expense. In April, the Company lifted the management wage
freeze effective July 1, 1994.
Contracted services expense increased primarily because of research and
development costs supporting the Company's previously announced plans to
upgrade the core network infrastructure and to begin building an integrated
telecommunications, information, and entertainment network.
Licensing fees for digital switching software increased as the Company
implemented plans to create a fully digital telecommunications network.
Employee benefits expense decreased primarily because of a smaller workforce.
Depreciation expense increased due to an expanded plant base reflecting the
Company's increased investments in the network.
Operating Taxes
- - ---------------
1994 1993 Change Percent
- - ---------------------------------------------------------------------------
Operating Taxes 194 197 (3) (1.5)
- - ---------------------------------------------------------------------------
Reductions in certain deferred tax liabilities lowered tax expense by
$16 million. These reductions were partially offset by a federal tax rate
increase and higher pre-tax income.
Interest Expense
- - ----------------
1994 1993 Change Percent
- - ---------------------------------------------------------------------------
Interest expense 103 110 (7) (6.4)
- - ---------------------------------------------------------------------------
Interest expense decreased primarily due to lower interest rates for long-term
debt reflecting the Company's refinancing efforts in recent years.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
Cumulative Effect of Accounting Change
- - --------------------------------------
Effective January 1, 1993, the Company adopted two new accounting rules for
postretirement benefits and postemployment benefits. A first quarter 1993
noncash charge was recorded representing the cumulative after-tax effects of
applying the new rule for postemployment benefits to prior years. (See also
Note B - "Prior Year Accounting Changes" on page 8.) These new accounting
rules will increase annual benefit costs, but are not expected to materially
affect reported earnings.
Status of Restructuring Reserve
- - -------------------------------
As previously reported, the Company established a restructuring reserve at the
end of 1993 to provide for the incremental cost of force reductions and other
related costs to restructure its internal business processes through 1997. A
total of 1,800 employees left the company during first quarter 1994. A total
of $21 million was charged to the reserve in first quarter 1994, leaving a
balance of $1,076 million as of March 31, 1994. These costs were primarily to
cover severance benefits for about 600 employees. The majority of this year's
costs will be incurred during the second half of 1994.
Capital Expenditures
- - --------------------
The Company invested about $325 million during the first three months of 1994
primarily to modernize and expand the network. The Company expects to invest
about $1.8 billion in 1994, and about $16 billion over the next seven years.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
PENDING REGULATORY ISSUES
CPUC Regulatory Framework Review
- - --------------------------------
In March 1994, a CPUC Administrative Law Judge issued a proposed decision in
the New Regulatory Framework ("NRF") review. Among other issues, this review
has examined elements of the price cap formula, including the productivity
factor and the rate of return on investment, adopted in the 1989 NRF order.
The proposed decision would eliminate an element of the NRF which requires
equal sharing with customers of earnings exceeding a benchmark rate of return.
Earnings above a rate of return of 16.5 percent would continue to be returned
to customers. The proposed decision also recommends increasing the
productivity factor of the price cap formula from 4.5 percent to 6.0 percent
for the period 1994 through 1996. If adopted by the CPUC, the change in the
productivity factor would reduce annualized revenues about $100 million each
year, when compared to the previous year, through 1996. The Company does not
believe that the record in this proceeding supports an increase in the
productivity factor.
In April 1994, the Assigned Commissioner asked for additional comments on
whether the record in this proceeding would support modification of the price
cap formula. Modifications would include eliminating the rate of return
ceiling, indexing the rate of return floor to the 30 year Treasury Bond rate,
and redefining requirements for recovery of costs resulting from exogenous
events. The new definition would authorize recovery only for substantial
costs sustained as a result of a natural disaster or calamity. In response,
the Company filed comments noting the record supported elimination of the rate
of return ceiling. The Company also commented that the record does not
support the proposed indexing of the rate of return floor, but does support
eliminating the floor. In addition, there is support for the redefinition of
exogenous costs with the modification that recovery for jurisdictional cost
shifts also be included. The Company is unable to predict the final outcome
of these proceedings or the effective date of rate reductions, if any.
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
Late Payment Charge Complaint
- - -----------------------------
In March 1991, a consumer advocacy group filed a complaint with the CPUC
against the Company alleging that erroneous late payment charges were assessed
against some customers. In May 1993, the CPUC ordered the Company to refund
about $35 million in late payment and reconnection charges which resulted from
problems with its payment processing system. The CPUC also imposed penalties
totaling $15 million on the Company for improperly assessing late payment
charges and disconnecting customers between 1986 and February 1991. In
November 1993, the CPUC granted the Company a limited rehearing of the
decision. The rehearing examined the legal basis for the penalties, the
statute of limitations on refunds, and whether unclaimed refunds must escheat
to the state. In April 1994, the CPUC announced it would let its May 1993
order stand with minor modifications. As a result, the Company will reflect
an after-tax charge of about $30 million during second quarter 1994. However,
the Company believes the CPUC's most recent decision continues to misinterpret
California law and exceeds the CPUC's authority. For these reasons, the
Company will seek review of the decision by the California Supreme Court. The
Company is unable to predict the outcome of this matter.
FCC Annual Access Tariff Filing
- - ---------------------------
In April 1994, the Company submitted its annual access tariff filing to the
FCC under price cap regulation. In its filing, the Company proposed an annual
revenue reduction of about $20 million effective July 1, 1994. This decrease
reflects the net effect of changes in the inflation and productivity factors,
plus exogenous cost reductions of $21 million required by the FCC's rules.
Personal Communications Services
- - --------------------------------
The Corporation plans to aggressively pursue licenses for personal
communications services ("PCS") at FCC auctions expected late this year or
early in 1995. In December 1993, the FCC awarded "pioneer preferences" to
several companies. One company received one of the two larger Major Trading
Area ("MTA") licenses covering the Los Angeles, San Diego, and Las Vegas
market area. That company will receive the license without charge. This is
expected to place the successful bidder for the remaining MTA license in that
area at a significant competitive disadvantage because of its higher cost
structure. Winning bids in major PCS markets are expected to require large
capital expenditures. On March 1, 1994, the Company filed Petitions for
Review with the U.S. Court of Appeals for the D.C. Circuit seeking review of
the FCC's orders that granted pioneer preference awards at no charge. A
subcommittee of Congress is investigating the FCC's policy for making these
awards as well.
16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number Description
- - ------- -----------
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.
15 Letter re unaudited interim financial information.
The Company will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
17
FORM 10-Q
SIGNATURE
---------
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
By /s/ Peter A. Darbee
---------------------------------------
Peter A. Darbee
Vice President, Chief Financial Officer
and Controller
May 13, 1994
18
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto. All other exhibits are
provided as part of the electronic transmission.
Exhibit
Number Description
- - ------- -----------
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.
15 Letter re unaudited interim financial information.
19