<PAGE>
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, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8609
PACIFIC TELESIS GROUP
I.R.S. Employer No. 94-2919931
A Nevada Corporation
130 Kearny Street, San Francisco, California 94108
Telephone - Area Code (415) 394-3000
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, 1996, 428,434,672 common shares were outstanding.
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Review Report of Independent Accountants ...................... 1
Condensed Consolidated Statements of Income ................... 2
Condensed Consolidated Balance Sheets ......................... 3
Condensed Consolidated Statements of Cash Flows ............... 5
Notes to Condensed Consolidated Financial Statements .......... 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ....................... 10
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Report on Form 8-K ......................... 21
SIGNATURE ........................................................ 22
- ---------
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of Pacific Telesis Group:
We have reviewed the accompanying condensed consolidated balance sheet of
Pacific Telesis Group and Subsidiaries (the "Corporation") as of March 31,
1996, and the related condensed consolidated statements of income and cash
flows for the three-month periods ended March 31, 1996 and 1995. These
financial statements are the responsibility of the Corporation'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 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
for them to be in conformity with generally accepted accounting principles.
The Corporation's Pacific Bell subsidiary discontinued application of
Statement of Financial Accounting Standards No. 71 effective third quarter
1995.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Pacific Telesis Group and
Subsidiaries as of December 31, 1995, and the related consolidated statements
of income, shareowners' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 22, 1996, 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, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
May 13, 1996
1
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PACIFIC TELESIS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
(Dollars in millions, except per share amounts) 1996 1995
- ------------------------------------------------------------------------------
OPERATING REVENUES
Local service ......................................... $ 979 $ 949
Network access:
Interstate .......................................... 458 442
Intrastate .......................................... 180 167
Toll service .......................................... 317 319
Other service revenues ................................ 400 377
------ ------
TOTAL OPERATING REVENUES............................... 2,334 2,254
------ ------
OPERATING EXPENSES
Cost of products and services ......................... 447 501
Customer operations and selling expenses .............. 463 435
General, administrative, and other expenses ........... 326 314
Property and other taxes............................... 46 47
Depreciation and amortization ......................... 462 467
------ ------
TOTAL OPERATING EXPENSES............................... 1,744 1,764
------ ------
OPERATING INCOME....................................... 590 490
Interest expense....................................... 93 117
Miscellaneous income (expense) - net................... (4) 31
------ ------
INCOME BEFORE INCOME TAXES............................. 493 404
Income taxes........................................... 195 122
------ ------
NET INCOME............................................. $ 298 $ 282
====== ======
Earnings per share .................................... $ 0.70 $ 0.67
Dividends per share ................................... $0.545 $0.545
Average shares outstanding (thousands) ................ 428,435 424,065
==============================================================================
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
2
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in millions) 1996 1995
- -----------------------------------------------------------------------------
ASSETS: (Unaudited)
Cash and cash equivalents......................... $ 65 $ 76
Accounts receivable - (net of allowances for
uncollectibles of $141 and $132 in 1996 and 1995,
respectively)................................... 1,446 1,505
Prepaid expenses and other current assets......... 1,014 1,002
------- -------
Total current assets.............................. 2,525 2,583
------- -------
Property, plant, and equipment - at cost.......... 27,535 27,222
Less: accumulated depreciation................. (16,116) (15,837)
------- -------
Property, plant, and equipment - net.............. 11,419 11,385
------- -------
Other noncurrent and intangible assets............ 1,914 1,873
------- -------
TOTAL ASSETS...................................... $15,858 $15,841
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY:
Accounts payable and accrued liabilities.......... $ 1,997 $ 2,203
Debt maturing within one year..................... 912 1,530
Other current liabilities......................... 850 908
------- -------
Total current liabilities......................... 3,759 4,641
------- -------
Long-term obligations............................. 5,084 4,737
------- -------
Other noncurrent liabilities and deferred credits. 4,235 4,273
------- -------
(Continued on next page)
3
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
March 31, December 31,
(Dollars in millions) 1996 1995
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY: (Continued)
Commitments and contingencies (Note B)
Corporation-obligated mandatorily redeemable
preferred securities of subsidiary trust*
(Note C)........................................ 500 -
------- -------
Common stock ($0.10 par value; 432,827,595........
shares issued; 428,434,672 shares outstanding).. 43 43
Additional paid-in capital........................ 3,500 3,498
Accumulated deficit............................... (914) (982)
Treasury stock (4,392,923 shares)................. (127) (127)
Deferred compensation - LESOP trust............... (222) (242)
------- -------
Total shareowners' equity......................... 2,280 2,190
------- -------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY......... $15,858 $15,841
======= =======
==========================================================================
* The sole asset of the trust consists of $515.5 million in principal amount
of the 7.56% Subordinated Debentures due 2026 of Pacific Telesis Group. The
accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
4
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 3 Months Ended
March 31,
----------------------
(Dollars in millions) 1996 1995
- ----------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES:
Net income............................................ $298 $282
Adjustments to net income:
Depreciation and amortization....................... 462 467
Change in deferred income taxes..................... 21 (2)
Changes in operating assets and liabilities:
Accounts receivable.............................. 59 192
Prepaid expenses and other current assets........ (19) (120)
Other noncurrent and intangible assets........... (8) 11
Accounts payable and accrued liabilities......... (207) (113)
Other current liabilities........................ (66) (5)
Noncurrent liabilities and deferred credits...... (53) (77)
Other adjustments, net.............................. 20 3
------ ------
Cash from operating activities........................ 507 638
------ ------
CASH FROM (USED FOR) INVESTING ACTIVITIES:
Additions to property, plant, and equipment........... (486) (335)
Investment in PCS licenses............................ (20) (83)
Other investing activities, net....................... 9 (12)
------ ------
Cash used for investing activities.................... (497) (430)
------ ------
CASH FROM (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.............. 248 -
Retirements of long-term debt......................... - (2)
Proceeds from issuance of trust originated
preferred securities................................ 500 -
Dividends paid........................................ (233) (231)
Decrease in short-term borrowings, net................ (619) (1)
Other financing activities, net....................... 83 (3)
------ ------
Cash used for financing activities.................... (21) (237)
------ ------
Decrease in cash and cash equivalents................. (11) (29)
Cash and cash equivalents at January 1................ 76 135
------ ------
Cash and cash equivalents at March 31................. $ 65 $106
====== ======
Cash payments for:
Interest............................................ $121 $141
Income taxes........................................ $ - $ -
===========================================================================
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
5
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of
Pacific Telesis Group (the "Corporation") and its wholly and majority-
owned subsidiaries. The Corporation includes a holding company,
Pacific Telesis, and its telephone subsidiaries: Nevada Bell and
Pacific Bell (which when used herein includes its subsidiaries,
Pacific Bell Directory, Pacific Bell Information Services, Pacific Bell
Mobile Services, Pacific Bell Internet Services, Pacific Bell Network
Integration and others) hereinafter referred to as the Telephone
Companies. Other Pacific Telesis subsidiaries include Pacific Telesis
Enterprises, Pacific Bell Communications, and several other subsidiaries
that provide video, communications and other services. The Condensed
Consolidated Financial Statements reflect reclassifications made to
conform with the current year presentation.
The Condensed Consolidated Financial Statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("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 both the Corporation's
1995 annual report on Form 10-K and its 1996 Proxy Statement that
includes the audited 1995 financial statements. Effective third quarter
1995, the Corporation's Pacific Bell subsidiary discontinued accounting
under Statement of Financial Accounting Standards No. ("SFAS") 71,
"Accounting for the Effects of Certain Types of Regulation." The
Corporation's Nevada Bell subsidiary continues to apply SFAS 71
accounting.
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 L.L.P.,
independent accountants. Their report is on page 1.
6
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B. COMMITMENTS AND CONTINGENCIES
Merger Agreement
On April 1, 1996, SBC Communications Inc. ("SBC") and the Corporation
jointly announced a definitive agreement whereby the Corporation will
become a wholly owned subsidiary of SBC. Under terms of the merger
agreement, each share of Pacific Telesis common stock will be exchanged
for 0.733 shares of SBC common stock, subject to adjustment. The
transaction, which has been approved by the Board of Directors of each
company, is intended to be accounted for as a pooling of interests and to
be a tax-free reorganization. Pursuant to the merger agreement, the
Corporation agreed to reduce its dividend per share for second quarter
1996 and each subsequent quarter to an amount not to exceed 0.733
multiplied by SBC's dividend per share for each quarter. Based on SBC's
first quarter dividend of $0.43 per share, the Corporation's quarterly
dividend would not exceed $0.315 per share. Completion of the merger is
subject to certain conditions, including regulatory approvals and
approval by the shareowners of each company.
Purchase Commitments
In November 1995, the Corporation announced plans to acquire 100 percent
of the stock of Wireless Holdings, Inc. and Videotron Bay Area, Inc.,
which hold licenses and rights to provide wireless video services. Both
are joint ventures between Transworld Telecommunications, Inc. ("TTI")
and Le Groupe Videotron Ltee. The transaction involves the exchange of
approximately $120 million of the Corporation's stock for the outstanding
stock of the acquired companies and the Corporation's assumption of
approximately $55 million of debt. Closing is expected in third quarter
1996 and is subject to a number of conditions, including regulatory and
TTI shareowner approval.
In December 1994, Pacific Bell contracted for the purchase of up to
$2 billion of Advanced Communications Network facilities, which will
incorporate emerging technologies. Pacific Bell is committed to purchase
these facilities in 1998 if they meet certain quality and performance
criteria. Management expects the purchase amount to be less than
$800 million in 1998.
As of March 31, 1996 Pacific Bell had purchase commitments of about
$260 million remaining in connection with its previously announced
program for deploying an all digital switching platform with ISDN and
SS-7 capabilities.
7
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B. COMMITMENTS AND CONTINGENCIES (Continued)
Purchase Options
In June 1990, Prime Cable of Chicago, Inc. ("Prime Cable") acquired
certain Chicago cable television properties from Group W. The
Corporation, through its PTCB subsidiary, holds options to purchase a
75 percent interest in Prime Cable. TC Cable, Inc. ("TC Cable") now
holds this interest. PacTel Capital Funding, a wholly owned subsidiary
of the Corporation, has guaranteed bank financing used by TC Cable and
its parent corporation to acquire this interest. The guarantees cover
initial loan amounts of $60 million as well as interest accruing on the
loans, which will be added to the outstanding loan balances up to an
aggregate of $136 million. In management's opinion, the likelihood that
the Corporation will be required to pay principal or interest on this
debt under these guarantees is remote.
Revenues Subject to Refund
In 1992, the California Public Utilities Commission ("CPUC") issued a
decision adopting, with modification, SFAS 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions," for regulatory
accounting purposes. Annual price cap decisions by the CPUC granted
Pacific Bell approximately $100 million in each of the years 1993-1996
for partial recovery of higher costs under SFAS 106. However, the CPUC
in October 1994 reopened the proceeding to determine the criteria for
exogenous cost treatment and whether Pacific Bell should continue to
recover these costs. The CPUC's order held that related revenues
collected after October 12, 1994, are subject to refund plus interest.
It is possible that the CPUC could decide this issue in the near term,
and that the decision could have a material adverse effect on Pacific
Bell. Related revenues subject to refund totaled about $147 million at
March 31, 1996. Management believes postretirement benefits costs are
appropriately recoverable in Pacific Bell's price cap filings.
8
<PAGE>
PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B. COMMITMENTS AND CONTINGENCIES (Continued)
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 Pacific Bell, on a specific methodology for
valuing utility property for property tax purposes. The 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 million of annual property tax savings should be treated as an
exogenous cost reduction in Pacific Bell's annual price cap filings.
These intervenors have also asserted that past property tax savings
totaling as much as $60 million 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. In an Interim Opinion issued
in June 1995, the CPUC decided to defer a final decision on this matter
pending resolution of the criteria for exogenous cost treatment under its
regulatory framework. The criteria are being considered in a separate
proceeding initiated for rehearing of the CPUC's postretirement benefits
other than pensions decision discussed above. It is possible that the
CPUC could decide this issue in the near term, and that the decision
could have a material adverse effect on Pacific Bell.
C. CORPORATION-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST
Pacific Telesis Financing I, II, and III (the "Trusts") were formed for
the exclusive purpose of issuing preferred and common securities
representing undivided beneficial interests in the Trusts and investing
the proceeds from the sale of Trust Originated Preferred Securities
("TOPrS") in unsecured subordinated debt securities of the Corporation.
In January 1996, the Corporation sold $500 million of 7.56 percent TOPrS
through Pacific Telesis Financing I. The 20 million shares of TOPrS were
priced at $25 per share, have a 30-year maturity, an extension option,
and are callable in five years at par. The TOPrS shares are subject to a
limited guarantee by the Corporation. The proceeds were used to reduce
the Corporation's commercial paper outstanding.
As of March 31, 1996, the sole asset of Pacific Telesis Financing I
consisted of $515.5 million in principal amount of the 7.56 percent
Subordinated Debentures of the Corporation.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Quarterly Report on Form 10-Q contains historical information and certain
forward-looking statements that involve potential risks and uncertainties.
Pacific Telesis Group's (the "Corporation") actual results could differ
materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed herein and those discussed in the "Annual Financial Review" in the
Corporation's 1996 Proxy Statement. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Corporation undertakes no obligation to revise or update these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following discussions and data compare the results of operations of the
Corporation for the three-month period ended March 31, 1996 to the
corresponding period in 1995. The Corporation's operations include
Pacific Bell and Nevada Bell (the "Telephone Companies"), along with several
other units. Results for the first three months of 1996 may not be indicative
of results for the full year.
A summary of selected operating data is shown below:
For the 3 Months Ended
March 31,
----------------------
%
Operating Statistics 1996 1995 Change
- -----------------------------------------------------------------------------
Return on shareowners' equity (%).................. 53.4 21.1 -
Capital expenditures ($mil)........................ 538 487 10.5
Total employees at March 31........................ 48,776 51,251 -4.8
Telephone Companies' employees at March 31*........ 45,019 48,027 -6.3
Telephone Companies' employees per ten thousand
access lines*.................................... 28.1 31.2 -9.9
=============================================================================
* Excludes Pacific Bell Directory and Pacific Bell Mobile Services employees.
10
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Earnings
- --------
For first quarter 1996, the Corporation reported earnings of $298 million, or
$0.70 per share, compared to $282 million, or $0.67 per share for first
quarter 1995. This represents an increase of 5.7 percent in net income and
4.5 percent in earnings per share.
The Corporation's first quarter results reflect a significant increase in
access line growth, highlighting the Corporation's success in marketing
additional access lines for the home and paralleling California's continued
economic resurgence. The California Public Utilities Commission ("CPUC")
authorized facilities-based local services competition effective January 1996,
and resale competition effective March 1996. As of March 31, 1996, this
recently authorized local competition had not caused a significant effect on
the Corporation's earnings. Management is concerned, however, that under
certain scenarios such competition could deprive Pacific Bell of the
opportunity to earn a fair rate-of-return depending on the outcome of certain
open issues in the local competition rules proceeding.
For the 3 Months Ended
March 31,
----------------------
%
Volume Indicators 1996 1995 Change
- -----------------------------------------------------------------------------
Switched access lines at March 31 (thousands)..... 16,009 15,409 3.9
Residence......................................... 10,016 9,713 3.1
Business.......................................... 5,780 5,483 5.4
Other............................................. 213 213 -
ISDN access lines at March 31..................... 66 27 144.4
(thousands, included in above)
Interexchange carrier access minutes-of-use
(millions)..................................... 15,827 14,381 10.1
Interstate........................................ 8,633 8,130 6.2
Intrastate........................................ 7,194 6,251 15.1
Toll messages (millions).......................... 1,253 1,167 7.4
Toll minutes-of-use (millions).................... 3,819 3,582 6.6
Voice mailbox equivalents at March 31(thousands).. 1,516 1,212 25.1
Custom calling services at March 31(thousands).... 7,406 6,730 10.0
=============================================================================
11
<PAGE>
The total number of access lines in service grew to 16,009 thousand, an
increase of 3.9 percent for the twelve months ended March 31, 1996. The
residential access line growth rate increased to 3.1 percent for the twelve
months ended March 31, 1996 from about 2.1 percent last year. Changes in
technology, telecommuting and the Corporation's increased marketing efforts
are fueling increased demand for additional telephone lines in the home.
Second access lines in residences grew 11.0 percent, from 1,675 thousand lines
to 1,860 thousand lines. The growth rate in business access lines climbed to
5.4 percent for the twelve months ended March 31, 1996 from 4.1 percent last
year. The growth in business access lines reflects increased employment levels
in California. The number of ISDN lines in service increased 144.4 percent for
the twelve months ended March 31, 1996 as customers increased telecommuting
and demanded faster data transmission and Internet access. Sales of the
Corporation's high-speed data transmission products are growing rapidly due to
improved market segmentation and sales training.
Access minutes-of-use represent the volume of traffic carried by interexchange
carriers over the Telephone Companies' local networks. Access minutes-of-use
for the three months ended March 31, 1996 increased by 10.1 percent compared
to a 9.1 percent increase during the same period last year due primarily to
economic growth.
Toll messages and minutes-of-use are comprised of Message Telecommunications
Service and Optional Calling Plans ("local toll") as well as WATS and
terminating 800 services. For the three months ended March 31, 1996, toll
minutes-of-use increased by 6.6 percent. The increase was driven by economic
growth partially offset by competitive losses.
High demand for the Corporation's voice mail products continued in 1996. Voice
mailbox equivalents in service increased 25.1 percent for the 12 months ended
March 31, 1996 to 1,516 thousand. Similarly, demand for Custom Calling
Services, such as call waiting, grew 10.0 percent for the 12 months ended
March 31, 1996 as customers asked for greater convenience and more control
over their telephone communications.
12
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Operating Revenues
- ------------------
For the 3 Months Ended
March 31,
---------------------
($ millions) 1996 1995 Change
- -----------------------------------------------------------------------------
Total operating revenues ....................... $2,334 $2,254 $80
3.5%
- -----------------------------------------------------------------------------
Revenues for first quarter 1996 increased $80 million from the same period
last year primarily due to increased customer demand of $115 million for the
Corporation's telephone services driven by the strengthening of California's
economy, partially offset by $30 million of revenue reductions ordered by the
Federal Communications Commission ("FCC"). The CPUC issued an order in
December 1995 suspending use of the "inflation minus productivity" component
of the price cap formula for 1996 through 1998. This action freezes the price
caps on most of the Company's regulated services through 1998 except for
adjustments due to exogenous costs or price changes approved through the
CPUC's application process.
Factors affecting revenue changes for the first quarter of 1996 are summarized
in the following table.
Total
Price Change
Cap Customer From
($ millions) Orders Misc. Demand 1995
- -----------------------------------------------------------------------------
Local service........................ $ - $ 7 $ 23 $30
Network access
Interstate......................... -30 24 22 16
Intrastate......................... - -8 21 13
Toll service......................... - -33 31 -2
Other service revenues............... - 5 18 23
---- --- ---- ---
Total operating revenues............. -$30 -$5 $115 $80
=============================================================================
The $23 million increase in customer demand for local service is the result of
the 3.9 percent growth in access lines and the 10.0 percent growth in custom
calling services. These increases were generated by the improved economy in
California and the Corporation's focused customer retention efforts.
The $22 million increase in interstate network access revenues due to customer
demand reflects increased interexchange carrier access minutes-of-use, as well
as increased access lines. The $21 million customer demand-related increase in
intrastate network access revenues also resulted from growth in access
minutes-of-use.
13
<PAGE>
The $31 million increase in customer demand-related toll service revenues is
driven primarily by increased local toll usage resulting from general economic
growth. The customer demand-related increase in local toll service revenues
was partially offset by competitive losses in WATS and 800 services.
Interexchange carriers currently have the competitive advantage of being able
to offer WATS and 800 services both within and between service areas.
The increase in other service revenues reflects the continuing success of the
Telephone Companies' voice mail products and directory operations.
Operating Expenses
- ------------------
For the 3 Months Ended
March 31,
----------------------
($ millions) 1996 1995 Change
- -----------------------------------------------------------------------------
Total operating expenses....................... $1,744 $1,764 -$20
-1.1%
- -----------------------------------------------------------------------------
The decrease in total operating expenses for the three months ended March 31,
1996 compared to the same period in 1995 reflects the Corporation's continuing
cost reduction efforts in the core telephone business. Increased expenses for
new business initiatives largely offset these decreases. Primary factors
affecting expense changes are summarized below.
Total
Pacific Pacific PTG
Bell* Bell* Pacific Other Change
Salaries Employee Bell* PTG** from
($ millions) & Wages Benefits Misc. Entities 1995
- -----------------------------------------------------------------------------
Cost of products and services.. -$22 -$26 -$ 7 $ 1 -$54
Customer operations and
selling expenses............. 6 -5 2 25 28
General, administrative,
and other expenses........... -5 -1 13 5 12
Property & other taxes......... - - -1 - -1
Depreciation and amortization.. - - -10 5 -5
---- ---- ---- ---- ----
Total operating expenses....... -$21 -$32 -$ 3 $36 -$20
=============================================================================
* Excludes Pacific Bell subsidiaries.
** Pacific Telesis Group. Includes Pacific Bell subsidiaries.
14
<PAGE>
At Pacific Bell, excluding its subsidiaries, salary and wage expense decreased
$21 million for first quarter 1996 compared to the same period in 1995,
primarily due to the continued force reduction programs and decreased overtime
in 1996 due to milder weather when compared to 1995. The effect of these
decreases was partially offset by wage increases associated with new labor
agreements effective August 1995.
At Pacific Bell, excluding its subsidiaries, employee benefits expense
decreased $32 million for the three-month period ending March 31, 1996
compared to the same period in 1995 primarily due to changes in employee
benefit plans and benefit plan assumptions. The effect of these decreases was
partially offset by increased pension expense as a result of discontinuing the
application of Statement of Financial Accounting Standards No. ("SFAS") 71,
"Accounting for the Effects of Certain Types of Regulation" that was effective
third quarter 1995. Management expects the changes in employee benefit plans
and benefit plan assumptions to continue to produce savings throughout the
year.
At Pacific Bell, excluding its subsidiaries, depreciation expense decreased
$10 million for the three-month period ending March 31, 1996 compared to the
same period in 1995 primarily due to the elimination of the amortization of
certain regulatory assets associated with the discontinued application of
SFAS 71. The effect of this decrease was partially offset by higher
telecommunications plant balances in first quarter 1996.
The Corporation's other entities' total operating expenses increased for first
quarter 1996 compared to first quarter 1995 due to expenses for new business
initiatives, such as Personal Communications Services ("PCS"), Internet access
and long distance.
Interest Expense
- ----------------
For the 3 Months Ended
March 31,
---------------------
($ millions) 1996 1995 Change
- -----------------------------------------------------------------------------
Interest expense................................... $93 $117 -$24
-20.5%
- -----------------------------------------------------------------------------
Interest expense for first quarter 1996 decreased compared to the same period
in 1995 due primarily to lower interest rates and the change in classification
of interest during construction from an item of miscellaneous income to a
reduction in interest expense due to the discontinued application of SFAS 71.
15
<PAGE>
Miscellaneous Income (Expense) - Net
- ------------------------------------
For the 3 Months Ended
March 31,
----------------------
($ millions) 1996 1995 Change
- -----------------------------------------------------------------------------
Miscellaneous income (expense) - net....... -$4 $31 -$35
-113.0%
- -----------------------------------------------------------------------------
Miscellaneous income decreased for first quarter 1996 compared to first
quarter 1995 primarily due to interest income received on a tax refund in
first quarter 1995, the change in classification of interest during
construction from an item of miscellaneous income to a reduction of interest
expense, and dividends paid on Trust Originated Preferred Securities
("TOPrS"). (See Note C - "Corporation-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust" on page 9.)
Income Taxes
- ------------
For the 3 Months Ended
March 31,
----------------------
($ millions) 1996 1995 Change
- -----------------------------------------------------------------------------
Income taxes...................................... $195 $122 $73
59.8%
- -----------------------------------------------------------------------------
The increase in income tax expense for first quarter 1996 compared to first
quarter 1995 is primarily due to higher pre-tax income, tax adjustments and
tax refunds received in 1995.
Status of Reserves
- ------------------
As previously reported, the Corporation 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. After new hires, net force reduction for Pacific Bell, excluding its
subsidiaries, was approximately 190 employees for the first three months of
1996. A total of $71 million in cash outlays was charged to the reserve in
first quarter 1996. These costs were primarily for information systems
reengineering and facilities consolidation. As of March 31, 1996, a balance
of $157 million remained in the restructuring reserve.
Other reserves were recorded in 1993, 1992 and 1990 primarily related to the
Corporation's withdrawal from, or restructuring of, its real estate, cable,
and customer premises equipment businesses. Management believes the
$98 million balance in these reserves remaining at March 31, 1996, is
adequate.
16
<PAGE>
LIQUIDITY AND FINANCIAL CONDITION
The Corporation defines liquidity as its ability to generate resources to
finance business expansion, construct capital assets, pay its current
obligations, and pay dividends. The Corporation expects to continue to meet
the majority of its liquidity needs from internally generated funds, but can
also obtain external financing through the issuance of common stock, preferred
stock, and short- and long-term debt, if needed. The merger agreement does
not affect the Corporation's ability to finance operations. (See "Merger
Agreement" under Note B on page 7.)
Short-term borrowings are available under a commercial paper program and
through uncommitted unused lines of credit. These lines of credit are subject
to continued review by the lending banks. At March 31, 1996, the unused lines
of credit available totaled approximately $2.7 billion.
For longer-term borrowings, at March 31, 1996, Pacific Bell has remaining
authority from the CPUC to issue up to $1 billion of long- and intermediate-
term debt. The proceeds may be used only to redeem maturing debt and to
refinance other debt issues. Pacific Bell has remaining authority from the
Securities and Exchange Commission ("SEC") to issue up to $400 million of
long- and intermediate-term debt through a shelf registration filed in April
1993. The Corporation's PacTel Capital Resources ("PTCR") subsidiary may
issue up to $192 million of medium-term notes through a shelf registration on
file with the SEC. The Corporation and Pacific Telesis Financing I, II, and
III have remaining authority to sell up to $500 million of TOPrS to the public
through a shelf registration filed with the SEC in October 1995. (See
Note C -"Corporation-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust" on page 9.) The TOPrS are subject to a limited guarantee by
the Corporation.
In March 1996, Moody's Investors Services, Inc. placed the senior long-term
debt ratings of Pacific Bell and PTCR as well as the preferred securities
rating of Pacific Telesis Financing I, II, and III under review for possible
downgrade. The ratings are still under review.
In April 1996, reflecting the announcement of the merger agreement with
SBC Communications Inc. ("SBC"), Standard & Poor's Corporation revised the
outlook on Pacific Telesis Group's corporate credit ratings, including PTCR,
to stable from negative. (See "Merger Agreement" under Note B on page 7.) The
outlook for Pacific Bell remains negative. Also reflecting the merger
agreement announcement, Duff and Phelps, Inc. reaffirmed its ratings of
Duff 1+ and Double-A-Minus ("AA-") on Pacific Bell's commercial paper and
debentures, respectively.
17
<PAGE>
The Corporation has entered into leasing arrangements to finance equipment
associated with the buildout of its PCS network. In accordance with generally
accepted accounting principles, these leases are being classified as capital
leases in property, plant, and equipment. As of March 31, 1996, the financing
obtained under the leases was $99 million. Management expects the total
financing to reach about $460 million, of which approximately one-third will
be repaid in Japanese yen. To hedge exposure to foreign currency exchange
fluctuations, the Corporation has entered into foreign currency forward
contracts to purchase yen in amounts equal to the current yen lease
obligations when they become due. Gains or losses on these contracts and the
yen lease obligations due to foreign currency rate fluctuations will offset in
results of operations. The Corporation does not expect to realize any loss
from counterparty nonperformance under these contracts.
In November 1995, the Corporation announced plans to acquire 100 percent of
the stock of Wireless Holdings, Inc. and Videotron Bay Area, Inc., which hold
licenses and rights to provide wireless video services. Both are joint
ventures between Transworld Telecommunications, Inc. ("TTI") and Le Groupe
Videotron Ltee. The transaction involves the exchange of approximately
$120 million of the Corporation's stock for the outstanding stock of the
acquired companies, and the Corporation's assumption of approximately
$55 million of debt. Closing is expected in third quarter 1996 and is subject
to a number of conditions, including regulatory and TTI shareowner approval.
Cash from operating activities decreased $131 million for the three months
ended March 31, 1996 compared to the same period in 1995. The decrease was
primarily due to timing differences in the payment and collection of accounts
payable and accounts receivable, respectively, and a tax refund of $70 million
received in 1995.
Cash used for investing activities increased $67 million for the three months
ended March 31, 1996 compared to the same period in 1995. The increase was
primarily due to investments in the Pacific Bell Mobile Services PCS network
and to upgrade the core telecommunications network. This increase was
partially offset by an $83 million payment on the PCS licenses in March 1995.
Management anticipates the level of capital expenditures for the full year
1996 to be lower than that of 1995.
Cash used for financing activities decreased $216 million for the three months
ended March 31, 1996 compared to the same period in 1995. The decrease
reflects an overall increase in long-term financing used primarily to reduce
short-term borrowings. In January 1996, the Corporation sold $500 million of
7.56 percent TOPrS. The proceeds were used to reduce the Corporation's
commercial paper outstanding. In February 1996, Pacific Bell issued
$250 million of 5.875 percent debentures due February 15, 2006. The proceeds
from the sale of the debentures were used to reduce short-term debt incurred
to retire Pacific Bell debentures in December 1995. In addition, the
Corporation financed $99 million through its leasing arrangements for
equipment purchases associated with the PCS network.
18
<PAGE>
The Corporation's debt ratio improved to 68.3 percent at March 31, 1996 from
74.1 percent at December 31, 1995. This improvement is due to the use of the
TOPrS proceeds to reduce commercial paper. (See Note C-"Corporation Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust" on page 9.)
Pre-tax interest coverage was 6.4 times for the first three months in 1996
compared to 4.5 times for the same period in 1995. This increase was due
primarily to higher pre-tax income.
For first quarter 1996, the Pacific Telesis Group Board of Directors
maintained the Corporation's dividend at $0.545 per share. Pursuant to the
merger agreement with SBC, the Corporation agreed to reduce its dividend per
share for second quarter 1996 and each subsequent quarter to an amount not to
exceed 0.733 multiplied by SBC's dividend per share for each quarter. Based
on SBC's first quarter dividend of $0.43 per share, the Corporation's
quarterly dividend would not exceed $0.315 per share. (See "Merger Agreement"
under Note B on page 7.)
MERGER AGREEMENT
On April 1, 1996, SBC and the Corporation jointly announced a definitive
agreement whereby the Corporation will become a wholly owned subsidiary of
SBC. Under terms of the merger agreement, each share of Pacific Telesis common
stock will be exchanged for 0.733 shares of SBC common stock, subject to
adjustment. The transaction, which has been approved by the Board of Directors
of each company, is intended to be accounted for as a pooling of interests and
to be a tax-free reorganization. Completion of the merger is subject to
certain conditions, including regulatory approvals and approval by the
shareowners of each company.
PENDING REGULATORY ISSUES
1996 Interstate Access Charge Filing
- ------------------------------------
In April 1996, the Telephone Companies filed their 1996 annual access tariffs
with the FCC. These tariffs propose rate increases of about $24 million for
the July 1, 1996 through June 30, 1997 tariff year.
19
<PAGE>
FCC Proposal on Wireless Interconnection
- ----------------------------------------
In January 1996, the FCC released a Notice of Proposed Rulemaking in which the
FCC proposed to change the arrangement under which the Telephone Companies and
other local exchange carriers ("LECs") are compensated for interconnecting
with and terminating traffic for Commercial Mobile Radio Service ("CMRS")
providers (including cellular and PCS providers). Under the FCC's proposal,
for an interim period the Telephone Companies would no longer receive
compensation for these functions. Each carrier would terminate traffic for
the other at no charge ("bill and keep"). LECs terminate over four times more
traffic for CMRS providers than CMRS providers terminate traffic for LECs.
The Telephone Companies have advocated interconnection based on negotiated
mutual compensation agreements. It is possible that the FCC could decide this
issue in the near term. If adopted, bill and keep would have a material
adverse effect on the Corporation.
Long Distance Service
- ---------------------
In February 1996, the Telecommunications Act of 1996 was signed into law
establishing new procedures under which the Corporation can apply to offer
long distance telephone service between service areas. To compete effectively
in this market, the Corporation formed Pacific Bell Communications ("PBCOM").
In March and April of 1996, PBCOM filed applications in California and Nevada
to provide competitive long distance telephone service between and within
service areas and local exchange services as a non-dominant carrier. The
Corporation must comply with a competitive checklist required by the
Telecommunications Act of 1996 before PBCOM can receive FCC approval to offer
long distance service between service areas. Both federal and state approvals
are required before PBCOM may enter these markets. Management expects to be
able to provide these services in early 1997.
Nevada Bell Rate Case
- ---------------------
In March 1996, Nevada Bell filed a rate case with the Public Service
Commission of Nevada ("PSCN"). Acceptance of the rate case as filed would
eliminate sharing of productivity gains between Nevada Bell and its
customers. It would also allow Nevada Bell to accelerate its depreciation
methods to reflect the shorter economic lives of assets in a competitive
environment and establish competitive pricing of certain services. The PSCN
is required to issue a decision on the filing by October 7, 1996. Nevada Bell
has asked that the new rate structure become effective as of January 1, 1997.
Nevada Bell does not anticipate that the depreciation method change, if
granted, would result in a write-down of telephone plant.
20
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Report 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
- ------- -----------
3(ii) By-Laws of Pacific Telesis Group, as amended to April 1, 1996.
4 No instrument which defines the rights of holders of long-
and intermediate-term debt of Pacific Telesis Group or its
subsidiaries is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, Pacific
Telesis Group hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 1st Quarter 1996 Form 10-Q.
The Corporation will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Report on Form 8-K.
Form 8-K, Date of Report January 4, 1996, was filed with the SEC,
under Item 7, attaching the Opinion of Richard W. Odgers, Esq.
regarding the issuance of TOPrS.
21
<PAGE>
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 Telesis Group
BY /s/ W. E. Downing
--------------------------
W. E. Downing
Executive Vice President,
Chief Financial Officer & Treasurer
May 13, 1996
22
<PAGE>
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
- ------- -----------
3(ii) By-Laws of Pacific Telesis Group, as amended to April 1, 1996.
4 No instrument which defines the rights of holders of long- and
intermediate-term debt of Pacific Telesis Group or its subsidiaries
is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, Pacific Telesis Group hereby agrees to
furnish a copy of any such instrument to the SEC upon request.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 1st Quarter 1996 Form 10-Q.
23
<PAGE>
EXHIBIT 3(ii)
-------------
BY-LAWS
OF
PACIFIC TELESIS GROUP
(As amended April 1, 1996)
Table of Contents
Article I, Offices................................................... 1
Article II, Meetings of Stockholders................................. 1
Article III, Directors............................................... 5
Article IV, Notices.................................................. 6
Article V, Officers.................................................. 6
Article VI, Certificates of Stock.................................... 7
Article VII, Seal.................................................... 8
Article VIII, Amendments............................................. 8
Article IX, Control Share Statute.................................... 8
<PAGE>
BY-LAWS
OF
PACIFIC TELESIS GROUP
(As amended April 1, 1996)
ARTICLE I
Offices
SECTION 1. The principal office of the corporation in the State of
Nevada shall be located at 645 East Plumb Lane, in the City of Reno, County of
Washoe.
SECTION 2. The corporation may also have offices at such other places
both within and without the State of Nevada as the Board of Directors or
officers may from time to time determine or the business of the corporation
may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Annual and special meetings of the stockholders shall be held
at such time and place within or without the State of Nevada as shall be
stated in the notice of the meeting, or in a duly executed waiver of notice
thereof.
SECTION 2. The annual meeting of the stockholders shall be held on such
date as may be designated by the Board of Directors, at which meeting the
stockholders shall elect by a plurality vote those members of the Board of
Directors who are to be elected at such meeting, and transact such other
business as shall properly be brought before the meeting. (As amended
March 22, 1991)
SECTION 3. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Articles of
Incorporation, may be called by the Chairman of the Board or by the President
and shall be called by the Chairman of the Board, the President or Secretary
at the request in writing of a majority of the Board of Directors or the
holders of sixty-six and two-thirds percent (66-2/3%) of the shares entitled
to vote at such meeting. Such request shall state the purpose or purposes of
the proposed meeting.
SECTION 4. The directors may fix a day not more than 60 days prior to
the holding of any meeting of the stockholders as the day as of which
stockholders entitled to notice of and to vote at such meeting shall be
determined; and only stockholders of record on such day shall be entitled to
notice of or to vote at such meeting.
1
<PAGE>
SECTION 5. Notices of meetings of stockholders shall be in writing and
signed by the Chairman of the Board, the President, the Secretary or an
Assistant Secretary, or by such other person or persons as the directors shall
designate. Such notice shall state the purpose or purposes for which, and the
time for when, the meeting is called, and the place where it is to be held. A
copy of such notice shall be either delivered personally or shall be mailed,
postage prepaid, to each stockholder of record entitled to vote at such
meeting not less than ten (10) or more than sixty (60) days before such
meeting. If mailed, it shall be directed to a stockholder at his address as
it appears on the records of the corporation, and upon such mailing of any
such notice, the service thereof shall be complete, and the time of the notice
shall begin to run from the date upon which such notice is deposited in the
mail for transmission to such stockholder. Delivery of any such notice to any
officer of a corporation or association, or to any member of a partnership,
shall constitute delivery of such notice to such corporation, association or
partnership. In the event of the transfer of stock after delivery or mailing
of the notice of and prior to the holding of the meeting it shall not be
necessary to deliver or mail notice of the meeting to the transferee.
SECTION 6. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
SECTION 7. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Articles of
Incorporation. If, however, such quorum shall not be present or represented
at any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
scheduled.
SECTION 8. When a quorum is present or represented at any meeting, the
vote of the holders of a majority of the voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or
of the Articles of Incorporation a different vote is required, in which case
such express provision shall govern and control the decision of such question.
SECTION 9. At any meeting of the stockholders, any stockholder may be
represented and have his shares voted by a proxy or proxies appointed by an
instrument in writing executed by the stockholder of record; provided,
however, that no such instrument may appoint more than three persons to act as
proxies at any such meeting, and if an instrument shall purport to appoint
more than three persons to act as proxies the corporation shall recognize as
proxies only the first three persons listed as appointed. In the event that an
instrument in writing executed by a stockholder of record shall designate two
or three persons to act as proxies, a majority of such persons present at the
meeting, or, if only one shall be present, then that one shall have and may
exercise all of the powers conferred by such written instrument upon all of
the persons so designated unless the instrument shall otherwise provide. No
such instrument shall be valid except for the purposes expressly stated
2
<PAGE>
therein, and shall not be valid after the expiration of six months from the
date of its execution, unless coupled with an interest, or unless the person
executing it specifies therein the length of time for which it is to continue
in force, which in no case shall exceed seven years from the date of its
execution. Subject to the above, any written instrument appointing a proxy or
proxies and duly executed by a stockholder of record shall, unless otherwise
limited by its terms, continue in full force and effect until a written
instrument bearing a later date is filed with the Secretary of the
corporation, which instrument by its terms either revokes the earlier
appointment or creates a new appointment.
SECTION 10. No action required or permitted to be taken at an annual or
special meeting of the stockholders of the corporation may be taken without a
meeting, and the power of the stockholders to consent in writing without a
meeting to the taking of any action is specifically denied. (As amended
October 1, 1989)
SECTION 11. To be properly brought before the annual meeting, business
must be either (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
stockholder. In addition to any other applicable requirements, for business
to be properly brought before the annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary
of the corporation. To be timely, a stockholder's notice must be delivered to
or mailed and received at the principal executive offices of the corporation,
addressed to the attention of the Secretary of the corporation, within the
time specified in the federal proxy rules for timely submission of a
stockholder proposal or, if not within such time, then not less than
twenty-five days nor more than sixty days prior to the meeting; provided,
however, that in the event that less than fifty days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received by the earlier of (a) the
close of business on the fifteenth day following the day on which such notice
of the date of the annual meeting was mailed or such public disclosure was
made, whichever first occurs, and (b)two days prior to the date of the
meeting. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting,
(ii) the name and record address of the stockholder proposing such business,
(iii) the class and number of shares of the corporation which are beneficially
owned by the stockholder, and (iv) any material interest of the stockholder in
such business. Notwithstanding anything in these By-Laws to the contrary, no
business shall be conducted at the annual meeting except in accordance with
the procedures set forth in this Section 11; provided, however, that nothing
in this Section 11 shall be deemed to preclude discussion by any stockholder
of any business properly brought before the annual meeting.
The Chairman of the Board of Directors shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 11, and
if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted. (As
amended September 24, 1993)
3
<PAGE>
SECTION 12. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors. Nominations
of persons for election to the Board of Directors at the annual meeting or by
the written consent of the shareholders, by or at the direction of the Board
of Directors, may be made by any Nominating Committee or person appointed by
the Board of Directors; nominations may also be made by any shareholder of the
corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 12. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the corporation. To be timely, a shareholder's notice shall be delivered
to or mailed and received at the principal executive offices of the
corporation addressed to the attention of the Secretary of the corporation not
less than twenty-five days prior to the meeting or the date the shareholders
are first solicited for their consents as the case may be; provided, however,
that, in the case of an annual meeting and in the event that less than fifty
days' notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must be so
received not later than the earlier of (a) the close of business on the
fifteenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made, whichever first occurs,
or (b) two days prior to the date of the meeting. Such shareholder's notice
to the Secretary shall set forth (a) as to each person whom the shareholder
proposes to nominate for election or reelection as a director, (i) the name,
age, business address and residence address of the person, (ii) the principal
occupation or employment of the person, (iii) the class and number of shares
of capital stock of the corporation which are beneficially owned by the
person, (iv) a statement as to the person's citizenship, and (v) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Section 14 of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder; and (b) as to the shareholder giving the notice, (i)
the name and record address of the shareholder and (ii) the class, series and
number of shares of capital stock of the corporation which are beneficially
owned by the shareholder. The corporation may require any proposed nominee to
furnish such other information as may reasonably be required by the
corporation to determine the eligibility of such proposed nominee to serve as
a director of the corporation. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth herein.
In connection with any annual meeting, the Chairman of the Board of
Directors shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the foregoing procedure, and
if he should so determine, he shall so declare to the meeting and the
defective nomination shall be disregarded. (As amended September 24, 1993)
4
<PAGE>
ARTICLE III
Directors
SECTION 1. The business of the corporation shall be managed by or under
the direction of the Board of Directors, which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute
or by the Articles of Incorporation or by these By-Laws directed or required
to be exercised or done by the stockholders.
SECTION 2. The Board of Directors of the corporation may hold meetings,
annual, regular and special, either within or without the State of Nevada.
SECTION 3. Regular meetings of the Board of Directors may be held
without notice at such time and place as shall from time to time be determined
by the Board and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a
quorum shall be present.
SECTION 4. Special meetings of the Board of Directors may be called by
the Chairman of the Board or the President, or a Vice Chairman, and shall be
called by the Chairman of the Board, the President or Secretary on written
request of a majority of the directors. Notice of special meetings shall be
given by the Secretary or an Assistant Secretary of the corporation to each
director personally or by telephone, facsimile transmission or telegram at
least two (2) hours before the meeting, or by mailing written notice at least
four (4) days before the meeting. (As amended October 28, 1988)
SECTION 5. A majority of the Board of Directors, at a meeting duly
assembled, shall be necessary to constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board of Directors, except
as may be otherwise specifically provided by statute or by the Articles of
Incorporation. A director may participate in any such meeting by means of a
conference telephone network or a similar communications method by which all
persons participating in the meeting can hear each other. Participation in a
meeting pursuant to any such communications method constitutes presence in
person at such meeting. Whenever any director participates in a meeting by
means of any such communications method, each of the persons participating in
the meeting shall sign the minutes thereof. Any action required or permitted
to be taken at a meeting of the directors may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all
of the directors entitled to vote with respect to the subject matter thereof.
SECTION 6. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation, which, to the
extent provided in the resolution, shall have and may exercise the powers of
the Board of Directors in the management of the business and affairs of the
corporation, and may have power to authorize the seal of the corporation to be
affixed to all papers which may require it. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors.
5
<PAGE>
SECTION 7. Unless other procedures are established by resolution adopted
by the Board of Directors, the provisions of Sections 3, 4 and 5 of this
Article III shall be applicable to committees of the Board of Directors, if
any are established. For such purpose, references to "the Board" or "the
Board of Directors" shall be deemed to refer to each such committee. The
committees shall keep regular minutes of their proceedings and report the same
to the Board when required. (As amended July 28, 1989)
ARTICLE IV
Notices
SECTION 1. Notice to directors may be given by the Secretary or an
Assistant Secretary of the corporation to each director by mail, personally or
by telephone, facsimile transmission or telegram. (As amended September 22,
1989)
SECTION 2. Whenever all parties entitled to vote at any meeting, whether
of directors or stockholders, consent, either by a writing on the records of
the meeting or filed with the Secretary, or by presence at such meeting an
oral consent entered on the minutes, or by taking part in the deliberations at
such meeting without objection, the doings of such meeting shall be as valid
as if had at a meeting regularly called and noticed. At such meeting any
business may be transacted which is not excepted from the written consent or
to the consideration of which no objection for want of notice is made at the
time. If any meeting be irregular for want of notice or of such consent,
provided a quorum was present at such meeting, the proceedings of said meeting
may be ratified and approved and rendered likewise valid and the irregularity
or defect therein waived by a writing signed by all parties having the right
to vote at such meetings; and such consent or approval of stockholders may be
by proxy or attorney, but all such proxies and powers of attorney must be in
writing.
SECTION 3. Whenever any notice whatsoever is required to be given under
the provisions of the statutes, of the Articles of Incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be
deemed equivalent thereto.
ARTICLE V
Officers
SECTION 1. The officers of the corporation shall be chosen by the Board
of Directors and shall hold office at the pleasure of the Board. The officers
of the corporation shall consist of a Chairman of the Board, a President, such
Vice Chairmen of the Board, such Executive Vice Presidents and Vice Presidents
as the Board of Directors may elect, a Secretary, a Treasurer, such Assistant
Secretaries and Assistant Treasurers and such other officers as the Board of
Directors may elect. (As amended January 22, 1988)
6
<PAGE>
SECTION 2. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors shall be the Chief Executive Officer and shall have
responsibility for the overall operations of the corporation; shall preside at
all meetings of the Board of Directors and of the Executive Committee, if one
be appointed, and of the stockholders; and shall perform such other duties as
the Board of Directors may from time to time assign.
SECTION 3. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. Each Vice Chairman
of the Board of Directors, if any is chosen, shall perform such duties as may
from time to time be delegated to him by the Chairman of the Board or as may
be assigned by the Board of Directors.
SECTION 4. OTHER OFFICERS. Each Executive Vice President, each
Vice President, the Secretary, each Assistant Secretary, the Treasurer, each
Assistant Treasurer and each other officer elected by the Board shall have
such powers and perform such duties as the Board of Directors or the Chairman
of the Board of Directors may from time to time direct. (As amended July 28,
1989)
SECTION 5. RESIDENT AGENT. The Board of Directors shall choose the
resident agent of the corporation, which may be either an individual or
corporation, resident or located in the State of Nevada. All legal process
and any demand or notice authorized by law to be served upon the corporation
may be served upon the resident agent in the manner provided by law.
ARTICLE VI
Certificates of Stock
SECTION 1. The Board of Directors may direct a new stock certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and
give the corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the corporation with respect to the
certificate alleged to have been lost or destroyed. The Board of Directors
may, from time to time, authorize the issuance of new certificates in place of
lost or destroyed certificates, without the necessity of action by the Board
of Directors in each particular case, upon the filing with such officers of
the corporation or such other persons as the Board of Directors may designate
of an affidavit or information and a bond of indemnity or indemnity agreement
satisfactory to such designated officers or persons, or any of them.
7
<PAGE>
SECTION 2. STOCKHOLDERS OF RECORD. The corporation shall be entitled to
recognize the exclusive right of the person registered on its books, whether
individually or as a trustee, pledgee or otherwise, as the owner of shares to
receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Nevada.
SECTION 3. The Board of Directors may fix a time as a record date for
the determination of stockholders entitled to receive any dividend or
distribution, or any allotment of rights, or to exercise rights in respect to
any change, conversion or exchange of shares, and only stockholders of record
on that date shall be entitled to receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be.
ARTICLE VII
Seal
The corporate seal shall have inscribed thereon the name of the
corporation and the year of its incorporation.
ARTICLE VIII
Amendments
These By-Laws may be altered, amended or repealed at any time by action
of the Board of Directors. These By-Laws may also be altered, amended or
repealed by action of the stockholders at any meeting of the stockholders if
notice of such alteration, amendment or repeal be contained in the notice of
such meeting; provided, however, that any alteration, amendment or repeal of
these By-Laws by action of the stockholders must be approved by the vote of a
least sixty-six and two-thirds percent (66-2/3%) of the voting power of the
shares of this corporation entitled to vote in the election of directors,
voting as one class.
ARTICLE IX
Control Share Statute
SECTION 1. Shares of this corporation's capital stock beneficially owned
by an acquiring person, as such term is defined in Section 78.3782 of the
Nevada Revised Statutes, shall be redeemable as provided in Section 78.3792 of
the Nevada Revised Statutes. This corporation specifically reserves all
rights accorded to it under Sections 78.378-78.3793 of the Nevada Revised
Statutes, including the right to elect not to be governed by such provisions
under Section 78.378 of the Nevada Revised Statutes. (As amended
September 22, 1989)
8
<PAGE>
SECTION 2. The provisions of Nevada Revised Statutes Sections 78.378 and
78.3793, inclusive, do not apply to any acquisition of a controlling interest
in this Corporation by SBC Communications Inc., a Delaware corporation
("SBC"), pursuant to the Agreement and Plan of Merger dated as of April 1,
1996, among this Company, SBC Communications Inc. and SBC Communications (NV)
Inc., a Nevada corporation, as the same may be amended, modified or
supplemented. (As amended April 1, 1996)
9
<PAGE>
Exhibit 11
----------
PACIFIC TELESIS GROUP AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Dollars in millions, except per share amounts; shares in thousands)
For the 3 Months Ended
March 31,
----------------------
1996 1995
------- -------
Net income............................................ $298 $282
======= =======
Weighted average number of common shares outstanding.. 428,435 424,065
Common stock equivalent shares applicable to
stock options..................................... 815 591
------- -------
Total number of shares for computing primary
earnings per share ............................... 429,250 424,656
Incremental shares for computing fully diluted
earnings per share................................ - 45
------- -------
Total number of shares for computing fully diluted
earnings per share................................ 429,250 424,701
======= =======
Earnings per common share (as reported)............... $ 0.70 $ 0.67
Primary earnings per share............................ $ 0.69 $ 0.66
Fully diluted earnings per share...................... $ 0.69 $ 0.66
=============================================================================
Earnings per share amounts for the three months ended March 31, 1996 and
March 31, 1995, as reported in the Condensed Consolidated Statements of
Income, were based on the weighted average number of common shares outstanding
for the respective periods. Primary and fully diluted earnings per share
amounts were not shown in the Condensed Consolidated Statements of Income, as
they differ from the reported earnings per share amounts by less than
three percent.
<PAGE>
Exhibit 15
----------
COOPERS & LYBRAND L.L.P.
May 13, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Re: Pacific Telesis Group
Registrations on Forms S-3, Forms S-4, and Forms S-8
----------------------------------------------------
We are aware that our report dated May 13, 1996 on our review of the interim
financial information of Pacific Telesis Group and Subsidiaries for the three-
month period ended March 31, 1996 and included in this Form 10-Q is
incorporated by reference in the Corporation's registration statements as
follows:
Form S-3: PacTel Capital Resources $500,000,000 Debt Securities and
Guarantee thereof by Pacific Telesis Group
Form S-3: Secondary Offering of 137,504 shares of Pacific Telesis Group
Common Stock
Form S-3: Shareowner Dividend Reinvestment and Stock Purchase Plan
Form S-3: Pacific Telesis Group and Pacific Telesis Financing I, II, and
III $1 billion of Trusts' Preferred Securities and Other
Securities
Form S-4: ABI American Businessphones, Inc. Merger
Form S-4: SBC Communications, Inc. Merger
Form S-8: Nonemployee Director Stock Option Plan
Form S-8: Supplemental Retirement and Savings Plan for Salaried Employees
Form S-8: Supplemental Retirement and Savings Plan for Nonsalaried
Employees
Form S-8: Stock Option and Stock Appreciation Rights Plan
Form S-8: PacTel Corporation Retirement Plan
Form S-8: Stock Incentive Plan
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statements prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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0
0
<OTHER-SE> 2,237
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