<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 June 30, 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 July 31, 1996, 428,330,798 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 ............ 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .......................... 12
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders ......... 27
Item 6. Exhibits and Reports on Form 8-K ............................ 28
SIGNATURE ............................................................ 30
- ---------
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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 June 30, 1996
and the related condensed consolidated statements of income for the three- and
six-month periods ended June 30, 1996 and 1995, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 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
August 12, 1996
1
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the 3 Months For the 6 Months
Ended June 30, Ended June 30,
(Dollars in millions, ----------------- ----------------
except per share amounts) 1996 1995 1996 1995
- ---------------------------------------------------------------------------
OPERATING REVENUES
Local service ................... $1,015 $ 946 $1,994 $1,895
Network access:
Interstate .................... 461 428 919 870
Intrastate .................... 186 178 366 345
Toll service .................... 322 296 639 615
Other service revenues .......... 409 383 809 760
------ ------ ------ -----
TOTAL OPERATING REVENUES......... 2,393 2,231 4,727 4,485
------ ------ ------ -----
OPERATING EXPENSES
Cost of products and services ... 398 425 845 926
Customer operations and
selling expenses .............. 475 440 938 875
General, administrative, and
other expenses ................ 410 328 736 642
Property and other taxes......... 44 53 90 100
Depreciation and amortization ... 466 467 928 934
------ ------ ------ -----
TOTAL OPERATING EXPENSES......... 1,793 1,713 3,537 3,477
------ ------ ------ -----
OPERATING INCOME................. 600 518 1,190 1,008
Interest expense................. 94 116 187 233
Other income(expense)-net........ (17) 13 (21) 44
------ ------ ------ -----
INCOME BEFORE INCOME TAXES....... 489 415 982 819
Income taxes..................... 208 155 403 277
------ ------ ------ -----
NET INCOME....................... $ 281 $ 260 $ 579 $ 542
====== ====== ====== ======
Earnings per share .............. $ 0.66 $ 0.61 $ 1.35 $1.28
Dividends per share ............. $0.315 $0.545 $ 0.86 $1.09
Average shares outstanding
(thousands) .................. 428,436 424,065 428,436 424,065
===========================================================================
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
June 30, December 31,
(Dollars in millions) 1996 1995
- ---------------------------------------------------------------------------
ASSETS: (Unaudited)
Cash and cash equivalents......................... $ 54 $ 76
Accounts receivable - (net of allowances for
uncollectibles of $144 and $132 in 1996
and 1995, respectively)......................... 1,552 1,505
Prepaid expenses and other current assets......... 1,010 1,002
------- ------
Total current assets.............................. 2,616 2,583
------- ------
Property, plant, and equipment - at cost.......... 27,983 27,222
Less: accumulated depreciation................. (16,457) (15,837)
------- ------
Property, plant, and equipment - net.............. 11,526 11,385
------- ------
Other noncurrent and intangible assets............ 1,915 1,873
------- ------
TOTAL ASSETS...................................... $16,057 $15,841
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY:
Accounts payable and accrued liabilities.......... $ 2,022 $ 2,203
Debt maturing within one year..................... 583 1,530
Other current liabilities......................... 722 908
------- ------
Total current liabilities......................... 3,327 4,641
------- ------
Long-term obligations............................. 5,149 4,737
------- ------
Other noncurrent liabilities and deferred credits. 4,119 4,273
------- ------
(Continued on next page)
3
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
June 30, December 31,
(Dollars in millions) 1996 1995
- ---------------------------------------------------------------------------
(Unaudited)
LIABILITIES AND SHAREOWNERS' EQUITY (Continued):
Commitments and contingencies (Note B)
Corporation-obligated mandatorily redeemable
preferred securities of subsidiary trusts*
(Note C)......................................... 1,000 -
------ ------
Common stock ($0.10 par value; 432,827,595
shares issued; 428,442,133 and 428,434,672
shares outstanding)............................ 43 43
Additional paid-in capital....................... 3,501 3,498
Accumulated deficit.............................. (770) (982)
Treasury stock (4,385,462 and 4,392,923 shares).. (127) (127)
Deferred compensation - LESOP trust.............. (185) (242)
------- ------
Total shareowners' equity........................ 2,462 2,190
------- ------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY........ $16,057 $15,841
======= =======
==========================================================================
* The sole asset of the trusts consist of $1,030 million in principal
amount of the Subordinated Debentures 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 6 Months Ended
June 30,
---------------------
(Dollars in millions) 1996 1995
- ---------------------------------------------------------------------------
CASH FROM (USED FOR) OPERATING ACTIVITIES:
Net income........................................... $ 579 $ 542
Adjustments to reconcile net income to cash from
operating activities:
Depreciation and amortization...................... 928 934
Change in deferred income taxes.................... 112 3
Changes in operating assets and liabilities:
Accounts receivable.............................. (47) 172
Prepaid expenses and other current assets........ (35) (38)
Other noncurrent and intangible assets........... (51) 152
Accounts payable and accrued liabilities......... (148) (51)
Other current liabilities........................ (100) (13)
Noncurrent liabilities and deferred credits...... (158) (307)
Other adjustments, net............................. (34) (37)
------- ------
Cash from operating activities....................... 1,046 1,357
------- ------
CASH USED FOR INVESTING ACTIVITIES:
Additions to property, plant, and equipment.......... (1,092) (832)
Investment in PCS licenses........................... (41) (640)
Other investing activities, net...................... (5) (13)
------- ------
Cash used for investing activities................... (1,138) (1,485)
------- ------
CASH FROM (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of common and treasury shares. 103 62
Proceeds from issuance of long-term debt............. 248 -
Retirements of long-term debt........................ (15) (202)
Proceeds from issuance of trust originated
preferred securities............................... 1,000 -
Proceeds from sale and leaseback transactions........ 178 -
Dividends paid....................................... (466) (462)
Increase (decrease) in short-term borrowings, net.... (945) 668
Other financing activities, net...................... (33) (1)
------- ------
Cash from financing activities....................... 70 65
------- ------
(Continued on next page)
5
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
For the 6 Months Ended
June 30,
---------------------
(Dollars in millions) 1996 1995
- ---------------------------------------------------------------------------
Decrease in cash and cash equivalents................ (22) (63)
Cash and cash equivalents at January 1............... 76 135
------- ------
Cash and cash equivalents at June 30................. $ 54 $ 72
======= ======
Cash payments for:
Interest........................................... $ 179 $ 238
Income taxes....................................... $ 151 $ 149
===========================================================================
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
6
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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. These reclassifications did not affect net income or
shareowners' equity.
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, Pacific Bell discontinued accounting under
Statement of Financial Accounting Standards No. ("SFAS") 71, "Accounting
for the Effects of Certain Types of Regulation." Nevada Bell 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.
7
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Change In Estimates
In March 1996, management amended the salaried pension plan, which changed
from a final pay plan to a cash balance plan. As a result of the approval
of this plan amendment, in second quarter 1996 the Corporation updated its
actuarial assumptions to reflect changes in market interest rates and
recent experience, including a change in its assumption concerning future
ad hoc increases in pension benefits. These changes in estimates increased
net income by approximately $38 million, or $0.09 per share for second
quarter 1996 in comparison to the same period in 1995.
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
is intended to be accounted for as a pooling of interests and to be a tax-
free reorganization. On July 31, 1996, the shareowners of the Corporation
and SBC approved the transaction, which previously had been approved by the
respective Board of Directors of each company. Pursuant to the merger
agreement, the Corporation reduced its second quarter 1996 dividend to
$0.315 per share from the first quarter 1996 dividend of $0.545 per share.
Dividends per share for each subsequent quarter will be adjusted to an
amount not to exceed 0.733 multiplied by SBC's dividend per share for each
quarter. The merger is subject to certain conditions and regulatory
approvals, including approval by the California Public Utilities Commission
("CPUC"), which has established a schedule for review of the transaction
with final comments from interested parties due in December 1996. If
approvals are granted, the transaction is expected to close in the first
quarter of 1997.
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 $110 million of the Corporation's stock for the outstanding
stock of the acquired companies and the Corporation's assumption of
approximately $65 million of debt. Closing is expected in the latter half
of 1996 and is subject to a number of conditions, including regulatory and
TTI shareowner approval.
8
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PACIFIC TELESIS GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B. COMMITMENTS AND CONTINGENCIES (Continued)
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 now expects the actual amount of these facilities
purchased in 1998 will be less than $800 million.
As of June 30, 1996, Pacific Bell had purchase commitments of about
$232 million remaining in connection with its previously announced program
for deploying an all digital switching platform with ISDN and SS-7
capabilities.
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 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 $172 million at June 30, 1996.
Management believes postretirement benefits costs are appropriately
recoverable in Pacific Bell's price cap filings.
9
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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 approximately $60 million as of June 30, 1996, 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 the Corporation.
C. CORPORATION-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS
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. In June 1996, the Corporation sold
$500 million of 8.5 percent TOPrS through Pacific Telesis Financing II.
The 20 million shares of TOPrS are priced at $25 per share, have a 30-year
maturity, an extension option, and are callable in five years at par. The
proceeds were used to retire short-term indebtedness, primarily commercial
paper. TOPrS are subject to a limited guarantee from the Corporation.
As of June 30, 1996, the sole asset of Pacific Telesis Financing I and II
consists of subordinated debt securities of the Corporation in principal
amounts of $515.5 and $514.5 million, respectively, with interest rates of
7.56 and 8.5 percent, respectively.
10
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D. SUBSEQUENT EVENT
In August 1996, Pacific Bell issued $250 million of 6.875 percent
debentures due August 15, 2006. The debentures may not be redeemed prior
to maturity. The proceeds from the sale of the debentures will be used to
reduce short-term debt incurred to retire Pacific Bell's debentures
totaling approximately $500 million in December 1995.
11
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for historical information contained herein, this quarterly report on
Form 10-Q contains certain forward-looking statements that involve potential
risks and uncertainties. Pacific Telesis Group's (the "Corporation") future
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed herein and those discussed in the "Annual Financial Review" in
the Corporation's 1996 Proxy Statement. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Corporation undertakes no obligation to revise or update
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following discussions and data compare the results of operations of the
Corporation for the three- and six-month periods ended June 30, 1996 to the
same periods in 1995. The Corporation's operations include Pacific Bell and
Nevada Bell (the "Telephone Companies"), along with several other units.
Results for the first six months of 1996 may not be indicative of results for
the full year.
A summary of selected operating data is shown below:
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
---------------------- -----------------------
% %
Operating Statistics 1996 1995 Change 1996 1995 Change
- -----------------------------------------------------------------------------
Return on shareowners'
equity (%).................. 47.4 19.2 - 49.8 20.2 -
Capital expenditures ($mil)... 603 1,058 -43.0 1,141 1,545 -26.1
Total employees at June 30.... 48,656 50,871 -4.4 - - -
Telephone Companies' employees
at June 30*................. 44,743 47,648 -6.1 - - -
Telephone Companies' employees
per ten thousand access lines
at June 30*................ 27.6 30.8 -10.4 - - -
- -----------------------------------------------------------------------------
* excludes Pacific Bell Directory and Pacific Bell Mobile Services employees.
12
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Earnings
- --------
Fueled by increases in customer access line growth, marketing efforts, a
rebound in the California economy and continued cost containment, offset by
costs for this year's new business initiatives, the Corporation reported net
income of $281 million for the second quarter 1996, an 8.1 percent increase
over the $260 million reported for the same period last year. Earnings per
share for the second quarter 1996 was $0.66, up 8.2 percent from the $0.61 per
share for the same period last year. For the first six months of 1996, the
Corporation reported net income of $579 million, or $1.35 per share, compared
to earnings of $542 million, or $1.28 per share for a year ago. (See "Change
In Estimates" under Note A on page 8.)
For the first six months in 1995, pressure on earnings resulted from
incremental labor expense associated with the severe storms in early 1995.
These earnings decreases in 1995 were partially offset by the Corporation's
ongoing cost-reduction efforts and other items including the receipt of tax
and related interest refunds.
The California Public Utilities Commission ("CPUC") authorized facilities-
based local services competition effective January 1996, and resale
competition effective March 1996. As of June 30, 1996, such competition had
not yet had a significant effect on the Corporation's earnings. Management is
concerned, however, that depending on the outcome of certain open issues in
the local competition rules proceedings, such competition could deprive
Pacific Bell of the opportunity to earn a fair rate-of-return.
For a discussion on a recent FCC order that may affect future earnings, see
"FCC Interconnection Order" and "FCC Proposal on Wireless Interconnection" on
page 24.
13
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Volume Indicators
- -----------------
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
---------------------- ----------------------
% %
Volume Indicators 1996 1995 Change 1996 1995 Change
- ----------------------------------------------------------------------------
Switched access lines in
service at June 30
(thousands)............... 16,214 15,488 4.7 - - -
Residence................ 10,140 9,728 4.2 - - -
Business................. 5,860 5,546 5.7 - - -
Other.................... 214 214 - - - -
ISDN access lines
(included in above access
lines).................. 78 34 129.4 - - -
Interexchange carrier access
minutes-of-use (millions). *16,151 14,665 *10.1 *31,978 29,046 *10.1
Interstate............... *8,817 8,123 *8.5 *17,450 16,253 *7.4
Intrastate............... *7,334 6,542 *12.1 *14,528 12,793 *13.6
Toll messages (millions)... 1,298 **1,204 7.8 2,551 **2,371 7.6
Toll minutes-of-use
(millions)................ 3,837 3,587 7.0 7,656 7,169 6.8
Voice mailbox equivalents at
June 30 (thousands)....... 1,601 1,291 24.0 - - -
Custom calling services at
June 30 (thousands)....... 7,579 6,911 9.7 - - -
- -----------------------------------------------------------------------------
* Preliminary
** Restated
The total number of access lines in service grew to 16.214 million, an
increase of 4.7 percent for the twelve months ended June 30, 1996. This is an
improvement over the 2.9 percent increase for the same period last year. The
residential access line growth rate increased to 4.2 percent for the twelve
months ended June 30, 1996, from 2.2 percent last year. Changes in
technology, telecommuting, Internet access and the Corporation's marketing
efforts continue to fuel increased demand for additional telephone lines in
the home. Second access lines in residences grew 14.0 percent from
1.695 million lines to 1.932 million lines for the twelve months ended
June 30, 1996. The growth rate in business access lines was 5.7 percent for
the twelve months ended June 30, 1996, up from 4.1 percent for the same period
last year. The number of ISDN lines in service for the Corporation grew to
78 thousand, an increase of 129.4 percent for the twelve months ended June 30,
1996, as customers increased telecommuting and demanded faster data
transmission and Internet access. Accelerated demand for the Corporation's
high-speed data transmission continued through the second quarter due to the
Corporation's intensified marketing efforts.
14
<PAGE>
Access minutes-of-use represent the volume of traffic carried by interexchange
carriers over the Telephone Companies' local networks. Total access minutes-
of-use for the six months ended June 30, 1996 increased by 10.1 percent
(preliminary) over the same period last year. The increase in access minutes-
of-use was primarily attributable 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 six months ended June 30, 1996, toll
minutes-of-use increased by 6.8 percent driven by economic growth.
High demand for the Corporation's voice mail products continued in 1996.
Voice mailbox equivalents in service increased 24.0 percent for the twelve
months ended June 30, 1996 to 1.601 million. Similarly, demand for custom
calling services, such as call waiting, grew 9.7 percent for the twelve months
ended June 30, 1996 due to a rebound in the California economy and the
Corporation's focused customer retention efforts.
Operating Revenues
- ------------------
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
---------------------- -----------------------
($ millions) 1996 1995 Change 1996 1995 Change
- ----------------------------------------------------------------------------
Total operating revenues. $2,393 $2,231 $162 $4,727 $4,485 $242
7.3% 5.4%
- ----------------------------------------------------------------------------
Revenues for the three- and six-months ended June 30, 1996 increased from the
same periods last year primarily due to increased customer demand for the
Corporation's telephone services driven by marketing efforts and a rebound in
the California economy. Revenues for the three- and six-months ended June 30,
1996 were offset by $30 and $60 million, respectively, due to the Federal
Communications Commission ("FCC") price cap order for the fiscal year ending
June 30, 1996. For the 1996 annual access tariffs filings effective July 1,
1996, see "FCC Annual Access Tariff Filing and Regulatory Framework Review" on
page 25. The CPUC price cap order effective January 1, 1996, had a minimal
effect on Pacific Bell revenues due to an order in December 1995 suspending
use of the "inflation minus productivity" component of the price cap formula
for 1996 through 1998. This action freezes the price caps on most of Pacific
Bell's regulated services through 1998 except for adjustments due to exogenous
costs or price changes approved through the CPUC's application process.
Factors affecting revenue changes are summarized in the following tables.
15
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Second Quarter 1996 versus Second Quarter 1995
----------------------------------------------
Total
Price Change
Cap Customer From
($ millions) Orders Misc. Demand 1995
- ---------------------------------------------------------------------------
Local service........................ $ - $10 $ 59 $ 69
Network access
Interstate......................... -30 35 28 33
Intrastate......................... - -3 11 8
Toll service......................... - 6 20 26
Other service revenues............... - -1 27 26
----- ----- ----- ----
Total operating revenues............. $-30 $47 $145 $162
===========================================================================
First 6 Months 1996 versus First 6 Months 1995
----------------------------------------------
Total
Price Change
Cap Customer From
($ millions) Orders Misc. Demand 1995
- ---------------------------------------------------------------------------
Local service........................ $ - $17 $ 82 $ 99
Network access
Interstate......................... -60 59 50 49
Intrastate......................... - -11 32 21
Toll service......................... - -27 51 24
Other service revenues............... - 4 45 49
----- ----- ----- ----
Total operating revenues............. $-60 $42 $260 $242
===========================================================================
The increases in revenue due to customer demand for the periods presented in
the above tables for local service revenues are the result of the 4.7 percent
growth in access lines and the 9.7 percent growth in custom calling services.
These increases were generated by a rebound in the California economy and the
Corporation's focused customer retention efforts. In addition, Pacific Bell
introduced a new feature, "Call Return," on a "pay-per-use" basis in April
1996 that generated revenues of approximately $15 million for the quarter.
Increases in interstate network access revenues due to customer demand for the
periods presented in the above tables reflect increased interexchange carrier
access minutes-of-use, as well as increased access lines. Customer demand
increases in intrastate network access revenues also resulted from growth in
access minutes-of-use.
16
<PAGE>
Increases in toll service revenues due to customer demand for the periods
presented in the above tables were driven primarily by increased local toll
usage resulting from general economic growth. The customer demand-related
increase in local toll service revenues was partially offset by competitive
losses in WATS and 800 services. Interexchange carriers currently have the
competitive advantage of being able to offer WATS and 800 service both within
and between service areas.
The increases in other service revenues due to customer demand for the periods
presented in the above tables reflect the continuing success of the Telephone
Companies' voice mail products and directory operations. In addition,
primarily in the second quarter 1996, customer demand-related revenues
increased in the Corporation's network integration and wireless cable
services.
Operating Expenses
- ------------------
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
---------------------- ----------------------
($ millions) 1996 1995 Change 1996 1995 Change
- ---------------------------------------------------------------------------
Total operating expenses.. $1,793 $1,713 $80 $3,537 $3,477 $60
4.7% 1.7%
- ---------------------------------------------------------------------------
Total operating expenses for the three- and six-month periods ended June 30,
1996 increased when compared with 1995 reflecting costs for this year's new
business initiatives. Increased expenses were partially offset by cost
reductions from the Corporation's ongoing efficiency efforts and savings due
to changes in employee benefit plans and benefit plan assumptions. Primary
factors affecting expense changes are summarized below.
17
<PAGE>
Second Quarter 1996 versus Second Quarter 1995
-----------------------------------------------
Total
Pacific Pacific PTG
Bell* Bell* Pacific Other Change
Salaries Employee Bell* PTG** From
($ millions) & Wages Benefits Misc. Entities 1995
- ---------------------------------------------------------------------------
Cost of products and services. $ 4 -$40 $ 8 $ 1 -$27
Customer operations and
selling expenses............ -3 -31 24 45 35
General, administrative,
and other expenses.......... 4 7 44 27 82
Property and other taxes...... - - -9 - -9
Depreciation and amortization. - - -5 4 -1
---- ---- ---- ---- ----
Total operating expenses...... $ 5 -$64 $62 $77 $80
===========================================================================
* Excludes Pacific Bell subsidiaries.
** Includes Pacific Telesis Group and Pacific Bell subsidiaries.
First 6 Months 1996 versus First 6 Months 1995
----------------------------------------------
Total
Pacific Pacific PTG
Bell* Bell* Pacific Other Change
Salaries Employee Bell* PTG** From
($ millions) & Wages Benefits Misc. Entities 1995
- ---------------------------------------------------------------------------
Cost of products and services. -$18 -$66 $ 2 $ 1 -$81
Customer operations and
selling expenses............ 3 -36 26 70 63
General, administrative,
and other expenses.......... - 6 57 31 94
Property and other taxes...... - - -10 - -10
Depreciation and amortization. - - -14 8 -6
---- ---- ---- ---- ----
Total operating expenses...... -$15 -$96 $61 $110 $60
===========================================================================
* Excludes Pacific Bell subsidiaries.
** Includes Pacific Telesis Group and Pacific Bell subsidiaries.
At Pacific Bell, excluding subsidiaries, salary and wage expense for the six-
month period ended June 30, 1996 decreased compared to the same period in
1995, primarily due to the continued force reduction programs and decreased
overtime in first quarter 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. For the three-
month period ended June 30, 1996 compared to the same period in 1995, expense
savings from force reductions were further offset by overtime due to increased
business volumes.
18
<PAGE>
At Pacific Bell, excluding subsidiaries, employee benefits expense for the
three- and six-month periods ended June 30, 1996, decreased compared to the
same periods in 1995 primarily due to changes in employee benefit plans and a
related remeasurement of benefit plan expense. The changes in employee
benefit plans and benefit plan assumptions will continue to produce savings
throughout the year and in future periods. (See "Change In Estimates" under
Note A on page 8.)
At Pacific Bell, excluding subsidiaries, miscellaneous customer operations and
selling expenses, and general, administrative and other expenses increased for
the three- and six-month periods ended June 30, 1996 compared to 1995
primarily due to increased contract services and advertising associated with
Caller ID.
At Pacific Bell, excluding subsidiaries, miscellaneous property and other
taxes expense decreased for the three- and six-month periods ended June 30,
1996 compared to 1995 primarily due to nonrecurring audit adjustments accrued
in 1995.
At Pacific Bell, excluding subsidiaries, depreciation expense decreased for
the three- and six-month periods ended June 30, 1996 compared to 1995
primarily due to the elimination of the amortization of certain regulatory
assets associated with the discontinued application of Statement of Financial
Accounting Standards No. ("SFAS") 71, "Accounting for the Effects of Certain
Types of Regulation." The effect of this decrease was partially offset by
higher telecommunications plant balances.
The Corporation's other entities' total operating expenses increased for the
three- and six-month periods in 1996 compared to 1995 due to new business
initiatives, such as Personal Communications Services ("PCS"), Internet access
and long distance.
19
<PAGE>
Interest Expense
- ----------------
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
----------------------- ----------------------
($ millions) 1996 1995 Change 1996 1995 Change
- ---------------------------------------------------------------------------
Interest expense... $94 $116 -$22 $187 $233 -$46
-19.0% -19.7%
- ---------------------------------------------------------------------------
Interest expense decreased for the three- and six-month periods ended June 30,
1996 compared to 1995 primarily due to a change in the Corporation's debt
structure, lower interest rates and a change in classification of interest
capitalized during construction from an item of other income to a reduction in
interest expense due to the discontinued application of SFAS 71 at Pacific
Bell.
Other Income (Expense) - Net
- ----------------------------
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
----------------------- ----------------------
($ millions) 1996 1995 Change 1996 1995 Change
- ---------------------------------------------------------------------------
Other income (expense) - net -$17 $13 -$30 -$21 $44 -$65
-230.8% -147.7%
- ---------------------------------------------------------------------------
Other income (expense) - net decreased for the three- and six-month periods
ended June 30, 1996 compared to 1995 due to a change in classification of
interest capitalized during construction from an item of other income to a
reduction of interest expense and dividends paid on Trust Originated Preferred
Securities ("TOPrS"). (See Note C - "Corporation-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts" on page 10.) Interest
income received on a tax refund in first quarter 1995 contributed to the
comparative decrease for the six-month period ended June 30, 1996.
20
<PAGE>
Income Taxes
- ------------
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
----------------------- ----------------------
($ millions) 1996 1995 Change 1996 1995 Change
- ---------------------------------------------------------------------------
Income taxes ............. $208 $155 $53 $403 $277 $126
34.2% 45.5%
- ---------------------------------------------------------------------------
Income tax expense increased for the three- and six-month periods ended June
30, 1996 compared to 1995 primarily due to higher pre-tax income and tax
adjustments.
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 810 employees for the first six months of
1996. A total of $91 million in cash outlays was charged to the reserve in
the first half of 1996. These costs were for business infrastructure,
information system standards, service delivery and facilities consolidation.
In 1995, Pacific Bell charged $219 million to the restructuring reserve for
the cost through 1997 of enhanced retirement benefits negotiated in the 1995
union contracts. Upon further study, Pacific Bell has revised its estimate of
these retirement costs. Consequently, $64 million of these 1995 noncash
charges were reversed in second quarter 1996. There was no effect on net
income from either the 1995 charge or the 1996 change in estimate. As of June
30, 1996, a balance of $201 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 $96
million balance in these reserves remaining at June 30, 1996 is adequate.
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, 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 8.)
21
<PAGE>
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 June 30, 1996, the unused lines
of credit available totaled approximately $2.9 billion.
For longer-term borrowings, at June 30, 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.
In August 1996, Pacific Bell issued $250 million of 6.875 percent debentures
due August 15, 2006. The debentures may not be redeemed prior to maturity.
The proceeds from the sale of the debentures will be used to reduce short-term
debt incurred to retire Pacific Bell's debentures totaling approximately $500
million in December 1995.
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 8.) 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.
The Corporation has entered into sale and leaseback 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 June 30, 1996, the
financing obtained under the leases was $178 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 due to foreign currency
rate fluctuations on these contracts and on the yen lease obligations 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 $110
million of the Corporation's stock for the outstanding stock of the acquired
22
<PAGE>
companies and the Corporation's assumption of approximately $65 million of
debt. Closing is expected in the latter half of 1996 and is subject to a
number of conditions, including regulatory and TTI shareowner approval.
Cash from operating activities decreased $311 million for the six months ended
June 30, 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. The effect of a tax refund received in
1996 of approximately $133 million was substantially offset by a tax refund
received in 1995 of approximately $152 million.
Cash used for investing activities decreased $347 million for the six months
ended June 30, 1996 compared to the same period in 1995. The decrease was
primarily due to payments of $640 million on the Corporation's PCS licenses in
1995, offset by 1996 investments in the Pacific Bell Mobile Services' PCS
network and the core telecommunications network. Management anticipates the
level of capital expenditures for the remainder of 1996 to be lower than 1995.
Cash from financing activities increased $5 million for the six months ended
June 30, 1996 compared to the same period in 1995. The flat activity reflects
refinancing of short-term borrowings with long-term financing. The
Corporation sold $1 billion of TOPrS, $500 million at 7.56 percent in January
1996 through Pacific Telesis Financing I and $500 million at 8.5 percent in
June 1996 through Pacific Telesis Financing II. The 40 million shares of
TOPrS are priced at $25 per share, have a 30-year maturity, an extension
option and are callable in five years at par. The TOPrS are subject to a
limited guarantee by the Corporation. (See Note C - "Corporation-Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trusts" on page 10.)
The proceeds were used to retire outstanding short-term indebtedness,
primarily commercial paper. 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 during 1996, the
Corporation financed $178 million through its leasing arrangements for
equipment purchases for the PCS network.
The Corporation's debt ratio improved to 62.3 percent at June 30, 1996 from
74.1 percent at December 31, 1995. This improvement was primarily due to the
use of the TOPrS proceeds to retire outstanding short-term indebtedness,
primarily commercial paper. Pre-tax interest coverage was 6.4 times for the
first six months in 1996 compared to 4.5 times for the same period in 1995.
This increase was due primarily to higher pre-tax income and lower interest
expense.
In second quarter 1996, pursuant to the terms of the merger agreement, the
Corporation reduced its first quarter dividend from $0.545 per share to
$0.315 per share. This dividend reduction will improve cash flow by
approximately $95 million in third quarter 1996. (See "Merger Agreement"
under Note B on page 8.)
23
<PAGE>
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 is intended to be accounted for as a pooling of
interests and to be a tax-free reorganization. On July 31, 1996, the
shareowners of the Corporation and SBC approved the transaction, which
previously had been approved by the respective Board of Directors of each
company. The merger is subject to certain conditions and regulatory
approvals, including approval by the CPUC, which has established a schedule
for review of the transaction with final comments from interested parties due
in December 1996. If approvals are granted, the transaction is expected to
close in the first quarter of 1997.
PENDING REGULATORY ISSUES
FCC Interconnection Order
- -------------------------
In August 1996, the FCC released a decision (the "Interconnection Order")
which, among other things, will affect revenues collected for carrier access
used by interexchange carriers ("IECs") and for unbundled network elements
used by competitive local carriers ("CLCs"). Management is currently
reviewing this decision to assess the impact it will have on the Telephone
Companies.
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). The Interconnection Order
superseded this Notice of Proposed Rulemaking and will result in the Telephone
Companies providing interconnection at lower prices than those now in effect.
Management is currently reviewing this decision to access the impact it will
have on the Telephone Companies.
24
<PAGE>
FCC Annual Access Tariff Filing and Regulatory Framework Review
- ---------------------------------------------------------------
The Telephone Companies filed their 1996 annual access tariffs with the FCC
for the fiscal year effective July 1, 1996. The proposed revenue increases of
about $24 million are still under review by the FCC.
The FCC adopted new interim price cap rules in 1995 that govern the prices
that the larger LECs, including the Telephone Companies, charge IECs for
access to local telephone networks. The interim rules require the LECs to
adjust their maximum prices for changes in inflation, productivity and certain
costs beyond the control of the LEC. Under the interim plan, LECs may choose
from three productivity factors: 4.0, 4.7 or 5.3 percent. Election of the
5.3 percent productivity factor permits the LEC to retain all of its earnings
whereas the other lower productivity factors require earnings to be shared
with customers. As in 1995, the Telephone Companies again chose the
5.3 percent productivity factor that will enable them to retain all of their
earnings effective July 1, 1996. The higher productivity factor was chosen
because management believes that it will be more than offset by elimination of
the sharing mechanism. Permanent price cap rules are scheduled for September
1996 but may be delayed due to implementation of the Telecommunications Act of
1996.
Management continues to believe that the FCC should adopt pure price cap
regulation and eliminate the productivity factor, sharing and earnings cap.
CPUC Proposal on Universal Service
- ----------------------------------
In August 1996, a CPUC Administrative Law Judge issued a proposed decision on
universal phone service rules in California. Management is currently
reviewing this proposal to assess the impact it will have on Pacific Bell.
However, management is concerned that the proposal underestimates the cost of
providing universal service. A final decision is scheduled for September
1996.
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 within its region. 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 in
California and Nevada. Both federal and state approvals are required before
PBCOM may enter these markets. Management expects to be able to provide these
services by mid-1997.
25
<PAGE>
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 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.
26
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 2, 1996, the Corporation held its 1996 Annual Meeting of Shareowners.
Shareowners voted in favor of the election of three directors to serve a
three-year term, the ratification of Coopers & Lybrand as the Corporation's
independent auditors and against two shareowner proposals. Each matter
presented at the Annual Meeting of Shareowners received the following number
of votes:
Broker
Nominees For Withheld Abstentions Nonvotes
- -------- ----------- --------- ----------- --------
Gilbert F. Amelio 341,921,097 11,807,861 N/A N/A
Frank C. Herringer 342,198,294 11,530,664 N/A N/A
Lewis E. Platt 342,197,609 11,531,349 N/A N/A
Directors Whose Term of Office Continued After the Annual Meeting:
- ------------------------------------------------------------------
William P. Clark, Herman E. Gallegos, Mary S. Metz, Philip J. Quigley,
Toni Rembe, S. Donley Ritchey and Richard M. Rosenberg.
Ratification of Auditors:
- -------------------------
Broker
For Against Abstentions Nonvotes
- ----------- --------- ----------- --------
347,731,195 3,165,915 2,831,848 N/A
Shareowner Proposal Regarding Pacific Bell Directory Paper
Procurement Policies:
- -----------------------------------------------------------
Broker
For Against Abstentions Nonvotes
- ---------- ----------- ----------- ----------
25,978,728 266,538,773 21,487,854 39,723,603
Shareowner Proposal to Compensate Directors Solely in Stock:
- ------------------------------------------------------------
Broker
For Against Abstentions Nonvotes
- ---------- ----------- ----------- ----------
33,198,565 270,699,577 10,134,524 39,696,292
27
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders. (Continued)
On July 31, 1996, the Corporation held a Special Meeting of Shareowners to
vote on a proposal to approve and adopt the Agreement and Plan of Merger among
the Corporation, SBC Communications Inc. and SBC Communications (NV) Inc.,
dated April 1, 1996. The proposal received the following number of votes:
Approve and Adopt the Agreement and Plan of Merger:
- ---------------------------------------------------
Broker
For Against Abstentions Nonvotes
- ----------- --------- ----------- --------
313,514,848 6,918,094 3,442,772 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibits identified as on file with the SEC are incorporated herein
by reference as exhibits hereto.
Exhibit
Number Description
- ------- -----------
4a Rights Agreement, dated as of September 22, 1989, between
Pacific Telesis Group and The First National Bank of
Boston, as successor Rights Agent, which includes as
Exhibit B thereto the form of Rights Certificate (Exhibits
1 and 2 to Form SE filed September 25, 1989 as part of
Form 8-A, File No. 1-8609).
4b 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.
10a Agreement and Plan of Merger among Pacific Telesis Group,
SBC Communications Inc. and SBC Communications (NV) Inc.,
dated as of April 1, 1996. (Exhibit (2) to Form 8-K, Date
of Report April 1, 1996, File No. 1-8609.)
10qq Pacific Telesis Group 1996 Executive Deferred Compensation
Plan, as adopted effective December 1, 1995.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 2nd Quarter 1996 Form 10-Q.
28
<PAGE>
The Corporation will furnish to a security holder upon request a copy of any
exhibit at cost.
(b) Reports on Form 8-K.
--------------------
Form 8-K, Date of Report April 1, 1996, was filed with the SEC,
under Items 5 and 7, in connection with a press release issued
announcing that SBC Communications Inc. ("SBC") and the Corporation
entered into a definitive merger agreement pursuant to which SBC
Communications (NV) Inc., a wholly-owned subsidiary of SBC would be
merged with and into the Corporation.
Form 8-K, Date of Report June 10, 1996, was filed with the SEC,
under Item 5 in connection with a California Public Utilities
Commission decision specifying terms and conditions for resale
competition. In addition, this report was filed under Item 7 in
connection with exhibits relating to Registration Statement No. 33-
63647 on Form S-3 of the registrant and certain co-registrants.
29
<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
Date: August 12, 1996
30
<PAGE>
EXHIBIT INDEX
Exhibits identified as 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
- ------- -----------
4a Rights Agreement, dated as of September 22, 1989, between
Pacific Telesis Group and The First National Bank of
Boston, as successor Rights Agent, which includes as
Exhibit B thereto the form of Rights Certificate (Exhibits
1 and 2 to Form SE filed September 25, 1989 as part of
Form 8-A, File No. 1-8609).
4b 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.
10a Agreement and Plan of Merger among Pacific Telesis Group,
SBC Communications Inc. and SBC Communications (NV) Inc.,
dated as of April 1, 1996. (Exhibit (2) to Form 8-K, Date
of Report April 1, 1996, File No. 1-8609.)
10qq Pacific Telesis Group 1996 Executive Deferred Compensation
Plan, as adopted effective December 1, 1995.
11 Computation of Earnings per common share.
15 Letter re unaudited interim financial information.
27 Article 5 FDS for 2nd Quarter 1996 Form 10-Q.
31
EXHIBIT 10qq
------------
PACIFIC TELESIS GROUP
1996 EXECUTIVE DEFERRED COMPENSATION PLAN
(Adopted Effective December 1, 1995)
<PAGE>
TABLE OF CONTENTS
PAGE
----
SECTION 1. Purpose..................................................... 1
SECTION 2. Eligibility to Participate.................................. 1
SECTION 3. Plan Accounts............................................... 1
3.1 Establishment of Account................................ 1
3.2 No Funding or Assignment................................ 1
SECTION 4. Deferred Compensation....................................... 2
4.1 Annual Deferral and Distribution Election............... 2
4.2 Form of Election, Modification or Termination........... 3
4.3 Modification of Irrevocable Election by the Committee... 3
4.4 Allocation to Accounts.................................. 4
SECTION 5. Company Match............................................... 4
5.1 Eligibility for Company Match........................... 4
5.2 Amount of Company Match................................. 4
5.3 Allocation to Account................................... 4
5.4 Maximum Pre-Tax Savings Plan Deferrals Required......... 5
5.5 Savings Plan Provisions Prevail......................... 5
SECTION 6. Earnings on Accounts........................................ 5
6.1 Interest Allocations to Accounts........................ 5
6.2 Rate of Interest........................................ 5
6.3 Retroactive Limitation of Interest Accrual in Case of
Early Separation........................................ 5
6.4 Dividends and Adjustments for Pacific Telesis Group
Shares.................................................. 6
SECTION 7. Distribution................................................ 6
7.1 Distribution Elections.................................. 6
7.2 Options for Distribution During Life.................... 6
7.3 Options for Distribution In the Event of Death.......... 7
7.4 Form of Elections....................................... 7
7.5 Form and Timing of Distribution......................... 8
7.6 Distributions Not in Accordance with Elections.......... 8
7.6.1 Postponement of Payment............................... 8
7.6.2 Immediate Single Payment.............................. 8
7.6.3 Hardship Distribution................................. 9
7.7 Payment Obligation.................................... 9
SECTION 8. Administration; Claims and Review Procedures................ 9
8.1 Plan Administrator...................................... 9
8.2 Initial Claim Unnecessary............................... 9
8.3 Review of Adverse Decisions............................. 9
SECTION 9. Amendment and Termination................................... 10
9.1 Amendment............................................... 10
9.2 Termination............................................. 10
SECTION 10. Definitions................................................ 11
<PAGE>
PACIFIC TELESIS GROUP
1996 EXECUTIVE DEFERRED COMPENSATION PLAN
(Adopted Effective December 1, 1995)
SECTION 1. PURPOSE
The Pacific Telesis Group 1996 Executive Deferred Compensation Plan (the
"Plan") provides certain Officers of the Company with an opportunity to defer
compensation and accrue earnings on a pre-tax basis and with an opportunity to
receive employer matching contributions that cannot be provided to them under
the Pacific Telesis Group Supplemental Retirement and Savings Plan for
Salaried Employees ("the Savings Plan") because of the limitations imposed by
section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the
"Code").
SECTION 2. ELIGIBILITY TO PARTICIPATE
The following employees are eligible to participate in the Plan:
(A) Officers of Pacific Telesis Group and/or Pacific Bell;
(B) The Officers of any Affiliate of Pacific Telesis Group who are
specifically designated to participate by the PTG Board and the
Board of Directors or other governing body of such Affiliate.
SECTION 3. PLAN ACCOUNTS
3.1 ESTABLISHMENT OF ACCOUNT. An account shall be established for each
eligible employee who elects to become a participant in the Plan in
accordance with the procedures set forth in Section 4 of the Plan. The
account shall be credited with allocations and earnings under Sections 4,
5 and 6 and debited with distributions under Section 7 of the Plan.
3.2 NO FUNDING OR ASSIGNMENT. For income tax purposes under the Code and for
purposes of Title I of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), it is intended that this Plan constitute an
unfunded deferred compensation arrangement. The amounts credited to Plan
accounts for employees of each participating Company shall be held in the
general funds of such participating Company. All amounts in such
accounts, including all Compensation deferred by an employee, shall
remain an asset of the participating Company. A participating Company
shall not be required to reserve or otherwise set aside funds for the
payment of amounts credited to Plan accounts. The obligation of a
participating Company to pay benefits under the Plan constitutes a mere
promise to make benefit payments in the future, and shall be unfunded as
to the employee, whose rights shall be those of a general unsecured
creditor. Title to and beneficial ownership of any assets which a
participating Company may set aside or otherwise designate to make
payments under the Plan shall at all times remain in the participating
Company, and the employee shall not have any property interest in any
specific assets of a participating Company. The rights of an employee or
his or her beneficiary to benefit payments under the Plan are not subject
in any manner to assignment, alienation, pledge or garnishment by
creditors.
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SECTION 4. DEFERRED COMPENSATION
4.1 ANNUAL DEFERRAL AND DISTRIBUTION ELECTION. An eligible employee may
elect to participate in the Plan prior to the beginning of any calendar
year, or within 30 days of first becoming eligible to participate in the
Plan, or within 30 days of becoming eligible to participate in a feature
of the Plan with respect to such Plan feature. An employee's election
shall direct that compensation in one or more of the following categories
(collectively "Compensation") be deferred and credited to an account
under the Plan, subject to the limitations and effectiveness prescribed
for each category of Compensation, and shall direct that such
Compensation, together with all other amounts credited under the Plan
with respect to such Compensation under Section 5 (Company Match) and
Section 6 (Earnings), shall be distributed in accordance with a
distribution option set forth in Section 7.
(A) Salary. An employee may elect to defer part of his or her base
annual compensation ("Salary") otherwise payable for services
performed in a calendar year, but not less than $2,500 nor more than
80% of salary. Such election shall become effective for Salary
otherwise payable for services performed in the payroll period
beginning, (i) in the case of an employee who makes an election
within 30 days of first becoming eligible to participate in the
Plan, immediately subsequent to the election or (ii) in all other
cases, on the first day of the calendar year to which the election
applies. An election related to Salary otherwise payable for
services performed in any calendar year shall become irrevocable,
(x) in the case of an election made within 30 days of first becoming
eligible to participate in the Plan, on the last day before the
applicable payroll period for which the election becomes effective,
or (y) in all other cases, on the last day prior to the beginning of
such calendar year.
(B) STIP. An employee may elect to defer all or part, but not less than
$5,000, of his or her awards under the Pacific Telesis Group Short-
Term Incentive Plan, or a similar or successor incentive
compensation plan or program of Pacific Telesis Group or an
Affiliate ("STIP"), for services performed in a calendar year and
otherwise payable in the calendar year following such calendar year.
Such election may be made with respect to services to be performed
(i) in the remainder of the year in which the employee first becomes
eligible to participate in the Plan, provided the election is made
prior to October 1st of such year, which election shall become
effective for STIP earned with respect to services performed
beginning with the payroll period immediately subsequent to the
election, or (ii) in the next following calendar year, which
election on shall become effective on the first day of the calendar
year to which the election applies in all other cases. An election
related to the STIP award for services performed in a calendar year
shall become irrevocable (x) in the case of an election made within
30 days of first becoming eligible to participate in the Plan, on
the last day before the applicable payroll period for which the
election becomes effective, or (y) in all other cases, on the last
day prior to the beginning of such calendar year.
2
<PAGE>
(C) LTIP. An employee may elect to defer all or part, but not less than
$5,000, of his or her awards under the Pacific Telesis Group Senior
Management Long-Term Incentive Plan or a similar or successor long
term incentive compensation plan of Pacific Telesis Group or an
Affiliate ("LTIP"), for services performed in a multiple-year
performance period and otherwise payable in a calendar year
following such performance period. An election related to the LTIP
award otherwise payable for services performed in a performance
period shall become irrevocable on the last day prior to the
beginning of the performance period applicable to that LTIP award.
(D) Other Awards. An employee may elect to defer all or part of his or
her awards under any other bonus, special award, or any other
similar form of compensation ("Other Awards") otherwise payable to
him or her by a participating Company with respect to services
performed in a calendar year. An election related to Other Awards
otherwise payable in a calendar year shall become irrevocable on the
last day prior to the beginning of such calendar year.
Notwithstanding the foregoing, in no event shall deferrals under the
Plan include that portion of Compensation required for all
applicable tax, Social Security and employee benefit plan
withholding, whether or not such withholding requirement is related
to this Plan.
4.2 FORM OF ELECTION, MODIFICATION OR TERMINATION. An employee's election or
written notice of modification or termination of any prior election shall
be made in accordance with procedures established by the Plan
Administrator, in the form of a document approved by the Plan
Administrator, executed by the employee and filed with the Plan
Administrator or his or her designee. An election which has not become
irrevocable may be modified, terminated or reinstated by the employee
prior to the time such election would have become irrevocable as provided
in Section 4.1. An election with respect to Salary, STIP or Other Awards
for services performed in a calendar year and/or with respect to LTIP for
services performed in a multiple-year performance period shall be deemed
irrevocably terminated when the employee, whether by transfer or
termination of employment, ceases to be eligible to participate in the
Plan during such calendar year and/or such multiple-year performance
period (as applicable).
4.3 MODIFICATION OF IRREVOCABLE ELECTION BY THE COMMITTEE. Upon receipt of a
written request made by or on behalf of an employee, the Committee in its
sole discretion may modify or terminate the employee's election with
respect to Compensation otherwise payable in a calendar year as it deems
necessary to prevent extreme financial hardship to the employee,
notwithstanding that the election has become effective and irrevocable as
provided in Section 4.1.
3
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4.4 ALLOCATION TO ACCOUNTS. Deferred amounts related to Compensation which
would otherwise have been paid by a participating Company shall be
credited to the employee's account as of the date the Compensation would
otherwise have been paid. Deferred amounts related to Compensation which
would otherwise have been distributed in Pacific Telesis Group common
shares shall be credited to the employee's account as deferred Pacific
Telesis Group shares as of the date such Pacific Telesis Group shares
would otherwise have been transferred to the employee.
SECTION 5. COMPANY MATCH
5.1 ELIGIBILITY FOR COMPANY MATCH. An employee who (A) elects to defer
Compensation under the Plan for a calendar year, and (B) has made the
maximum elective deferral under the Savings Plan permitted by section
402(g) of the Code for such calendar year (except to the extent that a
further limitation is required by section 401(k)(3) and/or section 415 of
the Code), shall be eligible to have additional amounts based on
Compensation deferred pursuant to this Plan ("Company Match") credited to
his or her account hereunder.
5.2 AMOUNT OF COMPANY MATCH. The Company Match credited to an employee's
account under this Plan with respect to Compensation deferred during a
calendar year shall be equal to
(A) the amount of Compensation deferred into the employee's Plan
account, multiplied by
(B) the percentage in effect for that calendar year at which the
employee's Basic Contributions to the Savings Plan are matched by
employing Company contributions;provided, however, that the maximum
Company Match credited to the employee's account under this Plan
shall not exceed
(C) 6% of the employee's Savings Plan Salary, multiplied by
(D) the percentage in effect for that calendar year at which the
employee's Basic Contributions to the Savings Plan are matched by
employing Company contributions, reduced by
(E) the total amount of matching Company contributions credited to the
employee's account under the Savings Plan.
For purposes of determining the amount of Compensation deferred into the
employee's Plan account, deferred Pacific Telesis Group common shares
shall be valued by multiplying the number of shares deferred by the Price
of Pacific Telesis Group common shares on the deferral date.
5.3 ALLOCATION TO ACCOUNT. Until fully credited for the calendar year, and
subject to the delay provided in Section 5.4, Company Match shall be
credited to an employee's account under this Plan as of each date that
deferred Compensation is credited to the employee's account under this
Plan.
4
<PAGE>
5.4 MAXIMUM PRE-TAX SAVINGS PLAN DEFERRALS REQUIRED. No Company Match shall
be credited to an employee's account for a calendar year until the
employee has made before-tax contributions under the Savings Plan equal
to the maximum elective deferrals permitted under section 402(g) of the
Code, as further limited by section 401(k)(3) of the Code. Thereafter,
the employee's account shall immediately be credited with an amount equal
to the Company Match that would otherwise have been previously credited
under Section 5.3.
5.5 SAVINGS PLAN PROVISIONS PREVAIL. The provisions of this Section 5 shall
not limit or affect the application of the provisions regarding matching
Company contributions in the Savings Plan, which shall take precedence
over the provisions of this Section 5.
SECTION 6. EARNINGS ON ACCOUNTS.
6.1 INTEREST ALLOCATIONS TO ACCOUNTS. Deferred amounts related to
Compensation which would otherwise have been paid in cash shall bear
interest from the date the Compensation would otherwise have been paid.
Interest shall be applied to Company Match credited to an employee's
account as if such Company Match had been credited to the employee's
account at the same time that the related amounts of Compensation
deferred hereunder were credited to the employee's account. The interest
credited to an account shall be compounded annually at the end of each
calendar year.
6.2 RATE OF INTEREST. The rate of interest to be applied to an employee's
aggregate account balance under the Plan for a calendar year shall be
determined by the Committee from time to time, and promptly communicated
to eligible employees in advance of its application, but in no event
shall (A) the interest rate be decreased below the average 10-Year
Treasury note rate, (B) any reduction apply to interest already credited
to Plan accounts for periods prior to the Committee's action, or (C) any
interest rate previously guaranteed for a given period and communicated
to eligible employees be reduced during such period except as may be
equitable in light of any change in applicable law which substantially
increases the burden to the participating Companies of paying such
guaranteed interest.
6.3 RETROACTIVE LIMITATION OF INTEREST ACCRUAL IN CASE OF EARLY SEPARATION.
Notwithstanding Section 6.2, an employee whose Separation occurs before
he or she attains age 55 will receive interest on all deferred cash
Compensation and Company Match for all years of participation in the Plan
based on the average 10-Year Treasury note rate, rather than the rate of
interest established by the Committee for any particular calendar year.
5
<PAGE>
6.4 DIVIDENDS AND ADJUSTMENTS FOR PACIFIC TELESIS GROUP SHARES. An employee's
account credited with deferred Pacific Telesis Group shares shall be
credited on each subsequent dividend payment date for Pacific Telesis
Group shares with an amount equivalent to the dividend payable on the
number of Pacific Telesis Group common shares equal to the number of
deferred Pacific Telesis Group shares in the employee's account on the
record date for such dividend. Such amount shall then be converted to a
number of additional deferred Pacific Telesis Group shares, determined by
dividing such amount by the Price of Pacific Telesis Group common shares
on the dividend payment date. In the event of any change in outstanding
Pacific Telesis Group common shares by reason of any stock dividend or
split, recapitalization, merger, consolidation, combination or exchange
of shares or other similar corporate change, the Committee shall make
such adjustments, if any, that it deems appropriate in the number of
deferred Pacific Telesis Group shares then credited to an employee's
account. Any and all such adjustments shall be conclusive and binding
upon all parties concerned.
SECTION 7. DISTRIBUTION
7.1 DISTRIBUTION ELECTIONS. At the time an eligible employee makes an
election to defer Compensation otherwise payable for services performed
in a calendar year, the employee also shall make an election with respect
to the distribution, during the employee's lifetime, of such deferred
Compensation, together with Company Match and earnings credited to the
employee's Plan account with respect to such deferred Compensation.
Subject to the provisions on Hardship distributions in Section 7.6.3 and
the provisions on Options for Distribution in the Event of Death in
Section 7.3, distribution elections shall become effective and
irrevocable at the same time the election to defer such Compensation
becomes effective and irrevocable under Section 4.1.
7.2 OPTIONS FOR DISTRIBUTION DURING LIFE. An employee may elect to receive
the amounts credited to the employee's Plan account with respect to a
deferral election made pursuant to Section 4.1 (a) in one payment, or (b)
in a number of annual installments over a period of 5, 10, or 15 years,
calculated in accordance with procedures established by the Plan
Administrator. As specified by the employee, distributions shall
commence as soon as practicable after
(A) the first day of the calendar year next following the employee's
Separation;
(B) the first day of the fifth calendar year next following the
employee's Separation; or
(C) the first day of the calendar year next following the employee's
attainment of a specified age between 59 1/2 and 70.
6
<PAGE>
All amounts credited to an employee's Plan account with respect to which
he or she has elected distribution in the same form and commencing at the
same time shall be aggregated as a single Distribution Account.
Notwithstanding the employee's election under this Section 7.2 with
respect to the time and form of distribution for each such Distribution
Account, if the aggregate of all amounts credited to an employee's
Distribution Account is less than $50,000 at the time of such employee's
Separation, such Distribution Account shall be distributed in a single
payment as soon as practicable after the first day of the calendar year
next following the employee's Separation.
7.3 OPTIONS FOR DISTRIBUTION IN THE EVENT OF DEATH. An employee may elect
that, in the event the employee should die before full payment of all
amounts credited to the employee's Plan account, the balance of the
employee's Plan account shall be distributed to the beneficiary or
beneficiaries designated by the employee
(A) in one payment, paid as soon as practicable after the first day of
the calendar year next following the year of the employee's death;
(B) in 10 annual installments, calculated in accordance with procedures
established by the Plan Administrator, commencing as soon as
practicable after the first day of the calendar year next following
the year of the employee's death, provided that if the aggregate of
all amounts credited to an employee's Plan Account is less than
$50,000 at the time of such employee's death, such Distribution
Account shall be distributed in a single payment as soon as
practicable after the first day of the calendar year next following
the employee's death; or
(C) by a continuation of the distribution times and forms elected under
Section 7.2 (in the case of an employee who dies before commencement
of distributions, using as any specified age the date the employee
would have attained that age if he or she had continued to live),
subject to the single payment distribution of a Distribution Account
credited with less than $50,000 at the time of the employee's death,
as set forth in Section 7.2.
If no election has been made under this Section 7.3, the balance of the
employee's deferred account shall be distributed in one payment as soon
as practicable after the first day of the calendar year next following
the year of the employee's death. If no beneficiary designation has been
made, distribution shall be made to the estate of the employee.
7.4 FORM OF ELECTIONS. Distribution elections and beneficiary designations
shall be made in writing in the form of a document or documents approved
by the Plan Administrator, executed by the employee and filed with the
Plan Administrator or his or her designee. An employee may designate one
or more individuals or a trust as his or her beneficiary, and may change
the beneficiary designation at any time, effective upon receipt by the
Plan Administrator or his or her designee.
7
<PAGE>
7.5 FORM AND TIMING OF DISTRIBUTION. Amounts credited to an employee's Plan
account as cash plus accumulated interest, less applicable withholding
taxes, shall be distributed in cash. Amounts credited as deferred
Pacific Telesis Group shares, less applicable withholding taxes, shall be
distributed in the form of whole Pacific Telesis Group common shares,
plus cash for any fractional share. Installment distributions subsequent
to the first installment shall be paid on or about the anniversary date
of the first annual installment until the entire balance of the
employee's Plan account is paid. Account balances held pending
distribution shall continue to be credited with interest or additional
deferred Pacific Telesis Group shares, as applicable, determined in
accordance with Section 6.
7.6 DISTRIBUTIONS NOT IN ACCORDANCE WITH ELECTIONS.
7.6.1 POSTPONEMENT OF PAYMENT. The Committee may postpone payment of
Plan benefits to an employee (A) who, in the year Plan benefits would
otherwise be payable, is a "covered employee" for purposes of the
$1 million limitation on deductible compensation under Section 162(m) of
the Code, and (B) whose compensation for the year in which Plan benefits
would otherwise be payable would, but for such postponement, exceed the
$1 million limit on deductibility. In addition. notwithstanding an
election pursuant to Section 7.2, at the sole discretion of the
Committee, in the event that an employee's Separation is on account of
total and permanent disability, as determined by the Committee, the
Committee may postpone payment of Plan benefits to such employee to
commence in a year later than the year in which his or her Plan benefits
would otherwise be payable upon such Separation, provided that no such
postponement shall extend beyond the earlier of (a) ten years from the
date of Separation, or (b) the year in which such employee attains age
65.
7.6.2 IMMEDIATE SINGLE PAYMENT. Notwithstanding an election pursuant to
Section 7.2, at the sole discretion of the Committee the entire amount
then credited to the employee's account shall be paid as soon as
practicable in a single payment if an employee is involuntarily
terminated by his or her Company or becomes employed by a governmental
agency having jurisdiction over the activities of Pacific Telesis Group
or any of its Affiliates.
8
<PAGE>
7.6.3 HARDSHIP DISTRIBUTION. Upon receipt of a written request made by
or on behalf of an employee, the Committee in its sole discretion may
authorize a Hardship distribution from the employee's Plan account. For
purposes of the Plan, "Hardship" means an unanticipated emergency that is
caused by an event beyond the control of the employee and that would
result in severe financial hardship if early distribution were not
permitted. As determined by the Committee in its sole discretion,
Hardship may include one or more of the following:
(A) A sudden and unexpected illness or accident of the employee;
(B) Extraordinary and unreimbursed medical or hospital expenses incurred
by the employee or a member of his or her family or a relative;
(C) The loss of the employee's property due to casualty; or
(D) Any other similar unforeseeable emergency that is caused by and
event beyond the control of the employee and would impose a severe
financial hardship if early distribution were not permitted.
A distribution based on Hardship cannot exceed the amount required to meet the
immediate financial need created by the Hardship and not reasonably available
from other resources of the employee, including reimbursement or compensation
by insurance or otherwise; provided that an employee shall not be required to
request a hardship distribution from the Savings Plan in order to receive a
Hardship distribution under this Plan.
7.7 PAYMENT OBLIGATION. The obligation to distribute benefits under the Plan
shall be borne primarily by the last Company to employ an employee in a
position eligible to participate in the Plan immediately prior to the
distribution. A Company's withdrawal from participation in the Plan
shall not affect that Company's liability hereunder. If for any reason
the primarily liable Company fails to make timely payment of a amount due
under the Plan, Pacific Telesis Group shall be secondarily liable for the
obligation.
SECTION 8. ADMINISTRATION; CLAIMS AND REVIEW PROCEDURES.
8.1 PLAN ADMINISTRATOR. The Plan Administrator shall be the Executive Vice
President - Human Resources Pacific Telesis Group, or his or her deligee.
The Plan Administrator shall have the authority to administer and
interpret the Plan, including sole discretion to determine the rights of
an employee or beneficiary under the Plan, and to authorize disbursements
under the Plan, except for decisions expressly reserved by the Plan for
the Committee or for the PTG Board or the Board of Directors of an
Affiliate.
8.2 INITIAL CLAIM UNNECESSARY. No claim for benefits shall be required for
commencement of distributions in accordance with an employee's election
under Sections 7.2 and 7.3 of the Plan. The obligation of a Company to
make distributions under the Plan shall not be affected by any action or
inaction (on the part of an employee, his beneficiaries or any Company)
with respect to amounts owed, including but not limited to the failure to
make timely demand, the granting of extensions of time or other
indulgences, the failure to make timely payment or the failure to give
notices other than those prescribed in Section 8.3.
9
<PAGE>
8.3 REVIEW OF ADVERSE DECISIONS. An employee or beneficiary who disagrees
with a decision by the Plan Administrator relating to the payment of
benefits under the Plan may submit a claim requesting Plan benefits in
writing to the Committee, which shall respond in writing. A claim shall
be deemed denied unless the response is sent within 90 days (or within
180 days, if the Committee extends the time to respond by notifying the
claimant in writing of the special circumstances requiring an extension
and the date by which the response is expected). If the claim is denied
in whole or part, the response shall state (A) the specific reasons,
making specific reference to pertinent provisions of the Plan; (B) what
additional information, if any, would help perfect the claim for
benefits; and (C) what steps the claimant must take to submit the claim
for review. Within 60 days after the date of a denial, a claimant may
file a written request for the PTG Board of Directors to review the
denial. Notwithstanding Section 8.2 of the Plan, such request for review
must be made in a timely manner for the purpose of seeking any further
review of a decision or determining any entitlement to a benefit under
the Plan. The PTG Board shall notify the claimant in writing of the
review decision, specifying the reasons for the decision and the Plan
provisions on which it is based. A claim shall be deemed denied unless
the decision on appeal is sent within 60 days (or within 120 days, if the
PTG Board extends the time to respond by notifying the claimant in
writing). The Plan Administrator, Committee and PTG Board shall retain
such right, authority and discretion as are provided or not expressly
limited in section 503 of ERISA and the regulations thereunder and, if
the Committee denies a claim upon review, the claimant shall have such
further rights of review as are provided therein.
SECTION 9. AMENDMENT AND TERMINATION.
9.1 AMENDMENT. The PTG Board of Directors may at any time make changes in
the Plan, but such amendment shall have prospective effect only and shall
not adversely affect the rights of any employee, without his or her
consent, to any benefit under the Plan to which such employee was
entitled prior to the effective date of amendment. Changes in the
interest rate applied to Plan account balances as determined by the
Committee from time to time in accordance with Section 6.2 of the Plan
shall not be deemed to be Plan amendments, notwithstanding that they
apply to Compensation previously earned and deferred. The Executive Vice
President - Human Resources of Pacific Telesis Group, with the approval
of the Executive Vice President and General Counsel of Pacific Telesis
Group, shall be authorized to make minor or administrative changes to the
Plan.
9.2 TERMINATION. The PTG Board of Directors may at any time terminate the
Plan. Any termination of the Plan shall not terminate the deferral of
Compensation previously deferred into a Plan account, but may prevent the
deferral of Compensation not yet earned notwithstanding the employee's
prior election to defer such Compensation.
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SECTION 10. DEFINITIONS.
For purposes of this Plan, the following words shall have the meaning so
defined unless the context clearly indicates otherwise:
10.1 "Affiliate" as the term relates to Pacific Telesis Group, means a
subsidiary of or other entity that controls, is controlled by, or is under
common control with Pacific Telesis Group, as the case may be. As used
herein, "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such
entity, whether through ownership of voting securities or other interests, by
contract or otherwise.
10.2 "PTG Board of Directors" or "PTG Board" means the Board of Directors of
Pacific Telesis Group.
10.3 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the regulations promulgated thereunder.
10.4 "Committee" means the Compensation and Personnel Committee of the Board
of Directors of Pacific Telesis Group.
10.5 "Company" shall mean Pacific Telesis Group, Pacific Bell or any other
corporation which is an Affiliate of Pacific Telesis Group.
10.6 "Officer" means an officer of a Company, as determined by the Plan
Administrator, but the term shall not include Assistant Secretary, Assistant
Treasurer, Assistant Comptroller or any other assistant officer.
10.7 "Price" with respect to Pacific Telesis Group common shares as of a
particular date means the average of the daily high and low sale prices of
Pacific Telesis Group common shares on the New York Stock Exchange ("NYSE")
for the period of five trading days ending on such date, or the period of five
trading days immediately preceding such date if the NYSE is closed on the
date.
10.8 "Savings Plan" means the Pacific Telesis Group Supplemental Retirement
and Savings Plan for Salaried Employees.
10.9 "Savings Plan Salary" means "Salary" as defined in the Pacific Telesis
Group Supplemental Retirement and Savings Plan for Salaried Employees, without
reduction for deferrals of salary under this Plan and without regard to the
limit on compensation under section 401(a)(17) of the Code. If an eligible
employee is employed by a participating Company for only a portion of a
calendar year or is on a leave of absence for a portion of a calendar year,
the employee's Savings Plan Salary is prorated to reflect only the period
during which the employee was actively employed by a participating Company.
10.10 "Separation" means retirement or termination from all employment with
Pacific Telesis Group or its Affiliates.
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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 For the 6 Months Ended
June 30, June 30,
---------------------- -----------------------
1996 1995 1996 1995
---------------------- -----------------------
Net income............... $ 281 $ 260 $ 579 $ 542
======== ======== ======= ========
Weighted average number
of common shares
outstanding ........... 428,436 424,065 428,436 424,065
Common stock equivalent
shares applicable to
stock options.......... 1,781 449 1,109 502
-------- -------- ------- --------
Total number of shares
for computing primary
earnings per share..... 430,217 424,514 429,545 424,567
Incremental shares for
computing fully diluted
earnings per share..... 69 0 741 0
-------- -------- ------- --------
Total number of shares
for computing fully
diluted earnings
per share.............. 430,286 424,514 430,286 424,567
======== ======== ======== ========
Earnings per common
share (as reported).... $ 0.66 $ 0.61 $ 1.35 $ 1.28
Primary earnings
per share.............. $ 0.65 $ 0.61 $ 1.35 $ 1.28
Fully diluted earnings
per share.............. $ 0.65 $ 0.61 $ 1.35 $ 1.28
Earnings per share amounts for the three- and six-month periods ended June 30,
1996 and June 30, 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
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COOPERS & LYBRAND L.L.P.
August 12, 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, Form S-4, and Forms S-8
---------------------------------------------------
We are aware that our report dated August 12, 1996 on our review of the
interim financial information of Pacific Telesis Group and Subsidiaries for
the three- and six-month periods ended June 30, 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-3: 2,576,494 shares of Pacific Telesis Group Common Stock
Form S-3: SBC Communications, Inc. Dividend Reinvestment Plan
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: 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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<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<PERIOD-TYPE> 6-MOS
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<SECURITIES> 0
<RECEIVABLES> 1,696
<ALLOWANCES> 144
<INVENTORY> 0
<CURRENT-ASSETS> 2,616
<PP&E> 27,983
<DEPRECIATION> 16,457
<TOTAL-ASSETS> 16,057
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<BONDS> 5,149
<COMMON> 43
0
0
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<CGS> 0
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<INCOME-PRETAX> 982
<INCOME-TAX> 403
<INCOME-CONTINUING> 579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 579
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
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