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 September 30, 1996
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 1-8610
SBC COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
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 October 31, 1996, 603,660,839 common shares were outstanding.
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SBC COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Operating Revenues
Local service $1,887.8 $1,667.5 $5,462.7 $4,832.4
Network access 820.1 780.8 2,427.9 2,290.7
Long-distance service 234.3 210.3 698.1 629.3
Directory advertising 307.6 313.4 523.2 547.0
Other 350.6 320.3 1,017.9 927.8
Total operating revenues 3,600.4 3,292.3 10,129.8 9,227.2
Operating Expenses
Cost of services and products 1,049.6 963.7 2,963.0 2,713.0
Selling, general and administrative 999.4 904.2 2,870.6 2,556.2
Depreciation and amortization 571.8 541.1 1,671.5 1,612.6
Total operating expenses 2,620.8 2,409.0 7,505.1 6,881.8
Operating Income 979.6 883.3 2,624.7 2,345.4
Other Income (Expense)
Interest expense (115.1) (129.3) (352.4) (389.3)
Equity in net income of affiliates 78.6 55.5 197.6 109.9
Other expense - net (14.8) (9.5) (32.7) (13.6)
Total other income (expense) (51.3) (83.3) (187.5) (293.0)
Income Before Income Taxes and
Extraordinary Loss 928.3 800.0 2,437.2 2,052.4
Income Taxes
Federal 303.5 236.6 791.1 607.4
State and local 31.5 29.1 87.8 73.5
Total income taxes 335.0 265.7 878.9 680.9
Income Before Extraordinary Loss 593.3 534.3 1,558.3 1,371.5
Extraordinary Loss from Discontinuance
of Regulatory Accounting, net of tax - (2,819.3) - (2,819.3)
Net Income (Loss) $593.3 $(2,285.0) $1,558.3 $(1,447.8)
Earnings Per Common Share:
Income Before Extraordinary Loss $0.97 $0.88 $2.56 $2.25
Extraordinary Loss from Discontinuance
of Regulatory Accounting, net of tax - (4.63) - (4.63)
Net Income (Loss) $0.97 $(3.75) $2.56 $(2.38)
Weighted Average Number of Common
Shares Outstanding (in millions) 608.6 609.9 609.0 608.5
Dividends Declared Per Common Share $0.43 $0.4125 $1.29 $1.2375
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SBC COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 689.5 $ 489.9
Short-term cash investments and other current assets 514.6 311.0
Accounts receivable - net of allowances for uncollectibles of
$155.4 and $134.0 2,370.8 2,389.2
Material and supplies 79.9 130.6
Prepaid expenses 348.2 156.8
Deferred charges 221.4 201.9
Total current assets 4,224.4 3,679.4
Property, Plant and Equipment - at cost 32,128.8 30,789.5
Less: Accumulated depreciation and amortization 18,620.3 17,801.2
Property, Plant and Equipment - Net 13,508.5 12,988.3
Intangible Assets - Net of Accumulated Amortization of
$588.1 and $547.7 2,564.2 2,679.4
Investments in Equity Affiliates 1,774.5 1,586.3
Other Assets 1,070.0 1,069.1
Total Assets $ 23,141.6 $ 22,002.5
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 1,975.4 $ 1,679.5
Accounts payable and accrued liabilities 3,336.1 3,125.3
Dividends payable 260.3 251.4
Total current liabilities 5,571.8 5,056.2
Long-Term Debt 5,482.0 5,672.3
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 797.0 723.5
Postemployment benefit obligation 2,738.8 2,735.7
Unamortized investment tax credits 262.6 286.6
Other noncurrent liabilities 1,450.0 1,272.4
Total deferred credits and other noncurrent liabilities 5,248.4 5,018.2
Shareowners' Equity
Common shares issued ($1 par value) 620.5 620.5
Capital in excess of par value 6,316.9 6,297.6
Retained earnings 1,453.0 672.4
Guaranteed obligations of employee stock ownership plans (242.3) (272.5)
Foreign currency translation adjustment (601.7) (580.9)
Treasury shares (at cost) (707.0) (481.3)
Total shareowners' equity 6,839.4 6,255.8
Total Liabilities and Shareowners' Equity $ 23,141.6 $ 22,002.5
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SBC COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
<CAPTION>
Nine months ended
September 30,
1996 1995
<S> <C> <C>
Operating Activities
Net income (loss) $ 1,558.3 $ (1,447.8)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,671.5 1,612.6
Undistributed earnings from investments in equity affiliates (151.6) (58.9)
Provision for uncollectible accounts 162.9 118.8
Amortization of investment tax credits (24.0) (34.4)
Pensions and other postemployment expenses 118.1 0.1
Deferred income taxes 132.4 206.6
Extraordinary loss, net of tax - 2,819.3
Other - net (214.0) (286.8)
Total adjustments 1,695.3 4,377.3
Net Cash Provided by Operating Activities 3,253.6 2,929.5
Investing Activities
Construction and capital expenditures (2,014.0) (1,619.5)
Investments in affiliates (28.1) (16.0)
Purchase of short-term investments (750.8) (596.7)
Proceeds from short-term investments 568.5 315.9
Dispositions 67.4 -
Acquisitions (37.0) (515.6)
Net Cash Used in Investing Activities (2,194.0) (2,431.9)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 198.3 94.0
Issuance of other short-term borrowings 208.8 91.1
Repayment of other short-term borrowings (88.8) (60.0)
Issuance of long-term debt 114.9 438.9
Repayment of long-term debt (299.5) (241.5)
Purchase of treasury shares (337.9) (129.0)
Issuance of treasury shares 38.9 62.3
Dividends paid (694.7) (663.4)
Net Cash Used in Financing Activities (860.0) (407.6)
Net increase in cash and cash equivalents 199.6 90.0
Cash and cash equivalents beginning of year 489.9 364.6
Cash and Cash Equivalents End of Period $ 689.5 $ 454.6
Cash paid during the nine months ended September 30 for:
Interest $ 358.0 $ 381.8
Income taxes $ 604.5 $ 583.2
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SBC COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
Guaranteed
Obligations Foreign
Capital in of Employee Currency
Common Excess of Retained Stock Owner- Translation Treasury
Shares Par Value Earnings ship Plans Adjustment Shares
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 620.5 $ 6,286.1 $ 2,593.5 $(314.7) $ (366.5) $ (463.3)
Net income (loss) - - (1,447.8) - - -
Dividends to shareowners - - (753.3) - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 29.8 - -
Foreign currency translation adjustment - - - - (90.0) -
Purchase of treasury shares - - - - - (129.0)
Issuance of treasury shares:
Dividend Reinvestment Plan - 10.1 - - - 86.5
Other - (4.0) - - - 73.9
Other - - 9.5 - - -
Balance, September 30, 1995 $ 620.5 $ 6,292.2 $ 401.9 $(284.9) $ (456.5) $ (431.9)
Balance, December 31, 1995 $ 620.5 $ 6,297.6 $ 672.4 $(272.5) $ (580.9) $ (481.3)
Net income - - 1,558.3 - - -
Dividends to shareowners - - (784.2) - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 30.2 - -
Foreign currency translation adjustment - - - - (20.8) -
Purchase of treasury shares - - - - - (337.9)
Issuance of treasury shares:
Dividend Reinvestment Plan - 21.8 - - - 83.1
Other - (3.7) - - - 29.1
Other - 1.2 6.5 - - -
Balance, September 30, 1996 $ 620.5 $ 6,316.9 $ 1,453.0 $ (242.3) $ (601.7) $ (707.0)
See Notes to Consolidated Financial Statements.
</TABLE>
* * * *
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
At September 30, or for the nine months then ended: 1996 1995
<S> <C> <C>
Return on weighted average shareowners' equity * . . . . . . . . . . . . . 31.13% 22.00%
Debt ratio *. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.16% 54.97%
Network access lines in service (000). . . . . . . . . . . . . . . . . . . 14,799 14,074
Access minutes of use (000,000) . . . . . . . . . . . . 43,586 39,854
Long-distance messages billed (000) . . . . . . . . . . . . . . . . . . 753,004 751,405
Cellular customers (000). . . . . . . . . . . . . . . . . . . . . . . . . 4,125 3,387
Number of employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,510 58,720
* Reflects the impact of the 1995 third quarter extraordinary loss from discontinuance of
regulatory accounting on shareowners' equity.
SBC COMMUNICATIONS INC.
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 SBC Communications Inc. (SBC) 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. Management believes that the disclosures made
are adequate to make the information presented not misleading. Certain
reclassifications have been made to the 1995 consolidated financial statements
to conform with the 1996 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 SBC's 1995
Annual Report to Shareowners.
2.CONSOLIDATION - The consolidated financial statements include the accounts of
SBC and its majority-owned subsidiaries. Southwestern Bell Telephone Company
(Telephone Company) is SBC's largest subsidiary. All significant
intercompany transactions are eliminated in the consolidation process.
Investments in companies in which SBC owns 20% to 50% of the voting common
stock or otherwise exercises significant influence over operating and
financial policies of the company are accounted for under the equity method.
Earnings from foreign investments accounted for under the equity method are
included for periods ended within three months of the date of SBC's
Consolidated Statements of Income.
3.MERGER AGREEMENT - On April 1, 1996, SBC and Pacific Telesis Group (PAC)
jointly announced a definitive agreement to merge an SBC subsidiary with PAC,
in a transaction in which each share of PAC common stock will be exchanged
for 0.733 of a share of SBC common stock, subject to adjustment as described
in the merger agreement. After the merger, PAC will be a wholly-owned
subsidiary of SBC. 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 SBC and PAC each approved the transaction, which had
previously been approved by the board of directors of each company. On
November 5, 1996, the United States Department of Justice announced it will
not initate action on the merger under the Hart-Scott Rodino antitrust law.
The merger agreement is subject to certain other regulatory approvals,
including approval by the California Public Utilities Commission, which has
established a schedule for review of the transaction with final comments from
the interested parties due in January 1997. If approvals are granted, the
transaction is expected to close in the first half of 1997.
4.EXTRAORDINARY LOSS - Effective September 1995, the Telephone Company
discontinued its application of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation (FAS 71)."
Upon discontinuance of FAS 71, the Telephone Company recorded a non-cash,
extraordinary charge of $2,819.3 (after a deferred tax benefit of $1,764.0).
This charge is composed of an after-tax charge of $2,897.3 to reduce the net
carrying value of telephone plant, partially offset by an after-tax benefit
of $78.0 for the elimination of net regulatory liabilities.
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
SBC Communications Inc. (SBC) reported net income of $593.3, or $.97 per share,
for the third quarter of 1996 and net income of $1,558.3, or $2.56 per share,
for the first nine months of 1996. Financial results for the third quarters and
first nine months of 1996 and 1995 are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
Third Quarter Nine-Month Period
Percent Percent
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 3,600.4 $ 3,292.3 9.4% $ 10,129.8 $ 9,227.2 9.8%
Operating expenses $ 2,620.8 $ 2,409.0 8.8% $ 7,505.1 $ 6,881.8 9.1%
Income before
extraordinary loss $ 593.3 $ 534.3 11.0% $ 1,558.3 $ 1,371.5 13.6%
Extraordinary loss - $(2,819.3) - - $(2,819.3) -
Net income (loss) $ 593.3 $(2,285.0) - $ 1,558.3 $(1,447.8) -
</TABLE>
The primary factors contributing to the increase in net income during the third
quarter and first nine months of 1996 were growth in demand for services and
products at Southwestern Bell Telephone Company (Telephone Company) and
Southwestern Bell Mobile Systems (Mobile Systems). Results for the third
quarter and first nine months of 1996 also reflect increased contributions
from SBC's international equity affiliates.
SBC's operating revenues in the third quarter and first nine months of 1996
increased $308.1, or 9.4%, and $902.6, or 9.8%, over the third quarter and first
nine months of 1995. Components of operating revenues for the third quarters
and first nine months of 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Third Quarter Nine-Month Period
Percent Percent
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Local service
Landline $ 1,202.8 $ 1,085.1 10.8% $ 3,495.2 $ 3,192.8 9.5%
Wireless 685.0 582.4 17.6 1,967.5 1,639.6 20.0
Network access
Interstate 537.1 517.7 3.7 1,601.3 1,525.9 4.9
Intrastate 283.0 263.1 7.6 826.6 764.8 8.1
Long-distance service 234.3 210.3 11.4 698.1 629.3 10.9
Directory advertising 307.6 313.4 (1.9) 523.2 547.0 (4.4)
Other 350.6 320.3 9.5 1,017.9 927.8 9.7
Total $ 3,600.4 $ 3,292.3 9.4% $ 10,129.8 $ 9,227.2 9.8%
Landline local service revenues increased in the third quarter and first
nine months of 1996 due primarily to increases in demand, including
increases in access lines and vertical services revenues. The number of
access lines increased by 5.2% since September 30, 1995, with approximately
29% 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 22%.
Wireless local service revenues increased in the third quarter and first
nine months of 1996 due primarily to a 21.8% increase in cellular customers
since September 30, 1995, partially offset by a slight decline in average
revenue per customer. Market penetration at the end of the third quarters
of 1996 and 1995 was 10.1 and 8.3 customers per 100 residents,
respectively, in Mobile Systems' service areas.
Interstate network access revenues increased in the third quarter and first
nine months of 1996 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. Reduced rates under the Federal Communications Commission's
(FCC) revised price cap plan, which was effective August 1, 1995, partially
offset the increases in the third quarter and, to a lesser extent, the
first nine months of 1996.
Intrastate network access revenues increased in the third quarter and first
nine months of 1996 due primarily to increases in demand, including usage
by alternative intraLATA toll carriers.
Long-distance service revenues increased in the third quarter of 1996
primarily due to growth in wireless revenues, including revenues from
interLATA service beginning in February 1996. Also increasing results for
the third quarter and first nine months of 1996 were intraLATA toll pool
settlements and the inclusion in 1995 of accruals for rate reductions
relating to an appealed 1992 rate order in Oklahoma. The settlement of the
appeals in October 1995 eliminated the need to continue these accruals.
Absent these accruals and settlements, the Telephone Company's long-
distance service revenues in the third quarter and first nine months of
1996 decreased due to the continuing impact of price competition from
alternative intraLATA toll carriers. Competition has had less impact on
message volumes, which were relatively unchanged, due to the Telephone
Company's deployment and promotion of optional calling plans.
Directory advertising revenues decreased in the third quarter and first nine
months of 1996 as increases in yellow pages revenues from Southwestern Bell
Yellow Pages, Inc. were more than offset by decreases resulting from the
January 1996 sale of SBC's publishing contracts for GTE Corporation's
service areas to GTE Directories.
Other operating revenues increased in the third quarter and first nine
months of 1996 due primarily to increased demand for the Telephone
Company's non-regulated services and products.
SBC's operating expenses in the third quarter and first nine months of 1996
increased $211.8, or 8.8%, and $623.3, or 9.1%, over the third quarter and first
nine months of 1995. Components of operating expenses for the third quarters
and first nine months of 1996 and 1995 are as follows:
</TABLE>
<TABLE>
<CAPTION>
Third Quarter Nine-Month Period
Percent Percent
1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Cost of services and
products $ 1,049.6 $ 963.7 8.9% $ 2,963.0 $ 2,713.0 9.2%
Selling, general and
administrative 999.4 904.2 10.5 2,870.6 2,556.2 12.3
Depreciation and
amortization 571.8 541.1 5.7 1,671.5 1,612.6 3.7
Total $ 2,620.8 $ 2,409.0 8.8% $ 7,505.1 $ 6,881.8 9.1%
</TABLE>
Cost of services and products increased for the third quarter and first
nine months of 1996 due to demand related increases at the Telephone
Company, primarily increases in switching system software license fees,
network expansion and maintenance and annual compensation. Other increases
related to growth at Mobile Systems.
Selling, general and administrative expenses increased in the third quarter
and first nine months of 1996 primarily due to growth-related increases at
Mobile Systems. Also contributing to increases in both periods were
increases in annual compensation and contracted services. In addition,
nine month results reflect higher operating taxes, including the 1996 Texas
Infrastructure Fund assessments, which for the third quarter were partially
offset by decreases in other operating taxes.
Interest expense decreased $14.2, or 11.0%, and $36.9, or 9.5%, in the third
quarter and first nine months of 1996 due to lower interest rates on short-term
debt, lower debt levels and capitalization of interest during construction
required by the discontinuance of regulatory accounting in the third quarter of
1995. Under regulatory accounting, the Telephone Company accounted for a
capitalization of both interest and equity costs during periods of construction
as other income.
Equity in net income of affiliates increased $23.1 and $87.7 in the third
quarter and first nine months of 1996. Comparisons to 1995 are affected by the
inclusion in 1995 of losses on United Kingdom cable operations and exchange
losses on the non-peso denominated debt of Telefonos de Mexico, S.A. de C.V.
(Telmex). SBC's United Kingdom cable operations were merged into TeleWest
Communications, P.L.C. in October 1995 and now are accounted for under the cost
method. Additionally, 1996 reflects improved results from SBC's investment in
French cellular operations and net gains on international affiliate investment
transactions. Operationally, Telmex results were relatively flat as decreases
in the value of the peso were mainly offset by operational growth and SBC's
higher percentage ownership resulting from Telmex's repurchase of outstanding
shares.
SBC's investment in Telmex is recorded in accordance with U.S. generally
accepted accounting principles, which exclude inflation adjustments and include
adjustments for the purchase method of accounting.
Income taxes increased $69.3, or 26.1%, and $198.0, or 29.1%, in the third
quarter and first nine months of 1996 due to higher earnings and the effect on
taxes of the discontinuance of regulatory accounting in the third quarter of
1995.
Extraordinary Loss - As described in Note 4 to the consolidated financial
statements, SBC recorded an extraordinary loss of $2.8 billion from
discontinuance of regulatory accounting which included a reduction in plant
asset lives by the Telephone Company in the third quarter of 1995.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITION
Federal Legislation - In February 1996, the Telecommunications Act of 1996 (the
Act) was enacted as a comprehensive federal telecommunications law. Among other
things, the Act established certain terms and conditions intended to promote
competition for the Telephone Company's local exchange services and defined
conditions SBC must comply with before being permitted to offer wireline
interLATA long-distance service in the Telephone Company's five-state area
(Texas, Missouri, Oklahoma, Kansas and Arkansas). SBC may offer this service
after obtaining state approval for an interconnection agreement with a
predominantly facilities-based competitor serving residential and business
customers that complies with a 14 point competitive checklist and FCC approval
of SBC's checklist compliance. The Act also directed the FCC to establish rules
and regulations to implement the Act, and to preempt specific state law
provisions under certain circumstances.
FCC Rules - In August 1996, the FCC adopted rules by which competitors could
connect with Local Exchange Carriers' (LEC) networks, including those of the
Telephone Company. Some of the provisions of the rules addressed unbundling of
network elements, pricing for interconnection and unbundled elements (pricing
provisions), and resale of network services. The FCC rules were appealed by
numerous parties, including SBC, other LECs, various state regulatory
commissions and the National Association of Regulatory Utility Commissioners.
FCC Rules Stayed - On October 15, 1996, the United States Court of Appeals for
the Eighth Circuit (Court) issued an order to stay the FCC's pricing provisions
and its rules permitting new entrants to "pick and choose" among the terms and
conditions of approved interconnection agreements. Other provisions of rules
adopted by the FCC in August 1996 to implement the Act remain in effect. The
terms of the stay will be in effect pending a review by the Court of the appeal
of the FCC rules, beginning in January 1997. The FCC has filed a request to
vacate the Court's stay with the United States Supreme Court.
The effects of the FCC rules are dependent on many factors including, but not
limited to: the ultimate resolution of the pending appeals; the number and
nature of competitors requesting interconnection, unbundling or resale; and the
results of the state regulatory commissions' review and handling of related
matters within their jurisdictions. Accordingly, an assessment of the impact of
the FCC rules on SBC's business is not possible.
Local Service Certification - Companies wishing to provide competitive local
service have filed numerous applications with state commissions throughout the
Telephone Company's five-state area, and the commissions of each state have
begun approving these applications. The Texas Public Utility Commission (TPUC)
has approved the application of Sprint Corporation to be granted a certificate
of authority, waiving the build-out requirements specified under state law for
facilities-based certificates of authority.
Interconnection Agreements - Companies seeking to connect to the Telephone
Company's network and provide local service must enter into interconnection
agreements with the Telephone Company, which are then subject to approval by the
appropriate state commission. The Telephone Company has entered into agreements
in each of its five states, and Texas, Missouri and Oklahoma commissions have
approved various agreements. Several companies who have failed to agree on all
terms of an interconnection agreement with the Telephone Company have filed for
binding arbitration before the state commissions in the five-state area. Only
one arbitration has been ruled on to date.
On October 31, 1996, the TPUC announced its ruling in a consolidated arbitration
hearing between the Telephone Company and AT&T Corp, MCI Communications, MFS
Communications, Teleport Communications Group, and American Communications
Services, Inc. The TPUC approved interim interconnection rates to be charged by
the Telephone Company as well as certain other terms of interconnection between
the parties. Agreements containing these rates and terms must be filed by
November 19, 1996 with the TPUC, which has stated it intends to issue its final
ruling on the agreements by December 19, 1996. The Telephone Company was also
ordered to file revised cost support for the establishment of permanent rates
with the TPUC by January 15, 1997, with an anticipated effective date of April
1997.
As a result of these agreements, the Telephone Company expects that in 1997 it
will experience local exchange competition from one or more of these providers
in selected markets. When these agreements are finalized, SBC intends to use
these and all other approved agreements as a part of its application to the FCC
to provide interLATA long-distance in Texas.
OTHER BUSINESS MATTERS
Merger Agreement - On April 1, 1996, SBC and Pacific Telesis Group (PAC) jointly
announced a definitive agreement to merge an SBC subsidiary with PAC, in a
transaction in which each share of PAC common stock will be exchanged for 0.733
of a share of SBC common stock, subject to adjustment as described in the merger
agreement. After the merger, PAC will be a wholly-owned subsidiary of SBC. 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 SBC and PAC
each approved the transaction, which had previously been approved by the board
of directors of each company. On November 5, 1996, the United States Department
of Justice announced it will not initate action on the merger under the Hart-
Scott-Rodino antitrust law. The merger agreement is subject to certain other
regulatory approvals, including approval by the California Public Utilities
Commission, which has established a schedule for review of the transaction with
final comments from the interested parties due in January 1997. If approvals
are granted, the transaction is expected to close in the first half of 1997..
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, as in 1995, SBC's primary source of funds
continued to be cash provided by operating activities. This, combined with
external financing and proceeds from the sale of directory printing contracts,
was used primarily to fund capital expenditures and pay dividends during the
first nine months of 1996. Due to growth at the Telephone Company and Mobile
Systems, SBC now anticipates capital expenditures for 1996 will approximate
$3 billion. Internally generated funds, combined with proceeds of external
financing, should be adequate to fund capital expenditures and dividends for the
remainder of the year. SBC had $689.5 of cash and cash equivalents and $425.3
of other short-term investments available at September 30, 1996. SBC has
entered into agreements with several banks for lines of credit totaling
$1,055.0, all of which may be used to support commercial paper borrowings.
These lines had not been utilized as of September 30, 1996. Commercial paper
and similar borrowings as of September 30, 1996 totaled $1,556.3.
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On August 13, 1996, SBC Communications Inc. (SBC) filed a Current Report on
Form 8-K, reporting on Item 7, Financial Statements and Exhibits. In the
Report, SBC provided pro forma combined condensed financial statements of
SBC and Pacific Telesis Group assuming the merger will be accounted for as
a "pooling of interests."
On September 30, 1996, SBC filed a Current Report on Form 8-K reporting on
Item 5, Other Events and Item 7, Financial Statements and Exhibits. In the
Report, SBC filed exhibits relating to the establishment of SBC
Communications Capital Corporation (formerly known as Southwestern Bell
Capital Corporation) Medium-Term Notes, Series E for up to $1 billion of
Medium-Term Notes Due Nine Months or More from Date of Issue.
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.
SBC Communications Inc.
November 5, 1996 /s/ Donald E. Kiernan
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<TABLE>
EXHIBIT 12
SBC COMMUNICATIONS INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
NINE MONTHS ENDED
------ SEPTEMBER 30,--- ------- YEAR ENDED DECEMBER 31,---------------------
1996 1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary
Loss and Cumulative Effect of
Changes in
Accounting Principles* $ 2,285.6 $ 1,993.5 $ 2,698.2 $ 2,300.0 $ 1,882.9 $ 1,701.2 $ 1,557.0
Add: Interest Expense 352.4 389.3 515.1 480.2 496.2 530.0 577.7
1/3 Rental Expense 26.5 22.6 45.9 41.8 41.0 45.1 37.5
Adjusted Earnings $ 2,664.5 $ 2,405.4 $ 3,259.2 $ 2,822.0 $ 2,420.1 $ 2,276.3 $ 2,172.2
Total Interest Charges $ 369.3 $ 389.3 $ 515.1 $ 480.2 $ 496.2 $ 530.0 $ 577.7
1/3 Rental Expense 26.5 22.6 45.9 41.8 41.0 45.1 37.5
Adjusted Fixed Charges $ 395.8 $ 411.9 $ 561.0 $ 522.0 $ 537.2 $ 575.1 $ 615.2
Ratio of Earnings to Fixed Charges 6.73 5.84 5.81 5.41 4.51 3.96 3.53
*Undistributed earnings on investments accounted for under the equity method have been excluded.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC
COMMUNICATIONS INC. SEPTEMBER 30, 1996 CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 689,500
<SECURITIES> 425,300
<RECEIVABLES> 2,526,200
<ALLOWANCES> 155,400
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 4,224,400
<PP&E> 32,128,800
<DEPRECIATION> 18,620,300
<TOTAL-ASSETS> 23,141,600
<CURRENT-LIABILITIES> 5,571,800
<BONDS> 5,482,000
0
0
<COMMON> 620,500
<OTHER-SE> 6,218,900
<TOTAL-LIABILITY-AND-EQUITY> 23,141,600
<SALES> 0<F2>
<TOTAL-REVENUES> 10,129,800
<CGS> 0<F3>
<TOTAL-COSTS> 2,963,000
<OTHER-EXPENSES> 1,671,500
<LOSS-PROVISION> 162,900
<INTEREST-EXPENSE> 352,400
<INCOME-PRETAX> 2,437,200
<INCOME-TAX> 878,900
<INCOME-CONTINUING> 1,558,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,558,300
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 0
<FN>
<F1>THIS AMOUNT IS IMMATERIAL.
<F2>NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING REVENUES
AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL STATEMENTS
PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS INCLUDED IN THE
"TOTAL REVENUE" TAG.
<F3>COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICES AND PRODUCTS IN THE
FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO REGULATION S-X, RULE
5-03(B).
</FN>
</TABLE>
