FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1997
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8609
PACIFIC TELESIS GROUP
Incorporated under the laws of the State of Nevada
I.R.S. Employer Identification Number 94-2919931
130 Kearny Street, San Francisco, California 94108
Telephone Number: (415) 394-3000
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF SBC COMMUNICATIONS INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PACIFIC TELESIS GROUP
- ----------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
<CAPTION>
- ----------------------------------------------------------------------------------
Three months ended
March 31,
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Local service $1,037 $ 979
Network access 662 638
Long-distance service 309 317
Directory advertising 363 307
Other 164 137
- ----------------------------------------------------------------------------------
Total operating revenues 2,535 2,378
- ----------------------------------------------------------------------------------
Operating Expenses
Cost of services and products 886 886
Selling, general and administrative 473 404
Depreciation and amortization 491 465
- ----------------------------------------------------------------------------------
Total operating expenses 1,850 1,755
- ----------------------------------------------------------------------------------
Operating Income 685 623
- ----------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (92) (93)
Other income (expense) - net (13) (4)
- ----------------------------------------------------------------------------------
Total other income (expense) (105) (97)
- ----------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Accounting Change 580 526
- ----------------------------------------------------------------------------------
Income taxes 228 210
- ----------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting
Change 352 316
- ----------------------------------------------------------------------------------
Cumulative Effect of Accounting Change, net of tax - 85
- ----------------------------------------------------------------------------------
Net Income $ 352 $ 401
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Earnings Per Common Share:
Income before Cumulative Effect of Accounting
Change $ 0.82 $ 0.74
Cumulative Effect of Accounting Change, net of tax - 0.20
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Net Income $ 0.82 $ 0.94
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Weighted Average Number of Common
Shares Outstanding (in millions) 428 428
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Dividends Declared Per Common Share $0.315 $0.545
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<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC TELESIS GROUP
- ---------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
<CAPTION>
- ---------------------------------------------------------------------------------
March 31, December
31,
-------------------------
1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 113 $ 72
Accounts receivable - net of allowances for
uncollectibles of $176 and $163 2,155 2,109
Prepaid expenses 70 52
Deferred charges 31 45
Other current assets 139 196
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Total current assets 2,508 2,474
- ---------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 29,531 29,032
Less: Accumulated depreciation and amortization 17,248 16,959
- ---------------------------------------------------------------------------------
Property, Plant and Equipment - Net 12,283 12,073
- ---------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated Amortization of 1,124 1,108
$4 and $4
- ---------------------------------------------------------------------------------
Other Assets 815 953
- ---------------------------------------------------------------------------------
Total Assets $ 16,730 $ 16,608
- ---------------------------------------------------------------------------------
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 1,115 $ 613
Accounts payable and accrued liabilities 2,455 2,779
Dividends payable 140 135
- ---------------------------------------------------------------------------------
Total current liabilities 3,710 3,527
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Long-Term Debt 5,431 5,424
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Deferred Credits and Other Noncurrent Liabilities
Postemployment benefit obligation 2,455 2,250
Unamortized investment tax credits 232 243
Other noncurrent liabilities 911 1,391
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Total deferred credits and other noncurrent liabilities 3,598 3,884
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Commitments and contingencies
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Corporation-obligated mandatorily redeemable preferred 1,000 1,000
securities of subsidiary trusts*
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Shareowners' Equity
Common shares issued ($1 par value) 43 43
Capital in excess of par value 3,490 3,501
Retained earnings (deficit) (267) (479)
Deferred compensation - LESOP (145) (161)
Treasury shares (at cost) (130) (131)
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Total shareowners' equity 2,991 2,773
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Total Liabilities and Shareowners' Equity $ 16,730 $ 16,608
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<FN>
* The trusts contain assets of $1,030 in principal amount of the Subordinated
Debentures of Pacific Telesis Group.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC TELESIS GROUP
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and
cash equivalents
(Unaudited)
<CAPTION>
- -------------------------------------------------------------------------------------
Three months ended
March 31,
------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 352 $ 401
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 491 465
Undistributed losses from investments in equity
affiliates 6 8
Provision for uncollectible accounts 58 48
Amortization of investment tax credits (11) (12)
Deferred income taxes 109 21
Cumulative effect of accounting change - (85)
Other - net
(719) (339)
- -------------------------------------------------------------------------------------
Total adjustments
(66) 106
- -------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities
286 507
- -------------------------------------------------------------------------------------
Investing Activities
Construction and capital
expenditures (601) (486)
Investments in affiliates
(8) (18)
Other
- 7
- -------------------------------------------------------------------------------------
Net Cash Used in Investing
Activities (609) (497)
- -------------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or
less 499 (619)
Issuance of trust originated preferred securities - 500
Issuance of long-term debt
8 346
Dividends paid
(135) (233)
Other
(8) (15)
- -------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities
364 (21)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
41 (11)
- -------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year
72 76
- -------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ $
113 65
- -------------------------------------------------------------------------------------
Cash paid during the three months ended March 31 for:
Interest $ 167 $ 121
Income taxes $ 33 $ -
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC TELESIS GROUP
- ---------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
- ---------------------------------------------------------------------------------
Capital Retained Deferred
in
Common Excess of Earnings CompensationTreasury
Shares Par Value (Deficit) -LESOP Shares
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 43 $ 3,498 $ (982) $ (242) $ (127)
Net income - - 401 - -
Dividends to shareowners - - (231) - -
Reduction of deferral associated
with Employee Stock Ownership
Plans - - - 20 -
Other - 2 1 - -
- ---------------------------------------------------------------------------------
------ ------- ------- ---------- --------
Balance, March 31, 1996 $ 43 $ 3,500 $ (811) $ (222) $ (127)
- ---------------------------------------------------------------------------------
Balance, December 31, 1996 $ 43 $ 3,501 $ (479) $ (161) $ $ (131)
Net income - - 352 - -
Dividends to shareowners - - (140) - -
Reduction of deferral associated
with Employee Stock Ownership
Plans - - - 16 -
Issuance of treasury shares - - - - 1
Other - (11) - - -
- ---------------------------------------------------------------------------------
------ ------- ------- --------- --------
Balance, March 31, 1997 $ 43 $ 3,490 $ (267) $ (145) $ $ (130)
- ---------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
* * *
*
SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months then 1997 1996
ended:
----------------------
Return on weighted average shareowners' 48.37% 52.11%
equity....................
Debt 62.12% 67.53%
ratio..................................
Network access lines in service 16,588 15,967
(000).........................................
Access minutes of use 17,088 15,826
(000,000).....................................
Number of 50,510 48,780
employees.....................................
<PAGE>
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PACIFIC TELESIS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
1. BASIS OF PRESENTATION - The consolidated financial statements have been
prepared by Pacific Telesis Group (PAC) pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) and, in the opinion of management,
include all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the results for the interim periods shown. Certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations. Certain reclassifications
have been made to the 1996 consolidated financial statements to conform with the
1997 presentation. The results for the interim periods are not necessarily
indicative of results for the full year. The consolidated financial statements
contained herein should be read in conjunction with the consolidated financial
statements and notes thereto included in PAC's 1996 Annual Report on Form 10-K
(the Form 10-K) filed with the Securities and Exchange Commission.
Prior to January 1, 1996, Pacific Bell Directory (a subsidiary of Pacific
Bell and an indirect subsidiary of PAC) recognized revenues and expenses related
to publishing directories in California using the "amortization" method, under
which revenues and expenses were recognized over the lives of the directories,
generally one year. Under the new "issue basis" method, revenues and expenses
are recognized when the directories are issued. The change to the issue basis
method was made because it is the method generally followed in the publishing
industry and better reflects the operating activity of the business.
The change was adopted during fourth quarter 1996. The cumulative after-tax
effect of applying the change in method to prior years was recognized as of
January 1, 1996 as a one-time, non-cash gain applicable to continuing operations
of $85, or $.20 per share. The gain is net of deferred taxes of $58. The first
three quarters of 1996 were restated in the Form 10-K to reflect the new method.
In 1996, management amended the salaried pension plan, which changed from a
final pay plan to a cash balance plan. Under the transition to the new plan,
some retirees elected to receive lump-sum payments in settlement of the pension
liability. These lump-sum payments in the first quarter of 1997 exceeded the
projected service and interest cost. PAC recognized a gain on these settlements
in first quarter 1997 that increased net income by $90, or $.21 per share.
2. CONSOLIDATION - The consolidated financial statements include the accounts of
PAC and its majority-owned subsidiaries. PAC's subsidiaries include, but are not
limited to, Pacific Bell (PacBell, which also includes its subsidiaries) and
Nevada Bell, which are collectively referred to as the Telephone Companies. All
significant intercompany transactions are eliminated in the consolidation
process. Investments in partnerships, joint ventures and less than
majority-owned subsidiaries are principally accounted for under the equity
method.
<PAGE>
PACIFIC TELESIS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued Dollars
in millions except per share amounts
3. MERGER - On April 1, 1997, SBC Communications Inc. (SBC) and PAC completed
the merger of an SBC subsidiary with PAC, in a transaction in which each share
of PAC common stock was exchanged for 0.73145 of a share of SBC common stock
(equivalent to approximately 313 million shares). With the merger, PAC became a
wholly-owned subsidiary of SBC. The transaction will be accounted for as a
pooling of interests and a tax-free reorganization.
PAC's results will include merger transaction costs and the effects of
changes applied retroactively to conform accounting methodologies between PAC
and SBC for, among other items, pensions and other postretirement benefits.
These changes will result in a net benefit to be recorded by PAC in the second
quarter of 1997, retroactive to January 1, 1997, as a cumulative effect of
accounting changes of $322, net of tax. Also, PAC will record in the second
quarter of 1997 the present value of amounts to be returned to California
ratepayers as a condition of the merger of $274, $165 net of tax. Had the merger
occurred January 1, 1997, income before cumulative effect of accounting changes
would have decreased by $165.
4. COMMITMENTS AND CONTINGENCIES
Purchase Commitments - In December 1994, PacBell contracted for the purchase of
up to $2,000 of Advanced Communications Network ("ACN") facilities, which
incorporated new technologies. During 1995, the ability to deploy the facilities
outstripped the ACN vendor's ability to deliver necessary products and software.
Accordingly, management decided to suspend construction at certain sites, which
reduced the expected cost to less than $700. If ACN facilities meet certain
quality and performance criteria (the Network Test), PacBell is committed to
purchase the ACN facilities in 1998. If the ACN facilities are acquired, due to
competition and other factors affecting PacBell's ability to recover its
investment in these facilities, their value to PacBell could be materially
impaired. If ACN facilities fail the Network Test, PacBell will not be committed
to buy the ACN facilities but might be liable to reimburse the principal ACN
vendor for some construction costs up to $300, which would also result in a
material charge.
As of March 31, 1997, PacBell had purchase commitments of about $176 remaining
in connection with its previously announced program for deploying an all digital
switching platform with ISDN and SS-7 capabilities.
Purchase Options - In June 1990, Prime Cable of Chicago, Inc. (Prime Cable)
acquired certain Chicago cable television properties from Group W. PAC, 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 PAC, has guaranteed bank financing used by
TC Cable and its parent corporation to acquire this interest. The guarantees
cover initial loan amounts of $60 as well as interest accruing on the loans,
which will be added to the outstanding loan balances up to an aggregate of $136.
In management's opinion, the likelihood that PAC will be required to pay
principal or interest on this debt under these guarantees is remote.
<PAGE>
PACIFIC TELESIS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) continued Dollars
in millions except per share amounts
Property Tax Investigation - In 1992, a settlement agreement was reached
between the State Board of Equalization, all California counties, the State
Attorney General, and 28 utilities, including PacBell, on a specific methodology
for valuing utility property for property tax purposes for a period of eight
years. The California Public Utilities Commission (CPUC) opened an investigation
to determine if any resulting property tax savings should be returned to
customers. Intervenors have asserted that as much as $20 of annual property tax
savings should be treated as an exogenous cost reduction in PacBell's annual
price cap filings. These intervenors have also asserted that past property tax
savings totaling as much as approximately $75 as of March 31, 1997, plus
interest should be returned to customers. Management believes that, under the
CPUC's regulatory framework, any property tax savings should be treated only as
a component of the calculation of shareable earnings and not as an exogenous
cost. In an Interim Opinion issued in June 1995, the CPUC decided to defer a
final decision on this matter pending resolution in a separate proceeding of the
criteria for exogenous cost treatment under its regulatory framework.
<PAGE>
PACIFIC TELESIS GROUP
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
Pacific Telesis Group (PAC) reported net income of $352, or $.82 per share, for
the first quarter of 1997. Financial results for the first quarters of 1997 and
1996 are summarized as follows:
- --------------------------------------------------------------------------------
First Quarter
-------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Operating revenues $ 2,535 $ 2,378 6.6%
Operating expenses $ 1,850 $ 1,755 5.4%
Income before cumulative $ 352 $ 316 11.4%
effect of accounting change
Cumulative $ - $ 85 -
effect of accounting change
- --------------------------------------------------------------------------
Net income $ 352 $ 401 (12.2)%
================================================================================
The primary factors contributing to the increase in income before cumulative
effect of accounting change during the first quarter of 1997 were a $90
after-tax settlement gain associated with lump-sum pension payments and growth
in demand for services and products at Pacific Bell and Nevada Bell (Telephone
Companies). Excluding this gain and last year's cumulative effect of accounting
change, first quarter 1997 results decreased slightly due to increased expenses
for start-up costs associated with new growth initiatives, primarily PCS
wireless, and expenses in the wireline business including preparation for
increased competition and unusually high expenses associated with damage caused
by winter storms. 1996 net income included a one-time, non-cash after-tax gain
of $85, or $.20 per share, associated with the cumulative effect of the change
in accounting for directory publishing revenues and expenses.
PAC's operating revenues in the first quarter of 1997 increased $157, or 6.6%.
Components of operating revenues for the first quarter of 1997 and 1996 are as
follows:
- --------------------------------------------------------------------------------
First Quarter
------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Local service $ 1,037 $ 979 5.9%
Network access
Interstate 474 458 3.5
Intrastate 188 180 4.4
Long-distance 309 317 (2.5)
service
Directory 363 307 18.2
advertising
Other 164 137 19.7
- ----------------------------------------------------------------------
Total $ 2,535 $ 2,378 6.6%
================================================================================
<PAGE>
PACIFIC TELESIS GROUP
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Local service revenues increased in the first quarter of 1997 due
primarily to increases in demand, including increases in access lines and
vertical services revenues. The number of access lines increased by 3.9%
since March 31, 1996, with approximately 13% of access line growth due to
the sales of additional access lines to existing residential customers.
Vertical services revenues, which include custom calling options, Caller
ID and other enhanced services, increased by approximately 21%. Local
service revenues also reflect the implementation of the California
Universal Service Fund that went into effect February 1, 1997. This fund
is intended to subsidize the provision of service to high cost areas.
Amounts received from the fund resulted in a shift of equivalent revenues
from intraLATA long-distance and intrastate network access revenues to
local service revenues in the first quarter of 1997. This shift is subject
to final California Public Utilities Commission (CPUC) approval, expected
in second quarter 1997. Increases in revenues were slightly offset by rate
reductions due to CPUC price cap orders.
Network Access Interstate network access revenues increased in the first
quarter of 1997 due primarily to an increase in demand for access services
by interexchange carriers. Growth in revenues from end user charges
attributable to an increasing access line base also contributed to the
increase. Partially offsetting these increases in interstate network
access revenues were sharing accrual adjustments from prior periods.
Intrastate network access revenues increased in the first quarter of 1997
due primarily to increases in demand, including usage by alternative
intraLATA toll carriers, partially offset by the effects of the California
Universal Service Fund described above.
Long-Distance Service revenues decreased slightly in the first quarter of
1997 primarily due to the effects of the California Universal Service Fund
described above primarily offset by increases in demand resulting from
California's growing economy.
Directory advertising revenues increased in the first quarter of 1997 due
mainly to the publication of books not published in 1996 and, to a lesser
extent, increased demand and earlier directory publication.
Other operating revenues increased in the first quarter of 1997 due
primarily to increased demand for Pacific Bell's (PacBell) non-regulated
services and products.
<PAGE>
PACIFIC TELESIS GROUP
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
PAC's operating expenses in first quarter 1997 increased $95, or 5.4%, over
first quarter 1996. Components of operating expenses for the first quarters of
1997 and 1996 are as follows:
- -------------------------------------------------------------------------------
First Quarter
------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Cost of services and products
$ 886 $ 886 - %
Selling, general and administrative
473 404
17.1
Depreciation and amortization
491 465 5.6
- ---------------------------------------------------------------------
Total $ 1,850 $ 1,755 5.4%
================================================================================
Total Operating Expenses Costs of services and products and selling, general and
administrative costs increased on a combined basis $69, or 5.3% in the first
quarter of 1997 due to increases for employee compensation, costs incurred to
prepare for local competition, and expenses associated with damage from winter
storms. Other increases related to new business initiatives for Personal
Communications Services (PCS), long-distance and video. These increases were
partially offset by savings due to a $152 settlement gain associated with
lump-sum pension payments and 1996 changes in benefit plans and plan
assumptions. Depreciation and amortization increased in the first quarter of
1997 due primarily to growth in plant levels.
Other Income (Expense)-Net decreased $9 in the first quarter of 1997 primarily
as a result of distributions paid due to the sale of an additional $500 of Trust
Originated Preferred Securities of $500 in June 1996.
Income taxes increased $18 in the first quarter of 1997 primarily due to higher
income before income taxes.
Cumulative Effect of Accounting Change As discussed in Note 1 to the financial
statements, Pacific Bell Directory changed its method of recognizing directory
publishing revenues and related expenses effective January 1, 1996. The
cumulative after-tax effect of applying the new method to prior years was
recognized as of January 1, 1996 as a one-time, non-cash gain applicable to
continuing operations of $85, or $.20 per share. The gain is net of deferred
taxes of $58. Management believes this change to the issue basis method is
preferable because it is the method generally followed in the publishing
industry and better reflects the operating activity of the business. This
accounting change is not expected to have a significant net income effect on
future periods.
<PAGE>
PACIFIC TELESIS GROUP
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
OTHER BUSINESS MATTERS
Restructuring Reserve - PAC established a restructuring reserve at the end of
1993 to provide for the incremental cost of force reductions associated with
restructuring business processes through 1997. A total of $22 in cash outlays
was charged to the reserve in the first quarter of 1997. As of March 31, 1997,
$75 remained in the restructuring reserve.
Merger - On April 1, 1997, SBC Communications Inc. (SBC) and PAC completed the
merger of an SBC subsidiary with PAC, in a transaction in which each share of
PAC common stock was exchanged for 0.73145 of a share of SBC common stock
(equivalent to approximately 313 million shares). With the merger, PAC became a
wholly-owned subsidiary of SBC. The transaction will be accounted for as a
pooling of interests and a tax-free reorganization (see Note 3 to the financial
statements).
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITIVE ENVIRONMENT
Access reform - On May 7, 1997, the Federal Communications Commission (FCC)
adopted orders on access charge reform and local exchange carrier price caps
which will reduce access charges by, in part, adjusting the productivity factor
to be used in interstate price cap calculations. In presenting the orders, the
FCC estimated there would be a $1.7 billion reduction in industry-wide
interstate access charges which are estimated to aggregate $23 billion.
Management is evaluating the effect of and its response to the orders.
Interconnection Agreements - Companies seeking to connect to the Telephone
Companies' networks and provide local service must enter into interconnection
agreements with the Telephone Companies which are then subject to approval by
the appropriate state commission. The Telephone Companies have entered into
agreements in both California and Nevada, whose commissions have approved
various agreements.
The Telephone Companies expect that they will experience local exchange
competition both from current providers and other new entrants in 1997. PAC
intends to use interconnection agreements to support its application to the FCC
to provide interLATA long-distance service in California and Nevada.
<PAGE>
PACIFIC TELESIS GROUP
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS - Continued
FCC Apportionment of Sharing Obligations - The FCC's price cap rules require
Local Exchange Carriers (LECs) to apportion sharing obligations among their
price cap baskets based on "cost-causative" methods. The FCC concluded that
proportionate revenues in each price cap basket could be used as a proxy for
cost. For years when PacBell had a sharing obligation, it excluded interstate
end user revenues from the sharing apportionment methodology. On April 17, 1997,
the FCC ruled that end user revenues must be included in the base by which
sharing is apportioned to the baskets. The Order requires PacBell to submit
recalculated price cap indices reflecting its apportionment methodology and to
revise its tariff rates as of July 1, 1997. Management estimates that the effect
of this order could be up to approximately $30 plus interest.
Revision of FCC 800 Data Base Access Tariffs - In October 1996, the FCC
issued a Report & Order on the 800 Database Access Tariffs. The Order required
tariff revisions and largely disallowed PacBell's request for exogenous
treatment of 800 database costs. Rates were revised effective December 21, 1996.
The original rates took effect May 1, 1993 pursuant to potential refund. On
April 14, 1997, the FCC issued an Order that required refunds be made. PacBell
must file a refund plan on May 14, 1997. Currently, management assesses this
refund to be approximately $22 plus interest.
Other Billing and Collecting Allocation Methodology Changes - The FCC adopted
new separations rules effective May 1, 1997 that shift recovery of substantial
other billing and collecting costs from the intrastate to the interstate
jurisdiction. This rule change could reduce PacBell's revenues by about $30 in
1997 and about $45 in each subsequent year. Management is evaluating options to
mitigate this effect on net income.
Revenues Subject to Refund - In 1992, the CPUC issued a decision adopting, with
modification, Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" (FAS 106), for
regulatory accounting purposes. Annual price cap decisions by the CPUC granted
PacBell approximately $100 in each of the years 1993-1996 for partial recovery
of higher costs under FAS 106. In October 1994, the CPUC reopened the proceeding
to review the criteria for exogenous cost treatment and whether PacBell should
continue to recover these costs. The CPUC's order also held that related
revenues collected after October 12, 1994, were subject to refund plus interest
pending future proceedings. These proceedings were concluded on April 9, 1997
when the CPUC reaffirmed that postretirement benefits costs are appropriately
recoverable in PacBell's price cap filings.
PACIFIC TELESIS GROUP
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2 Agreement and Plan of Merger among Pacific Telesis
Group, SBC
Communications, Inc. and SBC Communications (NVI, Inc.),
dated as of
April 1, 1996 (Exhibit 2 to Form 8-K filed April 1, 1996).
Exhibit 3a Articles of Incorporation of Pacific Telesis Group, as amended
April 1, 1997.
Exhibit 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).
4a(i) Amendment to Rights Agreement, dated as of April 1,
1996.
Exhibit 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.
Exhibit 10bb(i) Resolutions terminating the Pacific Telesis Group
Senior Management Long Term
Incentive Plan.
Exhibit 11 Computation of Earnings per Common Share.
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On February 11, 1997, Pacific Telesis Group (PAC) filed a Current Report
on Form 8-K, reporting on Item 7, Financial Statements and Exhibits. In
the Report, PAC filed a supplement that amends the Prospectus for the
Pacific Telesis Group Shareowners Dividend Reinvestment and Stock Purchase
Plan. The agreement provides that upon consummation of the merger with SBC
Communications Inc. (SBC), shares of Telesis stock will be converted into
the right to receive shares of SBC stock.
On March 13, 1997, PAC filed a Current Report on Form 8-K reporting on
Item 7, Exhibits. In the Report, PAC filed its 1996 Unaudited Management's
Discussion and Analysis of Financial Condition and Results of Operations;
and Audited Consolidated Balance Sheets as of December 31, 1996 and 1995,
and the related Consolidated Statements of Income, Shareowners' Equity,
and Cash Flows for each of the three years in the period ended December
31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Telesis Group
May 9, 1997 /s/ William E. Downing
----------------------
William E. Downing
Executive Vice President,
Chief Financial Officer and
Treasurer
Exhibit 3a
ARTICLES OF INCORPORATION
OF
PACIFIC TELESIS GROUP
Originally Filed October 26, 1983
Amended:
May 18, 1987
August 28, 1987
June 17, 1988
March 31, 1997
<PAGE>
==============================================================================
==============================================================================
ARTICLES OF INCORPORATION
OF
PACIFIC TELESIS GROUP
(As Amended March 31, 1997)
FIRST: The name of the corporation is PACIFIC TELESIS GROUP.
SECOND: The principal office of the corporation in the State of
Nevada is located at 645 East Plumb Lane, Reno, Washoe
County, Nevada 89502. The name and address of its
resident agent is R. G. Mitchell, 645 East Plumb Lane,
Reno, Nevada 89502. (As amended August 28, 1987)
THIRD: The corporation may engage in any lawful activity.
FOURTH: The aggregate number of shares that the Corporation shall
have the authority to issue is 1,000 shares of Common
Stock, par value $1.00 per share. (As amended March 31,
1997)
FIFTH: The governing board of this corporation shall be known as
the board of directors and its members shall be known as
directors, and the number of directors may from time to
time be increased or decreased by resolution of the board
of directors. (As amended March 31, 1997)
SIXTH: The capital stock, after the amount of the subscription
price, or par value, has been paid in, shall not be subject
to assessment.
SEVENTH: The name and post office address of each of the
incorporators signing the articles of incorporation are as
follows:
Robert Dalenberg 140 New Montgomery Street
San Francisco, CA 94105
Norah S. Freitas 140 New Montgomery Street
San Francisco, CA 94105
Terry Michael Kee 225 Bush Street
San Francisco, CA 94104
EIGHTH: The corporation is to have perpetual existence.
NINTH: The stockholders of the corporation shall have no
preemptive right to acquire unissued shares or treasury
shares of the corporation or securities convertible into or
exercisable for such shares.
TENTH: The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any
threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or
was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or
as a fiduciary of an employee benefit plan of this
corporation or of a wholly owned subsidiary corporation,
against expenses incurred in connection with such action,
suit or proceeding, including attorneys' fees, judgments,
fines and amounts paid in settlement, to the extent not
prohibited by law, state or federal. Expenses incurred in
defending any such proceeding may be advanced by the
corporation prior to the final disposition of such action,
suit or proceeding upon receipt of an undertaking to repay
such amount unless it shall be determined ultimately that
the person is entitled to be indemnified hereunder. This
Article TENTH may not be repealed or amended without the
affirmative vote of at least sixty-six and two-thirds
percent (66-2/3 %) of the voting power of the shares
entitled to vote thereon.
ELEVENTH: Subject to the further requirements of Articles FIFTH and
TENTH, this corporation reserves the right to amend, alter,
change or repeal any provision contained in the Articles of
Incorporation by approval of a majority of a quorum of, or
by unanimous written consent of, this corporation's Board
of Directors and by approval of a majority of the voting
power of this corporation's outstanding shares, except as
may be otherwise required by law, and all rights conferred
upon stockholders herein are granted subject to this
reservations.
TWELFTH: The Board of Directors is authorized on behalf of the
corporation to authorize and approve indemnity agreements
between the corporation and each director and each officer,
in form and content acceptable to the board, which
agreements shall provide that the corporation shall
indemnify (and advance expenses to) the indemnitee to the
fullest extent permitted by applicable law as such law may
be in effect at the time any such indemnification under any
such agreement may be sought), no later than 30 days after
a written demand has been made therefor, against all
expenses, judgments, fines, penalties, excise taxes and
amounts paid in settlement for claims with respect to
events relating to indemnitee's service with or for the
corporation, and which agreements shall provide that in any
proceeding to enforce the obligation to indemnify such
person, the corporation shall have the burden to establish
that such indemnification is prohibited; provided, however,
that such agreements shall, in form and content acceptable
to the board, exclude from indemnification a judgment or
other final adjudication adverse to indemnitee that
established (a) that his or her acts were committed in bad
faith or were the result of deliberate dishonesty, or
(b) that he or she in fact gained a financial advantage to
which he or she was not legally entitled, in which event
the amount of the indemnification shall be reduced by the
amount of such financial advantage gained. (As amended
May 18, 1987)
THIRTEENTH: The Board of Directors of the corporation, when evaluating
any offer of another party to (a) make a tender or exchange
offer for any equity security of the corporation, (b) merge
or consolidate the corporation with another corporation, or
(c) purchase or otherwise acquire all or substantially all
of the properties and assets of the corporation, may, in
connection with the exercise of its judgment in determining
what is in the best interests of the corporation and its
stockholders, give due consideration to (i) all relevant
factors, including without limitation the social, legal,
environmental and economic effects on the employees,
customers, suppliers and other affected persons, firms and
corporations, and on the communities and geographical areas
in which the corporation and its subsidiaries operate or
are located and on any of the businesses and properties of
the corporation or any of its subsidiaries, as well as such
other factors as the directors deem relevant, (ii) not only
the financial consideration being offered in relation to
the then current market price for the corporation's
outstanding shares of capital stock, but also in relation
to the then current value of the corporation in a freely
negotiated transaction and in relation to the Board of
Directors' estimate of the future value of the corporation
(including the unrealized value of its properties and
assets) as an independent going concern, and (iii) the
obligations of the corporation, and any of its
subsidiaries, to provide stable, reliable public utility
services on a continuing or long term basis. (As amended
May 18, 1987)
FOURTEENTH: To the fullest extent that the general corporation law of
the State of Nevada, as it exists on the date hereof or as
it may hereafter be amended, permits the limitation or
elimination of the personal liability of an officer or
director, no officer or director of this corporation shall
be personally liable to this corporation or its
stockholders for damages for breach of fiduciary duty as an
officer or director. No amendment to or repeal of this
Article shall apply to or have any effect on the liability
or alleged liability of any officer or director of this
corporation for or with respect to any acts or omissions of
such officer or director occurring prior to such amendment
or repeal. This Article FOURTEENTH may not be repealed or
amended without the affirmative vote of at least sixty-six
and two-thirds percent (66-2/3%) of the voting power of the
shares entitled to vote thereon. (As amended June 17, 1988)
=========================================================================
Exhibit 10bb(i)
=========================================================================
Senior Management Long Term Incentive Plan
WHEREAS, it is deemed desirable to terminate this corporation's Senior
Management Long Term incentive Plan (the "Plan") in connection with
the merger of this corporation with a wholly-owned subsidiary of SBC
Communications Inc., as contemplated by a merger agreement entered
into between the parties as of April 1, 1996 (the "Merger"):
RESOLVED that this corporation's Senior Management Long Term Incentive
Plan (the "Plan") shall be terminated with respect to the
participants who are "covered employees" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended,
effective immediately prior to the filing of the Articles of Merger
with the Secretary of State of Nevada. Further, the Plan shall be
terminated with respect to all participants other than those
described in the preceding sentence, effective upon the completion
of the Merger.
<TABLE>
EXHIBIT 11
----------------
PACIFIC TELESIS GROUP AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Dollars in millions, except per share amounts; shares in thousands)
For the 3 Months Ended
March 31,
<CAPTION>
-----------------------------
1997 1996
----------------------------
<S> <C> <C>
Net income $352 $401
=================
Weighted average number of common shares outstanding 428,312 428,435
Common stock equivalent shares applicable to stock options 2,975 815
---------- ----------
Total number of shares for computing primary earnings per share 431,827 429,250
Incremental shares for computing fully diluted earnings per share - -
---------- ----------
Total number of shares for computing fully diluted earnings per share 431,827 429,250
======= ==========
Earnings per common share (as reported) $ 0.82 $ 0.94
Primary earnings per share $ 0.82 $ 0.93
Fully diluted earnings per share $ 0.82 $ 0.93
<FN>
Earnings per share amounts for the three months ended March 31, 1997 and 1996,
as reported in the 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 Consolidated Statements of Income, as they differ from the reported
earnings per share amounts by less than three percent.
</FN>
</TABLE>
<TABLE>
EXHIBIT 12
PACIFIC TELESIS
GROUP
COMPUTATION OF RATIOS OF EARNINGS
TO FIXED CHARGES
Dollars in
Millions
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993** 1992*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income From Continuing Operations $ $ $ $ $ $ $
Before Income Taxes, 586 526 1,798 1,611 1,793 201 1,782
Extraordinary Loss and Cumulative
Effect of Accounting Change
Add: Interest Expense 92 114 455 442 455 509 506
1/3 Rental Expense 18 13 51 31 43 40 44
Dividends on Preferred
Securities of 20 9 60 - - - -
Subsidiary Trusts
====================================================================================================
Adjusted Earnings $ $ $ $ $ $
716 662 $2,364 2,084 2,291 750 2,332
====================================================================================================
Total Interest Charges $ $ $ $ $ $ $
127 114 455 442 455 509 510
1/3 Rental Expense 18 13 51 31 43 40 44
Dividends on Preferred Securities
of Subsidiary Trusts 20 9 60 - - - -
====================================================================================================
Adjusted Fixed Charges $ $ $ $ $ $ $
165 136 566 473 498 549 554
====================================================================================================
Ratio of Earnings to Fixed Charges 4.34 4.87 4.18 4.41 4.60 1.37 4.21
====================================================================================================
<FN>
* Restated to reflect the spin-off of the Pacific Telesis wireless operations which are excluded
from amounts for the "continuing operations" of Pacific Telesis Group.
** Results for 1993 reflect restructuring charges which reduced income from
continuing operations before income taxes by $1,431.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<CASH> 113
<SECURITIES> 0
<RECEIVABLES> 2,331
<ALLOWANCES> 176
<INVENTORY> 0
<CURRENT-ASSETS> 2,508
<PP&E> 29,531
<DEPRECIATION> 17,248
<TOTAL-ASSETS> 16,730
<CURRENT-LIABILITIES> 3,710
<BONDS> 5,431
<COMMON> 43
0
0
<OTHER-SE> 2,991
<TOTAL-LIABILITY-AND-EQUITY> 16,730
<SALES> 0
<TOTAL-REVENUES> 2,535
<CGS> 0
<TOTAL-COSTS> 1,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 580
<INCOME-TAX> 228
<INCOME-CONTINUING> 352
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 352
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.82
</TABLE>
