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 June 30, 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 1-8610
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 July 31, 1997, 913,947,295 common shares were outstanding.
<PAGE>
<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 Six months ended
June 30, June 30,
-----------------------------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Local service:
Landline $ 2,396 $ 2,187 $ 4,675 $ 4,287
Wireless 772 671 1,482 1,283
Network access:
Interstate 871 992 1,909 1,983
Intrastate 489 459 945 909
Long-distance service 530 561 1,071 1,103
Directory advertising 372 390 842 801
Other 506 478 1,003 946
- -------------------------------------------------------------------------------------
Total operating revenues 5,936 5,738 11,927 11,312
- -------------------------------------------------------------------------------------
Operating Expenses
Cost of services and products 2,227 1,937 4,282 3,869
Selling, general and administrative 2,996 1,294 4,278 2,467
Depreciation and amortization 1,646 1,018 2,714 2,029
- -------------------------------------------------------------------------------------
Total operating expenses 6,869 4,249 11,274 8,365
- -------------------------------------------------------------------------------------
Operating Income (Loss) (933) 1,489 653 2,947
- -------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (245) (213) (453) (425)
Equity in net income of affiliates 54 55 81 100
Other expense - net (63) (19) (83) (17)
- -------------------------------------------------------------------------------------
Total other income (expense) (254) (177) (455) (342)
- -------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes and
Cumulative Effect of Accounting (1,187) 1,312 198 2,605
Change
- -------------------------------------------------------------------------------------
Income Taxes (400) 509 128 1,004
- -------------------------------------------------------------------------------------
Income (Loss) Before Cumulative
Effect of Accounting Change (787) 803 70 1,601
- -------------------------------------------------------------------------------------
Cumulative Effect of Accounting
Change, net of tax - - - 90
- -------------------------------------------------------------------------------------
Net Income (Loss) $ (787) $ 803 $ 70 $ 1,691
- -------------------------------------------------------------------------------------
Earnings Per Common Share:
Income (Loss) Before Cumulative
Effect of Accounting Change $(0.86) $0.87 $0.08 $1.73
Cumulative Effect of Accounting - - - 0.10
Change
- -------------------------------------------------------------------------------------
Net Income (Loss) $(0.86) $0.87 $0.08 $1.83
- -------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding (in millions) 913 923 913 923
- -------------------------------------------------------------------------------------
Dividends Declared Per Common Share $ 0.4475 $ 0.43 $ 0.8950 $ 0.86
- -------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
- --------------------------------------------------------------------------------
June 30, December 31,
------------ -------------
1997 1996
- --------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 744 $ 314
Short-term cash investments 241 432
Accounts receivable - net of allowances for
uncollectibles of $355 and $311 4,700 4,684
Prepaid expenses 440 287
Deferred income taxes 812 201
Deferred charges 111 102
Other current assets 382 251
- --------------------------------------------------------------------------------
Total current assets 7,430 6,271
- --------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 63,680 61,786
Less: Accumulated depreciation and amortization 37,247 35,706
- --------------------------------------------------------------------------------
Property, Plant and Equipment - Net 26,433 26,080
- --------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated
Amortization of $929 and $611 3,308 3,589
- --------------------------------------------------------------------------------
Investments in Equity Affiliates 2,496 1,964
- --------------------------------------------------------------------------------
Other Assets 1,579 1,581
- --------------------------------------------------------------------------------
Total Assets $ 41,246 $ 39,485
- --------------------------------------------------------------------------------
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 3,754 $ 2,335
Accounts payable and accrued liabilities 7,738 6,584
Dividends payable 409 393
- --------------------------------------------------------------------------------
Total current liabilities 11,901 9,312
- --------------------------------------------------------------------------------
Long-Term Debt 11,098 10,930
- --------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 716 853
Postemployment benefit obligation 4,898 5,070
Unamortized investment tax credits 459 498
Other noncurrent liabilities 2,129 2,181
- --------------------------------------------------------------------------------
Total deferred credits and other noncurrent 8,202 8,602
liabilities
- --------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable
preferred securities of subsidiary trusts* 1,000 1,000
- --------------------------------------------------------------------------------
Shareowners' Equity
Common shares issued ($1 par value) 934 934
Capital in excess of par value 9,407 9,422
Retained earnings 551 1,297
Guaranteed obligations of employee stock (202) (229)
ownership plans
Deferred compensation - LESOP (121) (161)
Foreign currency translation adjustment (555) (637)
Treasury shares (at cost) (969) (985)
- --------------------------------------------------------------------------------
Total shareowners' equity 9,045 9,641
- --------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 41,246 $ 39,485
- --------------------------------------------------------------------------------
* The trusts contain $1,030 in principal amount of the Subordinated Debentures
of Pacific Telesis Group.
See Notes to Consolidated Financial Statements.
<PAGE>
- ---------------------------------------------------------------------------
SBC COMMUNICATIONS INC.
- ---------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
- ---------------------------------------------------------------------------
Six months ended
June 30,
------------------------
1997 1996
- ---------------------------------------------------------------------------
Operating Activities
Net income $ 70 $ 1,691
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,714 2,029
Undistributed earnings from investments in (31) (67)
equity affiliates
Provision for uncollectible accounts 265 179
Amortization of investment tax credits (39) (40)
Deferred income tax expense (499) 218
Cumulative effect of accounting change, net of - (90)
tax
Other - net 177 (716)
- ---------------------------------------------------------------------------
Total adjustments 2,587 1,513
- ---------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,657 3,204
- ---------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (2,771) (2,361)
Investments in affiliates (14) (51)
Purchase of short-term investments (326) (675)
Proceeds from short-term investments 517 294
Dispositions 346 70
Acquisitions (797) (54)
- ---------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,045) (2,777)
- ---------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 1,449 (911)
Issuance of other short-term borrowings 120 239
Repayment of other short-term borrowings (195) (89)
Issuance of long-term debt 407 424
Repayment of long-term debt (140) (293)
Issuance of trust originated preferred securities - 1,000
Purchase of fractional shares (15) -
Issuance of common shares - 3
Purchase of treasury shares (80) (105)
Issuance of treasury shares 81 67
Dividends paid (802) (916)
Other (7) 10
- ---------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing 818 (571)
Activities
- ---------------------------------------------------------------------------
Net increase (decrease) in cash and cash 430 (144)
equivalents
- ---------------------------------------------------------------------------
Cash and cash equivalents beginning of year 314 566
- ---------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 744 $ 422
- ---------------------------------------------------------------------------
Cash paid during the six months ended June 30 for:
Interest $ 461 $ 436
Income taxes $ 421 $ 479
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
SBC COMMUNICATIONS INC.
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited
<CAPTION>
Guaranteed Foreign
Capital in Obligations of Deferred Currency
Common Excess of Retained Employee Stock Compensation Translation Treasury
Shares Par Value Earnings Ownership Plans - LESOP Adjustment Shares
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 934 $ 9,422 $ 1,297 $ (229) $ (161) $ (637) $ (985)
Net income - - 70 - - - -
Dividends to shareowners - - (817) - - - -
Reduction of debt associated
with Employee Stock Ownership - - - 27 - - -
Plans
Reduction of debt associated
with Deferred Compensation - LESOP - - - - 40 - -
Foreign currency translation
adjustment - - - - - 82 -
Purchase of treasury shares - - - - - - (80)
Issuance of treasury shares - (8) - - - - 96
Other - (7) 1 - - - -
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $ 934 $ 9,407 $ 551 $ (202) $ (121) $ (555) $ (969)
- --------------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
At June 30, or for the six months then ended: 1997 1996
---------------------------
<S> <C> <C>
Return on weighted average shareowners' equity........... 1.36% 35.04%
Debt ratio............................................... 59.65% 55.78%
Network access lines in service (000).................... 32,054 30,782
Access minutes of use (000,000).......................... 63,974 58,937
Cellular customers (000)................................. 4,961 3,988
Number of employees......................................118,240 108,750
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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. 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 SBC's Current
Report on Form 8-K dated May 8, 1997, which presents the audited consolidated
financial statements of SBC reflecting the business combination of SBC and
Pacific Telesis Group.
2. CONSOLIDATION The consolidated financial statements include the accounts
of SBC and its majority-owned subsidiaries. SBC's largest subsidiaries are
Southwestern Bell Telephone Company (SWBell) providing telecommunications
services in Texas, Missouri, Oklahoma, Kansas and Arkansas, and Pacific
Telesis Group (PAC), providing telecommunications services in California and
Nevada. PAC's subsidiaries include Pacific Bell (PacBell, which also includes
its subsidiaries) and Nevada Bell. (SWBell, PacBell and Nevada Bell 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. 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. COMPLETION OF MERGER On April 1, 1997, SBC and PAC completed the merger
of an SBC subsidiary with PAC, in a transaction in which each outstanding
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 was accounted for as
a pooling of interests and a tax-free reorganization.
The combined results include the effect of changes applied retroactively to
conform accounting methodologies between PAC and SBC for, among other items,
pensions, postretirement benefits, sales commissions and merger transaction
costs and certain deferred tax adjustments resulting from the merger. The
retroactive application of these conforming changes increased SBC's net
income by $11 for the second quarter of 1996 and $34 for the first six months
of 1996; SBC had reported pre-merger net income of $501 and $965, while PAC
reported net income of $291 and $692. The conforming changes did not affect
operating revenues for the second quarter or first six months of 1996; during
those periods, PAC reported operating revenues of $2,405 and $4,783 and SBC
reported pre-merger revenues of $3,333 and $6,529.
Transaction costs and one-time charges resulting from the merger of $359
($215 net of tax) include, among other items, the present value of amounts to
be returned to California and Nevada ratepayers as a condition of the merger
(merger approval costs) and expenses for investment banker and professional
fees. Of this total, $287 ($180 net of tax) is included in expenses in the
first six months of 1997, and $72 ($35 net of tax) in 1996.
<PAGE>
- --------------------------------------------------------------------------------
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Post-merger initiatives
On June 19, 1997, SBC announced after-tax charges of $1.6 billion in the
second quarter related to several strategic decisions resulting from the
merger integration process that began with the April 1 closing of its merger
with PAC, which included $165 ($101 after tax) of charges related to recent
regulatory rulings and $281 ($176 after tax) for merger approval costs. The
decisions resulted from an extensive review of operations throughout the
merged company and include significant integration of operations and
consolidation of some administrative and support functions. Following is a
discussion of the most significant of these charges.
Reorganization SBC will centralize several key functions that will support
the operations of the Telephone Companies, including network planning,
strategic marketing and procurement. It is also consolidating a number of
corporate-wide support activities, including research and development,
information technology, financial transaction processing and real estate
management. PacBell, Nevada Bell and SWBell will continue as separate legal
entities. These initiatives will result in the creation of some jobs and the
elimination and realignment of others, with many of the affected employees
changing job responsibilities and in some cases assuming positions in other
locations.
SBC recognized a charge of approximately $338 ($213 net of tax) during the
second quarter of 1997 in connection with these initiatives. This charge was
comprised mainly of postemployment benefits, primarily related to severance,
and costs associated with closing down duplicate operations, primarily
contract cancellations. Other charges arising out of the merger related to
relocation, retraining and other effects of consolidating certain operations
will be recognized in future periods as those charges are incurred.
Impairments/asset valuation As a result of SBC's merger integration plans,
strategic review of domestic operations and organizational alignments, SBC
reviewed the carrying values of related long-lived assets. This review
included estimating remaining useful lives and cash flows and identifying
assets to be abandoned. Where this review indicated impairment, discounted
cash flows related to those assets were analyzed to determine the amount of
the impairment. As a result of these reviews, SBC wrote off some assets and
recognized impairments to the value of other assets with a combined charge of
$965 ($667 after tax) recorded in the second quarter of 1997. These
impairments and writeoffs related to the wireless digital TV operations in
southern California, certain analog switching equipment in California,
certain rural and other telecommunications equipment in Nevada, selected
wireless equipment, duplicate or obsolete equipment, cable within commercial
buildings in California, certain non-operating plant and other assets.
Video curtailment/purchase commitments SBC also announced it is scaling back
its limited direct investment in video services. As a result of this
curtailment, SBC has halted construction on the Advanced Communications
Network (ACN) in California. As part of an agreement with the ACN vendor, SBC
will pay the liabilities of the ACN trust that owns and finances ACN
construction, incur costs to shut down all construction previously conducted
under the trust and receive certain consideration from the vendor. In the
second quarter of 1997, SBC recognized its total expense of $553 ($346 after
tax) associated with these activities.
<PAGE>
- --------------------------------------------------------------------------------
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Additionally, SBC will curtail several other video-related activities
including discontinuing its broadband network video trials in Richardson,
Texas and San Jose, California, substantially scaling back its involvement in
the Tele-TV joint venture, working with Americast to define the appropriate
ongoing role for SBC within the Americast venture. and evaluating its option
to invest in cable television operations in Chicago. The collective impact of
these decisions resulted in a charge of $145 ($92 after tax) in the second
quarter of 1997.
4. NEW ACCOUNTING STANDARD Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128), requires dual presentation of basic and
diluted earnings per share (EPS). Diluted EPS will be similar to the fully
diluted EPS under current accounting rules. SBC will adopt FAS 128 in its
annual 1997 consolidated financial statements, but does not expect FAS 128 to
have any significant impact.
5. CUMULATIVE EFFECT OF CHANGE IN DIRECTORY ACCOUNTING Prior to January 1, 1996,
Pacific Bell Directory (a subsidiary of PacBell 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 of generally followed in the publishing industry, including
Southwestern Bell Yellow Pages, Inc., and better reflects the operating
activity of the business.
The change was adopted during the fourth quarter of 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 $90, or $0.10 per share. The gain is net of deferred
taxes of $53.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Overview Financial results for SBC Communications Inc. (SBC) for the second
quarters and first six months of 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Second Quarter Six-Month Period
--------------------------- ---------------------------
Percent Percent
1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 5,936 $ 5,738 3.5% $ 11,927 $ 11,312 5.4%
Operating expenses $ 6,869 $ 4,249 61.7% $ 11,274 $ 8,365 34.8%
Income (loss) before
cumulative effect of $ (787)$ 803 - $ 70 $ 1,601 -
accounting change
Cumulative effect of
accounting change - - - - $ 90 -
Net income (loss) $ (787)$ 803 - $ 70 $ 1,691 -
====================================================================================
</TABLE>
SBC's second quarter 1997 net loss of $787, or $0.86 per share, includes
after-tax charges of $1.6 billion reflecting strategic initiatives resulting
from a comprehensive review of operations of the merged company and the impact
of several recent regulatory rulings. Excluding these items, SBC reported net
income of $824, 2.6% higher than second quarter 1996 net income of $803, and on
a per share basis, $0.90 per share, 3.4% higher than 1996 second quarter
earnings per share of $0.87. SBC currently anticipates incurring additional
after-tax charges for ongoing merger integration costs, primarily related to
movement of employees, and local number portability of $300 to $500 during the
remainder of 1997.
Excluding these second quarter charges from the six months ended June 30, 1997,
income before cumulative effect of accounting change would have been $1,681,
5.0% higher than the first six months of 1996, and on a per share basis, $1.84
per share, 6.4% higher than the first six months of 1996 income before
cumulative effect of accounting change of $1.73.
Excluding these second quarter charges, the primary factors contributing to the
increase in income before cumulative effect of accounting change during the
second quarter and first six months of 1997 were growth in demand for services
and products at Southwestern Bell Telephone Company (SWBell) and Southwestern
Bell Mobile Systems (Mobile Systems), partially offset by increased expenses at
Pacific Bell (PacBell), including expenses for the introduction of Personal
Communications Services (PCS) operations in California and Nevada. Results for
the first six months of 1997 were also favorably affected by a first quarter
1997 $90 after-tax settlement gain at Pacific Telesis Group (PAC) associated
with lump-sum pension payments that exceeded the projected service and interest
costs for 1996 retirements.
<PAGE>
================================================================================
================================================================================
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 - Continued
Revenues SBC's operating revenues in the second quarter and first six months of
1997 reflect reductions of $188 related primarily to the impact of several
recent regulatory rulings. Excluding these items, SBC's operating revenues
increased $386, or 6.7%, and $803, or 7.1%, over the second quarter and first
six months of 1996. Components of operating revenues for the second quarters and
first six months of 1997 and 1996 are as follows:
- --------------------------------------------------------------------------------
Second Quarter Six-Month Period
----------------------------- -------------------------------
Percent Percent
1997 1996 Change 1997 1996 Change
- --------------------------------------------------------------------------------
Local service:
Landline $ 2,396 $ 2,187 9.6% $ 4,675 $ 4,287 9.1%
Wireless 772 671 15.1 1,482 1,283 15.5
Network access:
Interstate 871 992 (12.2) 1,909 1,983 (3.7)
Intrastate 489 459 6.5 945 909 4.0
Long-distance 530 561 (5.5) 1,071 1,103 (2.9)
service
Directory 372 390 (4.6) 842 801 5.1
advertising
Other 506 478 5.9 1,003 946 6.0
- ------------------------------------- -------------------
Total $ 5,936 $ 5,738 3.5% $ 11,927 $ 11,312 5.4%
================================================================================
Local Service Landline local service revenues increased in the second
quarter and first six months of 1997 due primarily to increases in demand,
including increases in access lines and vertical services revenues. The
number of access lines increased by 4.1% since June 30, 1996, of which 43%
was due to growth in California and 36% was due to growth in Texas.
Approximately 35% of access line growth was due to 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 High Cost Fund (CHCFB)
that went into effect February 1, 1997. The California Public Utilities
Commission (CPUC) has stated the CHCFB is intended to directly subsidize
the provision of service to high cost areas and allow PacBell to set
competitive rates for other services. For further information on the
operations of the CHCFB, see the discussion under the heading "Regulatory
Environment - California" on page 10 of SBC's Current Report on Form 8-K
dated May 8, 1997. Amounts received from the CHCFB resulted in a minor
shift of equivalent revenues from long-distance and intrastate network
access revenues to local service revenues in the second quarter and first
six months of 1997. Rate reductions due to CPUC price cap orders and
revenue sharing accruals partially offset increases in landline local
service revenues .
Wireless local service revenues increased in the second quarter and first
six months of 1997 due primarily to growth in the number of Mobile
Systems' cellular customers of 21.3% (19.2% excluding acquisitions) since
June 30, 1996, partially offset by a decline in average revenue per
customer. 1997 wireless local service revenues also include revenues from
PCS operations in California ,Nevada and Oklahoma, which contributed to
the increase. At June 30, 1997, SBC had 4,781,000 customers in areas in
which they were one of the two incumbent providers, 43,000 resale
customers and 137,000 PCS customers.
<PAGE>
================================================================================
================================================================================
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 - Continued
Network Access Interstate network access revenues decreased in the second
quarter and first six months of 1997 due to $187 in one-time charges.
These one-time charges include billing claim settlements related to the
Percentage Interstate Usage (PIU) factor in California and several Federal
regulatory issues including end user charges, recovery of certain
employee-related expenses and the retroactive effect of the productivity
factor adjustment in the Federal price cap filing. While the change in the
PIU factor in California, which is used to allocate network access
revenues between interstate and intrastate jurisdictions, also had the
effect of increasing intrastate network access revenues, it resulted in an
overall decline in total network access revenues. Without these impacts,
interstate network access revenues would have increased in the second
quarter and first six months of 1997 due largely to increases in demand
for access services by interexchange carriers and growth in revenues from
end user charges attributable to an increasing access line base. Partially
offsetting these increases were the effects of revenue sharing adjustments
made in 1996 at PacBell.
Intrastate network access revenues increased in the second quarter and
first six months of 1997 due primarily to the PIU settlements described
above. Excluding this impact, intrastate network access revenues were
relatively unchanged in the second quarter and first six months of 1997 as
increases in demand, including usage by alternative intraLATA toll
carriers, were offset by the state regulatory rate orders and the effects
of the CHCFB discussed above.
Long-Distance Service revenues decreased in the second quarter and first
six months of 1997 due to the effect of the CHCFB discussed above under
Local Service, regulatory rate orders, price competition from alternative
intraLATA toll carriers and the introduction and deployment of extended
area local service plans at SWBell. These decreases were somewhat offset
by increases due to growth in wireless revenues, including revenues from
interLATA service, and demand resulting from California's growing economy.
Directory Advertising revenues increased in the first six months of 1997
due mainly to the publication of directories not published in 1996 and, to
a lesser extent, increased demand. Directory advertising revenues
decreased in the second quarter of 1997 due to changes in directory
publication schedules as compared with 1996.
Other operating revenues increased in the second quarter and first six
months of 1997 due primarily to increased demand for voice messaging
services and revenues from new business initiatives, such as wireless
cable and internet services. These increases were somewhat offset by
decreases in equipment sales, including Caller ID equipment.
<PAGE>
================================================================================
================================================================================
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 - Continued
Expenses SBC's operating expenses in the second quarter and first six months of
1997 reflect $2,232 of charges related to strategic initiatives resulting from a
comprehensive review of operations of the merged company and the impact of
several recent regulatory rulings (see Note 3 to the Financial Statements).
Excluding these items, SBC's operating expenses increased $388, or 9.1%, and
$677, or 8.1%, over the second quarter and first six months of 1996. Components
of operating expenses for the second quarters and first six months of 1997 and
1996 are as follows:
- -------------------------------------------------------------------------------
Second Quarter Six-Month Period
----------------------------- -----------------------------
Percent Percent
1997 1996 Change 1997 1996 Change
- -------------------------------------------------------------------------------
Cost of
services and $ 2,227 $ 1,937 15.0% $ 4,282 $ 3,869 10.7%
products
Selling,
general and 2,996 1,294 131.5 4,278 2,467 73.4
administrative
Depreciation
and amortization 1,646 1,018 61.7 2,714 2,029 33.8
- ----------------------------------------- --------------------
Total $ 6,869 $ 4,249 61.7% $ 11,274 $ 8,365 34.8%
===============================================================================
Cost of services and products for the second quarter and first six months
of 1997 reflect charges of $62 relating to SBC's strategic initiatives and
operational reviews, including charges for customer number portability.
Excluding these charges, cost of services and products increased $228, or
11.8%, in the second quarter of 1997 and $351, or 9.1%, in the first six
months of 1997 due primarily to increases in employee compensation,
including increases related to force additions, network expansion and
maintenance, and expenses related to interconnection, the introduction of
PCS operations, and growth at Mobile Systems. For the six month period,
these increases were somewhat offset by PAC's first quarter 1997 $105
settlement gain associated with lump-sum pension payments that exceeded
the projected service and interest costs for 1996 retirements.
Selling, general and administrative expenses for the second quarter and
first six months of 1997 reflect $1,578 of charges relating to SBC's
strategic initiatives and operational reviews. As discussed in Note 3 to
the Financial Statements, the most significant of these charges included
shut down of the Advanced Communications Network, regulatory costs related
to the approval of the merger with SBC by California regulators, and
reorganization initiatives. Excluding these one-time charges, selling,
general and administrative expenses increased $124, or 9.6%, in the second
quarter of 1997 and $233, or 9.4%, in the first six months of 1997 due to
increases for expenses associated with the introduction of PCS operations,
employee compensation, sales agents commissions and advertising. For the
six month period, these increases were partially offset by PAC's first
quarter 1997 $47 settlement gain associated with lump-sum pension payments
that exceeded the projected service and interest costs for 1996
retirements.
Depreciation and amortization for the second quarter and first six months
of 1997 reflects charges totaling $592 to record impairment of plant and
intangibles. As discussed in Note 3 to the Financial Statements, the most
significant of these impairments related to the wireless digital TV
operations in southern California, certain analog switching equipment in
California, certain rural and other telecommunications equipment in
Nevada, selected wireless equipment and cable within commercial buildings
in California. Excluding these charges, depreciation and amortization
increased $36, or 3.5%, in the second quarter and $93, or 4.6% in the
first six months of 1997. The increases were primarily due to overall
higher plant levels partially offset by reduced depreciation during the
second quarter on analog switching equipment in California.
<PAGE>
================================================================================
================================================================================
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 - Continued
Interest expense increased $32, or 15.0%, and $28, or 6.6% in the second quarter
and first six months of 1997 due primarily to interest associated with second
quarter 1997 charges and increased short-term debt levels.
Equity in net income of affiliates decreased $19 in the first six months of 1997
due to decreased income from Telefonos de Mexico, S.A. de C.V. (Telmex),
resulting from SBC's reduced ownership percentage after the sale of Telmex L
shares and the change in the functional currency used by SBC to record its
interest in Telmex from the peso to the U.S. dollar beginning in 1997, partially
offset by income from SBC's May 1997 investment in Telkom SA Limited (see Other
Business Matters).
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.
Other income (expense) -net was a net expense of $63 for the second quarter and
$83 for the first six months of 1997. The increased expense includes $26 in
expenses related to SBC's strategic initiatives, primarily writeoffs of
nonoperating plant. Other increases from 1996 relate primarily to distributions
paid due to the sale by PAC of an additional $500 of Trust Originated Preferred
Securities in June 1996.
Income taxes for the second quarter reflect the tax effect of charges for
strategic initiatives resulting from SBC's comprehensive review of operations of
the merged company and the impact of several recent regulatory rulings. The
effective tax rate on these items was lower as a result of non-deductible items
included in the charge and valuation adjustments to certain deferred tax assets.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITIVE AND REGULATORY ENVIRONMENT
Access Reform/Price Caps On June 3, 1997, SBC filed with the Federal
Communications Commission (FCC) a Petition for Partial Stay (Petition) of
aspects of the orders adopted on May 7, 1997 by the FCC on access reform and
local exchange carrier price caps. The Petition asked the FCC to stay the
application of the 6.5% productivity offset to all price cap Local Exchange
Carriers (LECs), its retroactive application to the 1996 annual tariff filings,
and exogenous reductions associated with the completion of equal access
amortization. The FCC denied the stay on June 18, 1997. The impact of the
retroactive portion of the FCC orders was recorded in the second quarter of
1997.
On June 16, 1997, SBC and several other parties filed court appeals regarding
several aspects of the Access Reform and Price Cap Orders. The appeal related to
access reform has been assigned to the U.S. Court of Appeals for the Eighth
Circuit in St. Louis (8th Circuit). The appeal related to price caps and
<PAGE>
================================================================================
================================================================================
SBC COMMUNICATIONS INC.
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
the productivity offset decision has been assigned to the U.S. Court of Appeals
for the 10th Circuit in Denver, but on July 28, 1997 it was transferred to the
U.S. Court of Appeals for the D.C. Circuit.
Interconnection Agreements SBC continues to enter into interconnection
agreements with companies desiring to provide local service in its operating
territory. Agreements have been reached and approved by all of the state
commissions in states where SBC operates. Some parties have entered into second
arbitration processes to address remaining interconnection issues in dispute in
Kansas, Oklahoma, and Texas. Additionally, on July 17, 1997 the Federal District
Court in Kansas City dismissed without prejudice SBC's lawsuit challenging the
AT&T arbitration order in Kansas on the grounds it was premature.
On July 18, 1997, the 8th Circuit set aside key parts of the FCC Interconnection
Order that attempted to set prices for local exchange services, holding that the
right to set such prices is reserved exclusively to the states. SBC is in
agreement with the 8th Circuit's ruling on the order and believes the intent of
the Telecommunications Act of 1996 (Telecom Act) retained state regulators'
jurisdiction over pricing of intrastate service and local interconnection. The
FCC has indicated it will appeal the 8th Circuit's decision to the Supreme
Court.
InterLATA Long-distance Filing On April 11, 1997, SBC filed an application with
the FCC for the provision of interLATA long-distance services in Oklahoma under
the provisions of the Telecom Act. The Oklahoma Corporation Commission approved
SBC's application in April 1997. On June 26, 1997 the FCC denied SBC's
application on the basis that SBC had not met the requirement established by the
Telecom Act. SBC intends to appeal.
Incentive Legislation Oklahoma enacted legislation, effective July 1, 1997,
which provides for alternative regulation in Oklahoma for telecommunications
providers. Key provisions of the new law allow SBC to apply for alternative
regulation at any time, impose a restriction against the state commission
initiating a rate case until February 5, 2001, establish a Universal Service
Fund (USF), and require SBC to keep intrastate access rates in parity with
interstate rates, but allows SBC to seek partial recovery of the access rate
reductions from the USF. In addition, the new law allows for streamlined tariff
processing procedures and allows companies to apply to have services declared
competitive and eventually deregulated.
Portions of Telecom Act Challenged - On July 2, 1997, SBC sued in U.S. District
Court for the Northern District of Texas to declare a portion of the Telecom Act
unconstitutional on the grounds the Telecom Act improperly discriminates against
SBC by imposing restrictions that prohibit SBC from offering interLATA
long-distance and other services that other local exchange companies are free to
provide. The suit challenges only that portion of the Telecom Act which excludes
SBC from competing in certain lines of business.
OTHER BUSINESS MATTERS
In May 1997, the consortium of SBC and Telekom Malaysia Berhad, 60% owned by
SBC, completed the purchase of 30% of Telkom SA Limited (Telkom), the
state-owned government telecommunications company of South Africa. SBC invested
approximately $760, approximately $600 of which will remain in Telkom.
<PAGE>
================================================================================
================================================================================
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1997, as in 1996, SBC's primary source of funds
continued to be cash provided by operating activities. Additionally, in March
1997 SBC issued approximately $385 in debt due March 2001 which, at SBC's
option, may be redeemed upon maturity either in cash or Telmex L shares
(equivalent to up to 2.4% of Telmex's equity capitalization at March 31, 1997).
SBC had $744 in cash and cash equivalents available at June 30, 1997. SBC has
entered into agreements with several banks for lines of credit totaling $2,550,
all of which may be used to support commercial paper borrowings. SBC had no
borrowings outstanding under these lines of credit as of June 30, 1997.
Commercial paper borrowings as of June 30, 1997 totaled $3,223.
Over the next few years, SBC is expecting to incur significant capital and
software expenditures for customer number portability and interconnection. SBC
expects capital costs and expenses associated with customer number portability,
which allows customers to switch to new local competitors and keep the same
phone number, to total up to $1.5 billion on a pre-tax basis over the next four
years. Full recovery of customer number portability costs is required under the
Telecom Act; however, the FCC has not yet determined when or how those
significant costs will be recovered. The FCC has suspended tariffs filed by
SWBell and PacBell for recovery of these costs until September 1997, pending the
issuance of its order on customer number portability. SBC is unable to predict
the likelihood of the FCC permitting the tariffs to become effective. Capital
costs and expenses associated with interconnection will vary based on the number
of competitors seeking interconnection and markets entered and customers served
by those competitors. Accordingly, SBC is currently unable to reasonably
estimate these costs.
<PAGE>
================================================================================
================================================================================
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareowners
(a) The annual meeting of the shareowners of SBC Communications Inc. (SBC)
was held on April 25, 1997, in San Antonio, Texas. Shareowners
representing 503,128,160 shares of common stock were present in person or
were represented at the meeting by proxy.
(b) At the meeting, holders of common shares voted as indicated below to
elect the following persons to the Board of Directors for a three-year
term:
SHARES SHARES
DIRECTOR FOR WITHHELD*
-------- --- ---------
Clarence C. Barksdale 491,874,220 11,253,940
Ruben R. Cardenas 491,664,317 11,463,843
Martin K. Eby, Jr. 492,217,556 10,910,604
Charles F. Knight 491,369,658 11,758,502
Philip J. Quigley 492,224,303 10,903,857
Richard M. Rosenberg 492,105,630 11,022,530
Carlos Slim Helu 491,532,280 11,595,880
*Includes shares represented at the meeting by proxy where the shareowner
withheld authority to vote for the indicated director or directors, as
well as shares voted in person at the meeting where the shareowner did
not vote for such director or directors.
(c) Shareowners ratified the appointment of Ernst & Young LLP as independent
auditors of SBC for the year ended December 31, 1997. The vote was
496,996,578 FOR and 3,217,455 AGAINST, with 2,914,127 shares ABSTAINING.
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 April 1, 1997, SBC Communications Inc. (SBC) filed a Current Report on
Form 8-K, reporting on Item 2 Acquisition or Disposition of Assets, Item 5
Other Events, and Item 7 Financial Statements and Exhibits. In the Report,
SBC announced the completion of the merger of an SBC subsidiary with
Pacific Telesis Group
On May 9, 1997, SBC filed a Current Report on Form 8-K reporting on Item
7, Financial Statements and Exhibits. In the Report, SBC filed audited
consolidated supplemental financial statements of SBC Communications Inc.
reflecting the merger with Pacific Telesis Group.
On June 19, 1997, SBC filed a Current Report on Form 8-K reporting on Item
5, Other Events. In the Report, SBC announced strategic decisions related
to merger with Pacific Telesis Group and regulatory policies.
<PAGE>
================================================================================
================================================================================
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.
August 13, 1997 /s/ Donald E. Kiernan
------------------------
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<PAGE>
<TABLE>
=============================================================================================================================
EXHIBIT 12
=============================================================================================================================
SBC COMMUNICATIONS INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes, Extraordinary Loss
and Cumulative Effect of Accounting Changes* $ 167 $ 2,538 $ 4,975 $ 4,383 $ 4,091 $ 2,070 $ 3,447
Add: Interest Expense 453 425 812 957 935 1,005 1,036
Dividends on Preferred Securities 40 19 60 - - - -
1/3 Rental Expense 68 52 108 77 85 81 89
--------- --------- --------- --------- -------- -------- ---------
Adjusted Earnings $ 728 $ 3,034 $ 5,955 $ 5,417 $ 5,111 $ 3,156 $ 4,572
========= ========= ========= ========= ======== ======== =========
Total Interest Charges $ 530 $ 478 $ 947 $ 957 $ 935 $ 1,005 $ 1,036
Dividends on Preferred Securities 40 19 60 - - - -
1/3 Rental Expense 68 52 108 77 85 81 89
--------- --------- --------- --------- -------- -------- ---------
Adjusted Fixed Charges $ 638 $ 549 $ 1,115 $ 1,034 $ 1,020 $ 1,086 $ 1,125
========= ========= ========= ========= ======== ======== =========
Ratio of Earnings to Fixed Charges 1.14 5.53 5.34 5.24 5.01 2.91 4.06
<FN>
*Undistributed earnings on investments accounted for under the equity method
have been excluded.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM SBC
COMMUNICATIONS INC.'S JUNE 30,1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 744,000
<SECURITIES> 241,000
<RECEIVABLES> 5,055,000
<ALLOWANCES> 355,000
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 7,430,000
<PP&E> 63,680,000
<DEPRECIATION> 37,247,000
<TOTAL-ASSETS> 41,246,000
<CURRENT-LIABILITIES> 11,901,000
<BONDS> 11,098,000
0
0
<COMMON> 934,000
<OTHER-SE> 8,111,000
<TOTAL-LIABILITY-AND-EQUITY> 41,246,000
<SALES> 0<F2>
<TOTAL-REVENUES> 11,927,000
<CGS> 0<F3>
<TOTAL-COSTS> 4,282,000
<OTHER-EXPENSES> 2,714,000
<LOSS-PROVISION> 265,000
<INTEREST-EXPENSE> 453,000
<INCOME-PRETAX> 198,000
<INCOME-TAX> 128,000
<INCOME-CONTINUING> 70,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,000
<EPS-PRIMARY> 0.08
<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 REVENUES" 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>
