AT&T Inc. is a North American telecommunications company. In addition to telephone, data and video telecommunications, AT&T also provides mobile communications and internet services for companies, private customers and government organizations. AT&T has long had a monopoly in the United States and Canada.
FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 1995 or _ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-8610 SBC COMMUNICATIONS INC. Incorporated under the laws of the State of Delaware I.R.S. Employer Identification Number 43-1301883 175 E. Houston, San Antonio, Texas 78205 Telephone Number: (210) 821-4105 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At October 31, 1995, 609,860,483 common shares were outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements SBC COMMUNICATIONS INC. CONSOLIDATED STATEMENTS OF INCOME Dollars in millions except per share amounts (Unaudited) Three months ended Nine months ended September 30, September 30, 1995 1994 1995 1994 Operating Revenues Local service $ 1,667.5 $ 1,473.9 $ 4,832.4 $ 4,273.2 Network access 780.8 707.7 2,290.7 2,094.9 Long-distance service 210.3 242.4 629.3 695.7 Directory advertising 313.4 307.5 547.0 550.3 Other 270.0 268.6 809.0 796.8 Total operating revenues 3,242.0 3,000.1 9,108.4 8,410.9 Operating Expenses Cost of services and products 963.7 959.0 2,713.0 2,665.5 Selling, general and administrative 846.4 764.4 2,410.4 2,220.0 Depreciation and amortization 541.1 506.3 1,612.6 1,502.8 Total operating expenses 2,351.2 2,229.7 6,736.0 6,388.3 Operating Income 890.8 770.4 2,372.4 2,022.6 Other Income (Expense) Interest expense (130.5) (116.9) (390.5) (349.6) Equity in net income of affiliates 51.7 73.1 99.3 210.5 Other expense - net (12.0) (6.3) (28.8) (38.0) Total other income (expense) (90.8) (50.1) (320.0) (177.1) Income Before Income Taxes and Extraordinary Loss 800.0 720.3 2,052.4 1,845.5 Income Taxes Federal 236.6 211.1 607.4 545.9 State and local 29.1 28.4 73.5 75.6 Total income taxes 265.7 239.5 680.9 621.5 Income Before Extraordinary Loss 534.3 480.8 1,371.5 1,224.0 Extraordinary Loss from Discontinuance of Regulatory Accounting, net of tax (2,819.3) - (2,819.3) - Net Income (Loss) $ (2,285.0) $ 480.8 $ (1,447.8) $ 1,224.0 Earnings Per Common Share: Income Before Extraordinary Loss $ 0.88 $ 0.80 $ 2.25 $ 2.03 Extraordinary Loss from Discontinuance of Regulatory Accounting, net of tax (4.63) - (4.63) - Net Income (Loss) $ (3.75) $ 0.80 $ (2.38) $ 2.03 Weighted Average Number of Common Shares Outstanding (in millions) 609.9 601.7 608.5 601.6 Dividends Declared Per Common Share $ 0.4125 $ 0.3950 $ 1.2375 $ 1.1850 See Notes to Consolidated Financial Statements. SBC COMMUNICATIONS INC. CONSOLIDATED BALANCE SHEETS Dollars in millions except per share amounts September 30, December 31, 1995 1994 Assets (Unaudited) Current Assets Cash and cash equivalents $ 454.6 $ 364.6 Accounts receivable - net of allowances for uncollectibles of $126.6 and $130.4 2,214.1 2,204.6 Material and supplies 129.9 141.8 Prepaid expenses 172.5 162.0 Deferred charges 242.8 240.1 Deferred income taxes 109.7 180.7 Other 466.5 199.5 Total current assets 3,790.1 3,493.3 Property, Plant and Equipment - at cost 30,274.4 29,256.4 Less: Accumulated depreciation and amortization 17,486.5 11,939.8 Property, Plant and Equipment - Net 12,787.9 17,316.6 Intangible Assets - Net of Accumulated Amortization of $518.7 and $427.6 2,668.3 2,648.9 Investments in Equity Affiliates 2,091.5 1,748.0 Other Assets 714.1 798.5 Total Assets $ 22,051.9 $ 26,005.3 Liabilities and Shareowners' Equity Current Liabilities Debt maturing within one year $ 1,837.1 $ 1,668.6 Accounts payable and accrued liabilities 3,194.6 3,281.4 Dividends payable 251.7 240.8 Total current liabilities 5,283.4 5,190.8 Long-Term Debt 5,660.3 5,848.3 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 658.1 2,319.7 Postemployment benefit obligation 2,636.2 2,707.2 Unamortized investment tax credits 294.5 369.8 Other noncurrent liabilities 1,378.1 1,213.9 Total deferred credits and other noncurrent liabilities 4,966.9 6,610.6 Shareowners' Equity Common shares issued ($1 par value) 620.5 620.5 Capital in excess of par value 6,292.2 6,286.1 Retained earnings 401.9 2,593.5 Guaranteed obligations of employee stock ownership plans (284.9) (314.7) Foreign currency translation adjustment (456.5) (366.5) Treasury shares (at cost) (431.9) (463.3) Total shareowners' equity 6,141.3 8,355.6 Total Liabilities and Shareowners' Equity $ 22,051.9 $ 26,005.3 See Notes to Consolidated Financial Statements. SBC COMMUNICATIONS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in millions, increase (decrease) in cash and cash equivalents (Unaudited) Nine months ended September 30, 1995 1994 Operating Activities Net income (loss) $(1,447.8) $ 1,224.0 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,612.6 1,502.8 Undistributed earnings from investments in equity affiliates (58.9) (159.8) Provision for uncollectible accounts 118.8 110.2 Amortization of investment tax credits (34.4) (45.7) Pensions and other postemployment benefits 0.1 26.4 Deferred income tax expense 206.6 108.0 Extraordinary loss, net of tax 2,819.3 - Other - net (286.8) (169.6) Total adjustments 4,377.3 1,372.3 Net Cash Provided by Operating Activities 2,929.5 2,596.3 Investing Activities Construction and capital expenditures (1,619.5) (1,674.0) Investments in affiliates (16.0) - Purchase of short-term investments (596.7) (305.3) Proceeds from short-term investments 315.9 249.3 Acquisitions (515.6) (773.6) Net Cash Used in Investing Activities (2,431.9) (2,503.6) Financing Activities Net change in short-term borrowings with original maturities of three months or less 94.0 697.4 Issuance of other short-term borrowings 91.1 35.5 Repayment of other short-term borrowings (60.0) (12.5) Issuance of long-term debt 438.9 193.8 Repayment of long-term debt (241.5) (411.4) Issuance of common shares - 32.3 Purchase of treasury shares (129.0) (204.8) Issuance of treasury shares 62.3 15.4 Dividends paid (663.4) (625.8) Net Cash Used in Financing Activities (407.6) (280.1) Net increase (decrease) in cash and cash equivalents 90.0 (187.4) Cash and cash equivalents beginning of year 364.6 618.4 Cash and Cash Equivalents End of Period $ 454.6 $ 431.0 Cash paid during the nine months ended September 30 for: Interest $ 383.1 $ 348.9 Income taxes $ 639.2 $ 650.6 See Notes to Consolidated Financial Statements. <TABLE> SBC COMMUNICATIONS INC. CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY Dollars in millions (Unaudited) <CAPTION> Guaranteed Obligations Foreign Capital in of Employee Currency Common Excess of Retained Stock Owner- Translation Treasury Shares Par Value Earnings ship Plans Adjustment Shares <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1993 $ 602.7 $ 5,577.0 $ 1,891.4 $ (352.9) $ (40.2) $ (109.6) Net income - - 1,224.0 - - - Dividends to shareowners - - (712.9) - - - Reduction of debt associated with Employee Stock Ownership Plans - - - 34.9 - - Foreign currency translation adjustment - - - - (102.0) - Issuance of common shares: Dividend Reinvestment Plan 2.6 103.3 - - - - Other issuances 0.8 29.8 - - - - Purchase of treasury shares - - - - - (205.0) Issuance of treasury shares - 4.1 - - - 93.8 Other - - 5.0 - - - Balance, September 30, 1994 $ 606.1 $ 5,714.2 $ 2,407.5 $ (318.0) $ (142.2) $ (220.8) Balance, December 31, 1994 $ 620.5 $ 6,286.1 $ 2,593.5 $ (314.7) $ (366.5) $ (463.3) Net income (loss) - - (1,447.8) - - - Dividends to shareowners - - (753.3) - - - Reduction of debt associated with Employee Stock Ownership Plans - - - 29.8 - - Foreign currency translation adjustment - - - - (90.0) - Purchase of treasury shares - - - - - (129.0) Issuance of treasury shares: Dividend Reinvestment Plan - 10.1 - - - 86.5 Other issuances - (4.0) - - - 73.9 Other - - 9.5 - - - Balance, September 30, 1995 $ 620.5 $ 6,292.2 $ 401.9 $ (284.9) $ (456.5) $ (431.9) <FN> See Notes to Consolidated Financial Statements. </TABLE> * * * SELECTED FINANCIAL AND OPERATING DATA At September 30, or for the nine months then ended: 1995 1994 Return on weighted average shareowners' equity * . . . . . 22.00% 20.59% Debt ratio . . . . . . . . . . . . . . . . . . . . . . . . 54.97% 47.58% Network access lines in service (000) # . . . . . . . . . 14,074 13,507 Access minutes of use (000,000). . . . . . . . . . . . . . 39,854 35,859 Long-distance messages billed (000). . . . . . . . . . . . 751,405 773,075 Cellular customers (000) #. . . . . . . . . . . . . . . . 3,387 2,603 Number of employees . . . . . . . . . . . . . . . . . . . 58,720 59,350 * 1995 calculated using Income Before Extraordinary Loss. # 1994 amounts have been revised to reflect the most current information available. SBC COMMUNICATIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Dollars in millions except per share amounts 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS - 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 and discontinuance of regulatory accounting discussed in Note 3) necessary to present fairly the results for the interim periods shown. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Certain reclassifications have been made to the 1994 consolidated financial statements to conform with the 1995 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 1994 Annual Report to Shareowners. 2. CONSOLIDATION - The consolidated financial statements include the accounts of SBC and its majority-owned subsidiaries. Southwestern Bell Telephone Company (Telephone Company) is SBC's largest subsidiary. All significant intercompany transactions are eliminated in the consolidation process. Investments in companies in which SBC owns 20% to 50% of the voting common stock or otherwise exercises significant influence over operating and financial policies of the company are accounted for under the equity method. Earnings from foreign investments accounted for under the equity method are included for periods ended within three months of the date of SBC's Consolidated Statements of Income. 3. EXTRAORDINARY LOSS - In September 1995, SBC announced that the Telephone Company discontinued its application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). The rapid pace of change within the telecommunications industry and the evolution of the regulatory framework in which the Telephone Company operates have resulted in price-based regulation for most of the Telephone Company's revenues and accelerated competition in the Telephone Company's markets. Under these conditions, the Telephone Company can no longer be assured that rates charged to and collected from customers will be adequate to recover the costs of providing service, which includes the carrying value of telephone plant depreciated over relatively long regulator- prescribed lives. As a result, management determined that the Telephone Company no longer met the criteria for application of FAS 71. Therefore, in September 1995, the Telephone Company recorded a non-cash, extraordinary charge to net income of $2,819.3 (after a deferred tax benefit of $1,764.0). This is comprised of an after-tax charge of $2,897.3 to reduce the net carrying value of telephone plant, partially offset by an after-tax benefit of $78.0 for the elimination of net regulatory liabilities. The components of the charge are as follows: Pretax After- tax -------- -------- Increase telephone plant accumulated $ 4,657.0 $ 2,897.3 depreciation Adjust unamortized investment tax (40.9) (25.4) credits Eliminate tax-related regulatory (87.5) (87.5) assets and liabilities Eliminate other regulatory assets 54.7 34.9 Total $ 4,583.3 $ 2,819.3 The increase in accumulated depreciation of $4,657.0 reflects the effects of adopting depreciable lives for many of the Telephone Company's plant categories which more closely reflect the economic and technological lives of the plant. The adjustment was supported by a discounted cash flow analysis which estimated amounts of telephone plant that may not be recoverable from future discounted cash flows. This analysis included consideration of the effects of anticipated competition and technological changes on plant lives and revenues. Following is a comparison of new lives to those prescribed by regulators for selected plant categories: Average Lives (in Years) -------------------- Regulator- Estimated Telephone Plant Category Prescribed Economic - -------------------------- --------- ------- Digital switch 17 11 Digital circuit 12 7 Copper cable 24 18 Fiber cable 27 20 Conduit 57 50 The increase in accumulated depreciation also includes an adjustment of approximately $450 million to fully depreciate analog switching equipment scheduled for replacement. Remaining analog switching equipment will be depreciated using an average remaining life of four years. Investment tax credits (ITC) have historically been deferred and amortized over the estimated lives of the related plant. The adjustment to ITC reflects the shortening of those plant lives discussed above. Regulatory assets and liabilities are related primarily to accounting policies used by regulators in the ratemaking process which are different than those used by non-regulated companies, predominantly in the accounting for income taxes and deferred compensated absences. These items are required to be eliminated with the discontinuance of accounting under FAS 71. SBC COMMUNICATIONS INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS SBC Communications Inc. (SBC) reported income before extraordinary loss of $534.3, or $.88 per share, for the third quarter of 1995 and $1,371.5, or $2.25 per share, for the first nine months of 1995. SBC recognized an extraordinary loss of $2.8 billion from the discontinuance of regulatory accounting at Southwestern Bell Telephone Company (Telephone Company). Net losses for the third quarter and first nine months of 1995 were $2.3 billion and $1.4 billion, respectively. Financial results for the third quarters and first nine months of 1995 and 1994 are summarized as follows: -------- Third Quarter------- --------- Nine-Month Period---- Percent Percent 1995 1994 Change 1995 1994 Change --------- ------- ----- -------- -------- ---- Operating $ 3,242.0 $ 3,000.1 8.1% $ 9,108.4 $ 8,410.9 8.3% revenues Operating $ 2,351.2 $ 2,229.7 5.4% $ 6,736.0 $ 6,388.3 5.4% expenses Income before $ 534.3 $ 480.8 11.1% $ 1,371.5 $ 1,224.0 12.1% extraordinary loss Extraordinary $ (2,819.3) - - $ (2,819.3) - - loss Net income $ (2,285.0) $ 480.8 - $ (1,447.8) $ 1,224.0 - (loss) The primary factors contributing to the increase in income before extraordinary loss during the third quarter and first nine months of 1995 were growth in demand for services and products at the Telephone Company and Southwestern Bell Mobile Systems (Mobile Systems). Results for the first nine months of 1995 also reflect the effects of the decline in value of the Mexican peso on SBC's earnings from its equity affiliate, Telefonos de Mexico, S.A. de C.V. (Telmex). SBC's operating revenues in the third quarter and first nine months of 1995 increased $241.9, or 8.1%, and $697.5, or 8.3%, over the third quarter and first nine months of 1994, respectively. Components of operating revenues for the third quarters and first nine months of 1995 and 1994 are as follows: -------- Third Quarter--------- --------- Nine-Month Period--- Percent Percent 1995 1994 Change 1995 1994 Change --------- -------- ------ --------- ------- ------ Local service Landline $ 1,085.1 $ 1,020.0 6.4% $ 3,192.8 $ 3,012.3 6.0% Wireless 582.4 453.9 28.3 1,639.6 1,260.9 30.0 Network access Interstate 517.7 475.4 8.9 1,525.9 1,391.2 9.7 Intrastate 263.1 232.3 13.3 764.8 703.7 8.7 Long-distance 210.3 242.4 (13.2) 629.3 695.7 (9.5) service Directory 313.4 307.5 1.9 547.0 550.3 (0.6) advertising Other 270.0 268.6 0.5 809.0 796.8 1.5 Total $ 3,242.0 $ 3,000.1 8.1% $ 9,108.4 $ 8,410.9 8.3% Landline local service revenues increased in the third quarter and first nine months of 1995 due primarily to increases in demand, including 4.2% growth in the number of access lines since September 30, 1994 and increased demand for enhanced services, including Caller ID. Wireless local service revenues increased in the third quarter and first nine months of 1995 due primarily to a 30.1% increase in cellular customers since September 30, 1994 (24.2% increase excluding acquisitions), offset partially by a slight decline in average revenue per customer. Interstate network access revenues increased in the third quarter and first nine months of 1995 due primarily to an increase in demand for access services and growth in end user charges attributable to an increasing access line base, partially offset by reduced rates under the Federal Communications Commission's (FCC) revised price cap plan which became effective August 1, 1995. Results for the first nine months of 1994 also reflect a retroactive billing adjustment that decreased interstate revenues while increasing intrastate revenues. Intrastate network access revenues increased in the third quarter and first nine months of 1995 due primarily to increases in demand, including usage by alternative intraLATA toll carriers. Revenues for the first nine months of 1994 also include the billing adjustment noted above. Long-distance service revenues decreased in the third quarter and first nine months of 1995 due to competition-related decreases in residential message volumes. Competition from interexchange carriers has continued to increase through advertising and usage of "10xxx" and "1-800" access numbers. The decrease in long-distance service revenues is partially offset by higher access revenues, as noted above. Other operating revenues were flat in the third quarter of 1995 as the increased demand for the Telephone Company's non- regulated services and products, including Caller ID equipment, was offset by the decrease in equipment sales revenues at Mobile Systems. For the first nine months of 1995, the demand increases exceeded the decline in equipment sales. SBC's operating expenses in the third quarter and first nine months of 1995 increased $121.5, or 5.4%, and $347.7, or 5.4%, over the third quarter and first nine months of 1994, respectively. Components of operating expenses for the third quarters and first nine months of 1995 and 1994 are as follows: -------- Third Quarter------ -------- Nine-Month Period---- 1995 1994 Percent 1995 1994 Percent Change Change ------ ------ ----- -------- ------- ------ Cost of services $ 963.7 $ 959.0 0.5% $ 2,713.0 $ 2,665.5 1.8% and products Selling, general and 846.4 764.4 10.7 2,410.4 2,220.0 8.6 administrative Depreciation and 541.1 506.3 6.9 1,612.6 1,502.8 7.3 amortization Total $ 2,351.2 $ 2,229.7 5.4% $ 6,736.0 $ 6,388.3 5.4% Cost of services and products increased for the third quarter and first nine months of 1995 due to demand related increases for enhanced services at the Telephone Company and annual compensation increases. These increases were partially offset by the absence of expenses associated with United Kingdom cable television operations, which were changed to the equity method of accounting in the fourth quarter of 1994, decreased equipment costs at Mobile Systems and a decrease in switching system software license fees at the Telephone Company. Selling, general and administrative expenses increased in the third quarter and first nine months of 1995 due to growth in cellular operations, higher benefit expenses, increased advertising and increased contracted services. Depreciation and amortization increased in the third quarter and first nine months of 1995 due primarily to a growth in plant level and changes in plant composition, primarily at Mobile Systems and the Telephone Company, and, to a lesser extent, the effect of depreciation represcription. Interest expense increased $13.6, or 11.6%, and $40.9, or 11.7%, in the third quarter and first nine months of 1995, respectively, due primarily to an increase in the average amount of debt outstanding resulting from debt issued to finance growth and acquisitions at Mobile Systems. Interest expense for the first nine months of 1995 also reflects debt issued for acquisitions in France and Chile. Equity in net income of affiliates decreased $21.4, or 29.3%, and $111.2, or 52.8%, in the third quarter and first nine months of 1995, respectively. The third quarter decrease is primarily due to the inclusion in 1995 of losses on United Kingdom cable television operations, which were changed to the equity method of accounting in the fourth quarter of 1994 due to decreased ownership percentage, and the investment in France made in late 1994. These investments also affected the nine-month results. United Kingdom cable television operations are further discussed in "Other Business Matters". SBC's third quarter earnings from its investment in Telmex were flat compared to the third quarter of 1994. The effects of the decline in the value of the Mexican peso since the third quarter of 1994 were largely offset by operational growth at Telmex, indicated by increases in access lines, cellular customers and long-distance usage. Results for the first nine months of 1995 also reflect the effects of the first quarter 1995 decline in the value of the peso on SBC's earnings from its investment in Telmex. Substantially all of the decline occurred in the first quarter, when earnings decreased equally from exchange losses on Telmex's non-peso denominated debt and reductions in the translated amount of U.S. dollar earnings from Telmex's operations. Since that time, there have been no exchange losses on non-peso denominated debt due to the relative stabilization of the peso through the end of the third quarter, and operational growth has offset translation losses. SBC's future earnings from Telmex are sensitive to changes in the value of the peso. SBC's investment in Telmex is recorded under U.S. generally accepted accounting principles, which exclude inflation adjustments and include adjustments for the purchase method of accounting. Extraordinary Loss - As described in Note 3 to the consolidated financial statements, SBC recorded an extraordinary loss of $2.8 billion from discontinuance of regulatory accounting and reduction in plant asset lives by the Telephone Company in the third quarter. Management does not expect a significant increase in depreciation expense in the near future to result from the discontinuance of regulatory accounting. OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS REGULATORY DEVELOPMENTS Oklahoma On October 30, 1995, the Oklahoma Corporation Commission (OCC) approved a settlement that resolves pending court appeals of a 1992 rate order. The settlement ends a dispute which began in 1989, when the OCC ordered an investigation into the reasonableness of the Telephone Company's intrastate rates. An order was issued in August 1992, requiring the Telephone Company to refund $148.4, representing revenues in excess of an 11.41% return on equity for the period April 1991 through the date of the final order. The order also called for prospective annual rate reductions of $100.6 effective September 1992, required an investment of $84 in network modernization over five years, and lowered the allowed return on equity from 14.25% to 12.20%. Under the terms of the settlement agreement, the Telephone Company will pay a cash settlement of $170 to business and residential customers, and offer discounts with a retail value of $268 for certain Telephone Company services. Previously ordered rate reductions of $100.6 have been lowered to $84.4, of which $57.1 have already been implemented. The settlement allows the remaining $27.3 in rate reductions to be deferred with approximately $8.9 becoming effective in 1996, and the remainder during 1997. The Telephone Company will continue a previously announced $84 network modernization plan for rural Oklahoma. The settlement agreement also provides that no overearnings complaint can be filed against the Telephone Company until January 1, 1998. In addition, the OCC will begin exploring alternative forms of regulation within ten days of the settlement. The order approving the settlement becomes effective on November 30, 1995. Management anticipates that this settlement will not have a significant impact on earnings. The Telephone Company began accruing for the order in 1992 and the settlement and associated costs had been fully accrued as of the end of the third quarter of 1995. Missouri On September 7, 1995, in response to a legal challenge brought by interexchange carriers and the Missouri Cable TV Association, the Cole County Circuit Court (Circuit Court) reversed the August 1994 settlement agreement reached among the Telephone Company, the Missouri Public Service Commission (MPSC) and the Office of Public Counsel (OPC). The settlement agreement had ended a legal dispute with the MPSC over a December 1993 order. Under the agreement, which had extended through December 31, 1998, the Telephone Company implemented annual rate reductions of $69.6, issued one-time credits to customers totaling $64, and committed to an average annual capital investment of $275 during the term of the agreement. Also, it was agreed that the Telephone Company would not file a general rate case, not increase basic local exchange service rates and there would be no sharing of earnings. The MPSC and OPC agreed not to initiate any complaints regarding the Telephone Company's earnings prior to January 1, 1999. The Circuit Court's decision applies primarily to the rate review moratorium and capital investment agreements. The decision has no immediate impact on the Telephone Company's current rates because they were approved by the MPSC in separate proceedings and were not appealed. The MPSC and the Telephone Company appealed the Circuit Court's decision on October 12 and 13, 1995, respectively. OTHER BUSINESS MATTERS United Kingdom Cable Television Operations In October 1995, SBC combined its United Kingdom cable television operations with those of Tele-West Communications, P.L.C., a publicly held joint venture between Telecommunications, Inc. and U S West. The resulting entity, Tele-West P.L.C., is the largest cable television operator in the United Kingdom. SBC owns approximately 15% of the new entity and will account for its investment using the cost method of accounting. During the fourth quarter of 1995, SBC will record an after-tax gain on the transaction of approximately $110. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1995, as in 1994, SBC's primary source of funds continued to be cash provided by operating activities. Other sources of cash used for acquisitions and affiliate investments in early 1995 included proceeds from the issuance of short-term debt and sales of short-term investments. SBC had $454.6 of cash and cash equivalents available at September 30, 1995. SBC has entered into agreements with several banks for lines of credit totaling $1,170.0 all of which may be used to support commercial paper borrowings. These lines had not been utilized as of September 30, 1995. Commercial paper borrowings as of September 30, 1995 totaled $1,473.7. SBC COMMUNICATIONS INC. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 12 Computation of Ratios of Earnings to Fixed Charges. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K On September 29, 1995, SBC Communications Inc. (SBC) filed a Current Report on Form 8-K, reporting on Item 5, Other Events. SBC announced its Southwestern Bell Telephone Company subsidiary was discontinuing the use of Statement of Financial Accounting Standards No. 71. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SBC Communications Inc. November 7, 1995 /s/ Donald E. Kiernan Donald E. Kiernan Senior Vice President,Treasurer and Chief Financial Officer