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 1-8610
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 April 30, 1997, 912,223,683 common shares were outstanding.
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PART I - FINANCIAL INFORMATION
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On April 1, 1997, SBC Communications Inc. (SBC) and Pacific Telesis Group
(PAC) completed the merger of an SBC subsidiary with PAC. 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.
Because the merger was completed after March 31, 1997, the financial
information for SBC for the period ended March 31, 1997 is required to be
presented on a pre-merger basis. This information follows as Item 1a.
Financial Statements and Item 2a. Management's Discussion and Analysis of
Financial Condition and Results of Operations. Supplemental pro forma
financial information giving effect to the merger and discussing the pro
forma results of operations for the combined company is included subsequent
to these items as Item 1b. Supplemental Pro Forma Financial Statements and
Item 2b. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 1a. Financial Statements
SBC COMMUNICATIONS INC.
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CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
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Three months ended
March 31,
------------------
1997 1996
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Operating Revenues
Local service $ 1,952 $ 1,733
Network access 832 804
Long-distance service 232 224
Directory advertising 107 104
Other 333 332
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Total operating revenues 3,456 3,197
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Operating Expenses
Cost of services and products 1,179 1,076
Selling, general and administrative 809 775
Depreciation and amortization 578 546
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Total operating expenses 2,566 2,397
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Operating Income 890 800
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Other Income (Expense)
Interest expense (116) (120)
Equity in net income of affiliates 32 53
Other income (expense) - net (12) (4)
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Total other income (expense) (96) (71)
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Income Before Income Taxes 794 729
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Income Taxes 277 265
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Net Income $ 517 $ 464
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Earnings Per Common Share $ 0.86 $ 0.76
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Weighted Average Number of Common
Shares Outstanding (in millions) 599 609
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Dividends Declared Per Common Share $ 0.4475 $ 0.43
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See Notes to Consolidated Financial Statements.
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SBC COMMUNICATIONS INC.
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CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
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March 31, December 31,
-------------------------
1997 1996
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Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 733 $ 242
Short-term cash investments 307 432
Accounts receivable - net of allowances for
uncollectibles of
$140 and $148 2,379 2,575
Prepaid expenses 404 261
Deferred charges 229 205
Other current assets 189 197
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Total current assets 4,241 3,912
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Property, Plant and Equipment - at cost 33,195 32,754
Less: Accumulated depreciation and amortization 19,069 18,747
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Property, Plant and Equipment - Net 14,126 14,007
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Intangible Assets - Net of Accumulated Amortization
of $635 and $607 2,466 2,485
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Investments in Equity Affiliates 1,807 1,955
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Other Assets 1,097 1,090
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Total Assets $ 23,737 $ 23,449
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Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 2,054 $ 1,722
Accounts payable and accrued liabilities 3,245 3,839
Dividends payable 268 259
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Total current liabilities 5,567 5,820
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Long-Term Debt 5,740 5,505
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Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 847 784
Postemployment benefit obligation 2,617 2,720
Unamortized investment tax credits 247 255
Other noncurrent liabilities 1,577 1,530
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Total deferred credits and other noncurrent 5,288 5,289
liabilities
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Shareowners' Equity
Common shares issued ($1 par value) 620 620
Capital in excess of par value 6,324 6,322
Retained earnings 1,989 1,739
Guaranteed obligations of employee stock ownership (216) (229)
plans
Foreign currency translation adjustment (534) (633)
Treasury shares (at cost) (1,041) (984)
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Total shareowners' equity 7,142 6,835
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Total Liabilities and Shareowners' Equity $ 23,737 $ 23,449
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See Notes to Consolidated Financial Statements.
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SBC COMMUNICATIONS INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash
and cash equivalents
(Unaudited)
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Three months ended
March 31,
----------------------
1997 1996
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Operating Activities
Net income $ 517 $ 464
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 578 546
Undistributed earnings from investments in (23) (46)
equity affiliates
Provision for uncollectible accounts 53 40
Amortization of investment tax credits (8) (8)
Deferred income tax expense 9 66
Other - net (673) (146)
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Total adjustments (64) 452
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Net Cash Provided by Operating Activities 453 916
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Investing Activities
Construction and capital expenditures (662) (635)
Investments in affiliates (2) (4)
Purchase of short-term investments (198) (253)
Proceeds from short-term investments 323 168
Dispositions 329 45
Acquisitions (25) -
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Net Cash Used in Investing Activities (235) (679)
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Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 213 112
Issuance of other short-term borrowings 120 89
Repayment of other short-term borrowings (75) -
Issuance of long-term debt 397 -
Repayment of long-term debt (59) (71)
Purchase of treasury shares (80) (75)
Issuance of treasury shares 15 14
Dividends paid (258) (225)
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Net Cash Provided by (Used in) Financing Activities 273 (156)
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Net increase in cash and cash equivalents 491 81
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Cash and cash equivalents beginning of year 242 490
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Cash and Cash Equivalents End of Period $ 733 $ 571
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Cash paid during the three months ended March 31 for:
Interest $ 146 $ 134
Income taxes $ 317 $ 178
See Notes to Consolidated Financial Statements.
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<TABLE>
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SBC COMMUNICATIONS INC.
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CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
- --------------------------------------------------------------------------------------------
Guaranteed
Obligations
Capital of Foreign
in Employee Currency
Common Excess of Retained Stock Owner- Translation Treasury
Shares Par Value Earnings ship Adjustment Shares
Plans
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 620 $ 6,298 672 $ (272) $ (581) $ (481)
Net income - - 464 - - -
Dividends to shareowners - - (262) - - -
Reduction of debt
associated with Employee
Stock Ownership Plans - - - 12 - -
Foreign currency translation - - - - (10) -
adjustment
Purchase of treasury shares - - - - - (75)
Issuance of treasury shares:
Dividend Reinvestment - 9 - - - 25
Plan
Other - (2) - - - 17
Other - - 5 - - -
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------ -------- -------- -------- ------- -------
Balance, March 31, 1996 $ 620 $ 6,305 879 $ (260) $ (591) $ (514)
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Balance, December 31, 1996 $ 620 $ 6,322 1,739 $ (229) $ (633) $ (984)
Net income - - 517 - - -
Dividends to shareowners - - (268) - - -
Reduction of debt
associated with Employee
Stock Ownership Plans - - - 13 - -
Foreign currency translation - - - - 99 -
adjustment
Purchase of treasury shares - - - - - (80)
Issuance of treasury shares - (2) - - - 23
Other - 4 1 - - -
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------ -------- -------- -------- ------- -------
Balance, March 31, 1997 $ 620 $ 6,324 1,989 $ (216) $ (534) $ (1,041)
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<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
* * * *
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
At March 31, or for the three months then ended: 1997 1996
---------------------
<S> <C> <C>
Return on weighted average shareowners' equity....................... 29.07% 28.80%
Debt ratio........................................................... 52.18% 53.66%
Network access lines in service (000)................................ 15,198 14,465
Access minutes of use (000,000)...................................... 14,225 13,246
Cellular customers (000)............................................. 4,660 3,829
Number of employees.................................................. 63,170 59,540
</TABLE>
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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 1996
Annual Report to Shareowners.
2. CONSOLIDATION - The consolidated financial statements include the
accounts of SBC and its majority-owned subsidiaries. Southwestern Bell
Telephone Company (SWBell) was SBC's largest subsidiary during the first
quarter of 1997. 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. MERGER - On April 1, 1997, SBC and Pacific Telesis Group (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 was accounted for as
a pooling of interests and a tax-free reorganization. The financial
statements giving effect to the merger are presented in Item 1b. Supplemental
Pro Forma Financial Statements.
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.
<PAGE>
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SBC COMMUNICATIONS INC.
Item 2a. 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 $517, or $0.86 per share,
for the first quarter of 1997. Financial results for the first quarters of 1997
and 1996 are summarized as follows:
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First Quarter
-------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Operating revenues $ 3,456 $ 3,197 8.1%
Operating expenses $ 2,566 $ 2,397 7.1%
Net income $ 517 $ 464 11.4%
================================================================================
The primary factors contributing to the increase in net income during the first
quarter of 1997 were growth in demand for services and products at Southwestern
Bell Telephone Company (SWBell) and Southwestern Bell Mobile Systems (Mobile
Systems).
SBC's operating revenues in the first quarter of 1997 increased $259, or 8.1%,
over the first quarter 1996. Components of operating revenues for the first
quarters of 1997 and 1996 are as follows:
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First Quarter
-------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Local service
Landline $ 1,244 $ 1,121 11.0%
Wireless 708 612 15.7
Network access
Interstate 564 534 5.6
Intrastate 268 270 (0.7)
Long-distance service 232 224 3.6
Directory advertising 107 104 2.9
Other 333 332 0.3
- ----------------------------------------------------------------------
Total Operating Revenues $ 3,456 $ 3,197 8.1%
================================================================================
Local Service Landline 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 5.1% since March 31, 1996, of which 66% was due to growth in
Texas. Approximately 29% 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 22%.
Wireless local service revenues increased in the first quarter of 1997 due
primarily to growth in the number of Mobile Systems' cellular customers of
21.7% (19.8% excluding acquisitions) since March 31, 1996, partially
offset by a slight decline in average revenue per customer. At March 31,
1997, Mobile Systems had 4,623,000 customers in areas in which they were
one of the two incumbent providers and 37,000 resale customers.
<PAGE>
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SBC COMMUNICATIONS INC.
Item 2a. 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 increased in the first
quarter of 1997 due largely to increases 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.
Intrastate network access revenues were relatively unchanged in the first
quarter of 1997 as modest increases in demand, including usage by
alternative intraLATA toll carriers, were offset by net price decreases.
Long-Distance Service revenues increased in the first quarter of 1997 due
to growth in wireless revenues, including revenues from interLATA service
beginning in February 1996, somewhat offset by decreases at SWBell due to
the impact of price competition from alternative intraLATA toll carriers
and the introduction and deployment of extended area local service plans.
Other operating revenues in the first quarter of 1997 were essentially
unchanged as increases related to SWBell's non-regulated services and
products were offset by decreases in equipment sales.
SBC's operating expenses in the first quarter 1997 increased $169, or 7.1%, over
the first quarter of 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 $ 1,179 $ 1,076 9.6%
Selling, general and administrative 809 775 4.4
Depreciation and amortization 578 546 5.9
- ---------------------------------------------------------------------
Total Operating Expenses $ 2,566 $ 2,397 7.1%
================================================================================
Total Operating Expenses Cost of services and products and selling,
general and administrative expenses increased on a combined basis $137, or
7.4% in the first quarter of 1997 due to increases at SWBell for employee
compensation, network expansion and maintenance, sales agents commissions
and operating taxes. Other increases related to growth at Mobile Systems
and new business initiatives for long-distance and internet services.
These increases were somewhat offset by decreases in expenses for Caller
ID equipment at SWBell. Depreciation and amortization increased in the
first quarter of 1997 due primarily to growth in plant levels at SWBell
and Mobile Systems.
Equity in net income of affiliates decreased $21 in the first quarter 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 (as discussed in SBC's 1996 Annual Report) and the change in the
functional currency used by SBC to record its interest from the peso to the U.S.
dollar beginning in 1997.
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 $12, or 4.5%, in the first quarter of 1997 primarily due
to higher income before income taxes.
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 SWBell's network
and provide local service must enter into interconnection agreements with
SWBell, which are then subject to approval by the appropriate state commission.
SWBell has entered into agreements in each of its five states, and Texas,
Missouri and Oklahoma commissions have approved various agreements. Several
companies which have failed to agree on all terms of an interconnection
agreement with SWBell have filed for binding arbitration before the state
commissions in the five-state area.
In October 1996, in a consolidated arbitration hearing between SWBell and AT&T
Corp. (AT&T), MCI Communications Corporation (MCI), MFS Communications Company,
Inc. (MFS), Teleport Communications Group, and American Communications Services,
Inc., the Texas Public Utility Commission (TPUC) approved interconnection rates
to be charged by SWBell as well as certain other terms of interconnection
between the parties. SWBell also filed revised cost support for the
establishment of rates with the TPUC which may be subject to further hearings.
SWBell, AT&T and MCI filed suit in state and federal court maintaining that, for
various reasons, the arbitration award is unlawful. SWBell has TPUC-approved
interconnection agreements with 26 local service providers, with 17 pending
approvals as of April 15.
As a result of these agreements, SWBell 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 applications to the FCC to provide
interLATA long-distance service in each of its states.
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. If approved by the FCC, SBC could begin
offering interLATA landline long-distance services to customers in Oklahoma. The
FCC has 90 days to rule on the filing, according to the Telecom Act. The
Oklahoma Corporation Commission approved SBC's application in April 1997.
<PAGE>
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SBC COMMUNICATIONS INC.
Item 2a. 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
OTHER BUSINESS MATTERS
In March 1997, the consortium of SBC and Telekom Malaysia Berhad, 60% owned by
SBC, finalized an agreement to purchase 30% of Telkom South Africa (Telkom), the
state-owned government telecommunications company of South Africa. Under the
agreement, SBC is committed to invest approximately $750, approximately $600 of
which will remain in Telkom. The transaction is expected to close in the second
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter 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 $733 in cash and cash equivalents available at March 31, 1997. SBC has
entered into agreements with several banks for lines of credit totaling $750,
all of which may be used to support commercial paper borrowings. SBC had no
borrowings outstanding under these lines of credit as of March 31, 1997.
Commercial paper borrowings as of March 31, 1997 totaled $1,576.
Over the next few years, SBC is expecting to incur significant capital and
software expenditures for interconnection and customer number portability. The
extent and timing of these expenditures will vary depending on the timing and
nature of regulatory action and corresponding or compensating network
improvements, but are likely to be material.
<PAGE>
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Item 1b. Supplemental Pro Forma Financial Statements
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SBC COMMUNICATIONS INC.
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SUPPLEMENTAL PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
------------------------------------------------------------------------------
Three months ended
March 31,
------------------
1997 1996
------------------------------------------------------------------------------
Operating Revenues
Local service $ 2,989 $ 2,712
Network access 1,494 1,441
Long-distance service 541 542
Directory advertising 470 411
Other 497 468
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Total operating revenues 5,991 5,574
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Operating Expenses
Cost of services and products 2,055 1,932
Selling, general and administrative 1,282 1,173
Depreciation and amortization 1,068 1,011
------------------------------------------------------------------------------
Total operating expenses 4,405 4,116
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Operating Income 1,586 1,458
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Other Income (Expense)
Interest expense (208) (212)
Equity in net income of affiliates 27 45
Other income (expense) - net (20) 2
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Total other income (expense) (201) (165)
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Income Before Income Taxes and Cumulative
Effect of Accounting Change 1,385 1,293
------------------------------------------------------------------------------
Income Taxes 528 495
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Income Before Cumulative Effect of Accounting Change 857 798
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Cumulative Effect of Accounting Change, net of tax - 90
------------------------------------------------------------------------------
Net Income $ 857 $ 888
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Earnings Per Common Share:
Income Before Cumulative Effect of Accounting Change $ 0.94 $ 0.86
Cumulative Effect of Accounting Change - .10
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Net Income $ 0.94 $ 0.96
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Weighted Average Number of Common
Shares Outstanding (in millions) 912 923
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See Notes to the Supplemental Pro Forma Consolidated Financial Statements.
<PAGE>
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SBC COMMUNICATIONS INC.
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SUPPLEMENTAL PRO FORMA CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
- -------------------------------------------------------------------------------
March 31, December 31,
--------------------------
1997 1996
- -------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 846 314
Short-term cash investments 307 432
Accounts receivable - net of allowances for
uncollectibles of $316 and $311 4,534 4,684
Prepaid expenses 438 287
Deferred charges 129 102
Other current assets 367 452
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Total current assets 6,621 6,271
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Property, Plant and Equipment - at cost 62,707 61,786
Less: Accumulated depreciation and amortization 36,317 35,706
- -------------------------------------------------------------------------------
Property, Plant and Equipment - Net 26,390 26,080
- -------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated Amortization
of $639 and $612 3,586 3,589
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Investments in Equity Affiliates 1,818 1,964
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Other Assets 1,605 1,581
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Total Assets $ 40,020 39,485
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 3,169 2,335
Accounts payable and accrued liabilities 5,664 6,584
Dividends payable 408 393
- -------------------------------------------------------------------------------
Total current liabilities 9,241 9,312
- -------------------------------------------------------------------------------
Long-Term Debt 11,170 10,930
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Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,076 853
Postemployment benefit obligation 5,175 5,070
Unamortized investment tax credits 479 498
Other noncurrent liabilities 1,725 2,181
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Total deferred credits and other noncurrent 8,455 8,602
liabilities
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Corporation-obligated manditorily 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 9,414 9,422
Retained earnings 1,746 1,297
Guaranteed obligations of employee stock ownership (216) (229)
plans
Deferred Compensation - LESOP (146) (161)
Foreign currency translation adjustment (538) (637)
Treasury shares (at cost) (1,040) (985)
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Total shareowners' equity 10,154 9,641
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Total Liabilities and Shareowners' Equity $ 40,020 39,485
- -------------------------------------------------------------------------------
*The trusts contain assets of $1,030 in principal amount of the Subordinated
Debentures of Pacific Telesis Group.
See Notes to Supplemental Pro Forma Consolidated Financial Statements.
<PAGE>
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SBC COMMUNICATIONS INC.
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SUPPLEMENTAL PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
- ---------------------------------------------------------------------------
Three months ended
March 31,
----------------------
1997 1996
- ---------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 739 $ 1,423
- ---------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (1,263) (1,121)
Other 419 (55)
- ---------------------------------------------------------------------------
Net Cash Used in Investing Activities (844) (1,176)
- ---------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 712 (507)
Other (75) 330
- ---------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 637 (177)
- ---------------------------------------------------------------------------
Net increase in cash and cash equivalents 532 70
- ---------------------------------------------------------------------------
Cash and cash equivalents beginning of year 314 566
- ---------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 846 $ 636
- ---------------------------------------------------------------------------
See Notes to the Supplemental Pro Forma Consolidated Financial Statements.
SELECTED FINANCIAL AND OPERATING DATA
At March 31, or for the three months then ended: 1997 1996
-----------------------
Return on weighted average shareowners' equity....... 33.88% 35.62%
Debt ratio........................................... 56.25% 59.02%
Network access lines in service (000)................ 31,786 30,432
Access minutes of use (000,000)...................... 31,313 29,072
Wireless customers (000)............................. 4,686 3,829
Number of employees.................................. 113,680 108,320
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO SUPPLEMENTAL PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions except per share amounts)
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.
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 ratepayers as a condition of the merger and
expenses for investment banker and professional fees. Of this amount, $13 is
included in expenses in the first quarter of 1997.
Prior to January 1, 1996, Pacific Bell Directory (a subsidiary of PAC's
subsidiary Pacific Bell) 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, 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.
In 1996, management amended PAC's salaried pension plan, to change it 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 the first quarter of 1997 that increased net income by $90, or $0.10 per
share.
<PAGE>
- --------------------------------------------------------------------------------
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
Item 2b. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
SUPPLEMENTAL PRO FORMA RESULTS OF OPERATIONS
Following is a discussion and analysis of the supplemental pro forma results of
operations of SBC giving effect to the merger. This discussion should be read in
conjunction with SBC's current report on Form 8-K dated May 9, 1997, which
includes a Management's Discussion and Analysis addressing Results of
Operations, Operating Environment and Trends of the Business, Other Business
Matters and Liquidity and
Capital Resources.
SBC reported income before cumulative effect of accounting change of $857, or
$0.94 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 $ 5,991 $ 5,574 7.5%
Operating expenses $ 4,405 $ 4,116 7.0%
Income before cumulative effect of accounting $ 857 $ 798 7.4%
change
Cumulative effect of accounting change - $ 90 -
Net income $ 857 $ 888 -
================================================================================
The primary factors contributing to the increase in income before cumulative
effect of accounting change during the first quarter of 1997 were growth in
demand for services and products at SWBell and Pacific Bell (PacBell) and Mobile
Systems and an after-tax gain of $90 from PAC's settlement gain associated with
lump-sum pension payments. (SWBell, PacBell and Nevada Bell are collectively
referred to as the Telephone Companies.)
SBC's operating revenues in the first quarter of 1997 increased $417, or 7.5%,
over the first quarter 1996. Components of operating revenues for the first
quarters of 1997 and 1996 are as follows:
- --------------------------------------------------------------------------------
First Quarter
-------------------------------
Percent
1997 1996 Change
- --------------------------------------------------------------------------------
Local service
Landline $ 2,279 $ 2,100 8.5%
Wireless 710 612 16.0
Network access
Interstate 1,038 991 4.7
Intrastate 456 450 1.3
Long-distance service 541 542 (0.2)
Directory advertising 470 411 14.4
Other 497 468 6.2
- ----------------------------------------------------------------------
Total Operating Revenues $ 5,991 $ 5,574 7.5%
================================================================================
<PAGE>
SUPPLEMENTAL PRO FORMA RESULTS OF OPERATIONS - Continued
Local Service Landline 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 4.4% since March 31, 1996, of which 44% was due to growth in
California and 36% was due to growth in Texas. Approximately 34% 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 24%. 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 minor shift of
equivalent revenues from long-distance and intrastate network access
revenues to local service revenues in the first quarter of 1997. These
increases were slightly offset by rate reductions due to California Public
Utilities Commission (CPUC) price cap orders.
Wireless local service revenues increased in the first quarter of 1997 due
primarily to growth in the number of Mobile Systems' cellular customers of
21.7% (19.8% excluding acquisitions) since March 31, 1996, partially
offset by a slight decline in average revenue per customer. Beginning in
the first quarter of 1997, wireless local revenues also include revenues
from Personal Communications Services (PCS) operations in California and
Nevada. PCS revenues accounted for only a slight portion of the increase.
At March 31, 1997, Mobile Systems had 4,623,000 customers in areas in
which they were one of the two incumbent providers and 37,000 resale
customers; Pacific Bell Mobile Systems had 26,000 PCS customers.
Network Access Interstate network access revenues increased in the first
quarter of 1997 due largely to increases 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 were sharing accrual
adjustments from prior periods at PacBell.
Intrastate network access revenues increased slightly in the first quarter
of 1997 due to modest increases in demand, including usage by alternative
intraLATA toll carriers, somewhat offset by the effects of the California
Universal Service Fund discussed above.
Long-Distance Service revenues were unchanged in the first quarter of
1997. Increases due to growth in wireless revenues, including revenues
from interLATA service beginning in February 1996, and demand resulting
from California's growing economy were offset by decreases due to the
effect of the California Universal Service Fund discussed above, the
impact of price competition from alternative intraLATA toll carriers and
the introduction and deployment of extended area local service plans at
SWBell.
Directory Advertising revenues increased in the first quarter of 1997 due
mainly to the publication of directories 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 voice messaging services, computer
programming 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>
SUPPLEMENTAL PRO FORMA RESULTS OF OPERATIONS - Continued
SBC's operating expenses in the first quarter 1997 increased $289, or 7.0%, over
the first quarter of 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 $ 2,055 $ 1,932 6.4%
Selling, general and administrative 1,282 1,173 9.3
Depreciation and amortization 1,068 1,011 5.6
- ---------------------------------------------------------------------
Total Operating Expenses $ 4,405 $ 4,116 7.0%
================================================================================
Total Operating Expenses Cost of services and products and selling,
general and administrative expenses increased on a combined basis $232, or
7.5%, in the first quarter of 1997 due to increases at the Telephone
Companies for employee compensation, costs incurred to prepare for local
competition and expenses associated with damage from winter storms. Other
increases related to growth at Mobile Systems and new business initiatives
for PCS, long-distance and video. These increases were partially offset by
savings at PAC 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 at the Telephone Companies and Mobile
Systems.
Equity in net income of affiliates decreased $18 in the first quarter 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 (as discussed in SBC's 1996 Annual Report) and the change in the
functional currency used by SBC to record its interest from the peso to the U.S.
dollar beginning in 1997.
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 decreased $22 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 in June 1996.
Income taxes increased $33, or 6.7%, in the first quarter of 1997 primarily due
to higher income before income taxes.
Cumulative Effect of Accounting Change As discussed in Note 3 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 $90, or $0.10 per share. The gain is net of deferred
taxes of $53. Management believes this change to the issue basis method is
preferable because it is the method generally followed in the publishing
industry, including Southwestern Bell Yellow Pages, Inc., 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>
================================================================================
================================================================================
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12a Computation of Ratios of Earnings to Fixed Charges.
Exhibit 12b Supplemental Pro Forma Computation of Ratios of Earnings to
Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On March 14, 1997, 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 was accounted for as a
"pooling of interests."
On March 31, 1997, SBC filed a Current Report on Form 8-K reporting on
Item 7, Financial Statements and Exhibits. In the Report, SBC filed
exhibits relating to the issuance of 7 3/4% exchangeable notes due March
15, 2001.
<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.
May 9, 1997 /s/ Donald E. Kiernan
------------------------
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<TABLE>
==========================================================================================================================
EXHIBIT 12a
==========================================================================================================================
SBC COMMUNICATIONS INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 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 $ 771 $ 683 $ 3,093 $ 2,698 $ 2,300 $ 1,883 $ 1,701
Changes*
Add: Interest Expense 116 120 472 515 480 496 530
1/3 Rental Expense 16 14 57 46 42 41 45
--------- -------- --------- --------- -------- -------- ----------
Adjusted Earnings $ 903 $ 817 $ 3,622 $ 3,259 $ 2,822 $ 2,420 $ 2,276
========= ======== ========= ========= ======== ======== ==========
Total Interest Charges $ 122 $ 125 $ 493 $ 515 $ 480 $ 496 $ 530
1/3 Rental Expense 16 14 57 46 42 41 45
--------- -------- --------- --------- -------- -------- ----------
Adjusted Fixed Charges $ 138 $ 139 $ 550 $ 561 $ 522 $ 537 $ 575
========= ======== ========= ========= ======== ======== =========
Ratio of Earnings to Fixed Charges 6.54 5.88 6.59 5.81 5.41 4.51 3.96
<FN>
*Undistributed earnings on investments accounted for under the equity method
have been excluded.
</FN>
</TABLE>
<TABLE>
==========================================================================================================================
EXHIBIT 12b
==========================================================================================================================
SBC COMMUNICATIONS INC.
SUPPLEMENTAL PRO FORMA COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 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 $ 1,362 $ 1,247 $ 4,975 $ 4,383 $ 4,091 $ 2,070 $ 3,447
Changes*
Add: Interest Expense 208 212 812 957 935 1,005 1,036
Dividends on Preferred 20 9 60 - - - -
Securities
1/3 Rental Expense 34 27 108 77 85 81 89
--------- --------- --------- -------- --------- -------- --------
Adjusted Earnings $ 1,624 $ 1,495 $ 5,955 $ 5,417 $ 5,111 $ 3,156 $ 4,572
========= ========= ========= ======== ========= ======== ========
Total Interest Charges $ 248 $ 238 $ 947 $ 957 $ 935 $ 1,005 $ 1,036
Dividends on Preferred Securities 20 9 60 - - - -
1/3 Rental Expense 34 27 108 77 85 81 89
--------- --------- --------- -------- --------- -------- --------
Adjusted Fixed Charges $ 302 $ 274 $ 1,115 $ 1,034 $ 1,020 $ 1,086 $ 1,125
========= ======== ========= ======== ========= ======== ========
Ratio of Earnings to Fixed Charges 5.38 5.46 5.34 5.24 5.01 2.91 # 4.06
<FN>
*Undistributed earnings on investments accounted for under the equity method
have been excluded.
#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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM SBC
COMMUNICATIONS INC.'S MARCH 31, 1996 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 733,000
<SECURITIES> 307,000
<RECEIVABLES> 2,519,000
<ALLOWANCES> 140,000
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 4,241,000
<PP&E> 33,195,000
<DEPRECIATION> 19,069,000
<TOTAL-ASSETS> 23,737,000
<CURRENT-LIABILITIES> 5,567,000
<BONDS> 5,740,000
0
0
<COMMON> 620,000
<OTHER-SE> 6,522,000
<TOTAL-LIABILITY-AND-EQUITY> 23,737,000
<SALES> 0<F2>
<TOTAL-REVENUES> 3,456,000
<CGS> 0<F3>
<TOTAL-COSTS> 1,179,000
<OTHER-EXPENSES> 578,000
<LOSS-PROVISION> 53,000
<INTEREST-EXPENSE> 116,000
<INCOME-PRETAX> 794,000
<INCOME-TAX> 277,000
<INCOME-CONTINUING> 517,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 517,000
<EPS-PRIMARY> 0.86
<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>
