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) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 1996 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-8610 SBC COMMUNICATIONS INC. Incorporated under the laws of the State of Delaware I.R.S. Employer Identification Number 43-1301883 175 E. Houston, San Antonio, Texas 78205 Telephone Number: (210) 821-4105 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At April 30, 1996, 609,158,765 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 March 31, 1996 1995 Operating Revenues Local service $ 1,732.6 $ 1,539.9 Network access 804.0 743.3 Long-distance service 224.4 210.2 Directory advertising 104.2 115.0 Other 331.5 301.5 Total operating revenues 3,196.7 2,909.9 Operating Expenses Cost of services and products 933.1 867.5 Selling, general and administrative 917.7 802.3 Depreciation and amortization 545.9 532.2 Total operating expenses 2,396.7 2,202.0 Operating Income 800.0 707.9 Other Income (Expense) Interest expense (120.1) (133.8) Equity in net income of affiliates 53.4 8.3 Other income (expense) - net (4.0) 1.8 Total other income (expense) (70.7) (123.7) Income Before Income Taxes 729.3 584.2 Income Taxes Federal 237.9 170.7 State and local 27.4 18.3 Total income taxes 265.3 189.0 Net Income $ 464.0 $ 395.2 Earnings Per Common Share $ 0.76 $ 0.65 Weighted Average Number of Common Shares Outstanding (in millions) 609.2 607.5 Dividends Declared Per Common Share $ 0.43 $ 0.4125 See Notes to Consolidated Financial Statements. SBC COMMUNICATIONS INC. CONSOLIDATED BALANCE SHEETS Dollars in millions except per share amounts March 31, December 31, 1996 1995 (Unaudited) Current Assets Cash and cash equivalents $ 570.8 $ 489.9 Accounts receivable - net of allowances for uncollectibles of $131.2 and $134.0 2,203.9 2,389.2 Material and supplies 93.4 130.6 Prepaid expenses 286.7 156.8 Deferred charges 225.0 201.9 Other 396.1 311.0 Total current assets 3,775.9 3,679.4 Property, Plant and Equipment - at cost 31,331.6 30,789.5 Less: Accumulated depreciation and amortization 18,179.2 17,801.2 Property, Plant and Equipment - Net 13,152.4 12,988.3 Intangible Assets - Net of Accumulated Amortization of $529.6 and $547.7 2,623.2 2,679.4 Investments in Equity Affiliates 1,607.4 1,586.3 Other Assets 1,013.1 1,069.1 Total Assets $ 22,172.0 $ 22,002.5 Liabilities and Shareowners' Equity Current Liabilities Debt maturing within one year $ 1,869.0 $ 1,679.5 Accounts payable and accrued liabilities 2,920.2 3,125.3 Dividends payable 261.9 251.4 Total current liabilities 5,051.1 5,056.2 Long-Term Debt 5,587.6 5,672.3 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 749.6 723.5 Postemployment benefit obligation 2,732.8 2,735.7 Unamortized investment tax credits 278.3 286.6 Other noncurrent liabilities 1,332.7 1,272.4 Total deferred credits and other noncurrent liabilies 5,093.4 5,018.2 Shareowners' Equity Common shares issued ($1 par value) 620.5 620.5 Capital in excess of par value 6,305.0 6,297.6 Retained earnings 878.9 672.4 Guaranteed obligations of employee stock ownership (259.7) (272.5) Foreign currency translation adjustment (591.0) (580.9) Treasury shares (at cost) (513.8) (481.3) Total shareowners' equity 6,439.9 6,255.8 Total Liabilities and Shareowners' Equity $ 22,172.0 $ 22,002.5 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) Three months ended March 31, 1996 1995 Operating Activities Net income $ 464.0 $ 395.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 545.9 532.2 Undistributed earnings from investments in equity affiliates (45.5) (4.4) Provision for uncollectible accounts 39.9 32.2 Amortization of investment tax credits (8.3) (12.0) Pensions and other postemployment expenses 24.6 (100.6) Deferred income taxes 66.4 41.3 Other - net (171.0) (235.0) Total adjustments 452.0 253.7 Net Cash Provided by Operating Activities 916.0 648.9 Investing Activities Construction and capital expenditures (634.7) (460.3) Investments in affiliates (4.0) (72.3) Purchase of short-term investments (252.7) (98.0) Proceeds from short-term investments 167.7 122.8 Dispositions 44.8 - Acquisitions - (360.9) Net Cash Used in Investing Activities (678.9) (868.7) Financing Activities Net change in short-term borrowings with original maturities of three months or less 112.1 599.7 Issuance of other short-term borrowings 88.8 - Issuance of long-term debt 0.1 92.2 Repayment of long-term debt (71.5) (15.7) Purchase of treasury shares (75.0) (105.8) Issuance of treasury shares 14.4 16.5 Dividends paid (225.1) (214.4) Net Cash Provided by (Used in) Financing Activities (156.2) 372.5 Net increase in cash and cash equivalents 80.9 152.7 Cash and cash equivalents beginning of year 489.9 364.6 Cash and Cash Equivalents End of Period $ 570.8 $ 517.3 Cash paid during the three months ended March 31 for: Interest $ 133.7 $ 140.8 Income taxes $ 178.3 $ 320.9 See Notes to Consolidated Financial Statements. <TABLE> SBC COMMUNICATIONS INC. CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY Dollars in millions (Unaudited) <CAPTION> Guaranteed Obligation Foreign Capital in of Employe Currency Common Excess of Retained Stock Owner- Translation Treasury Shares Par Value Earnings ship Plans Adjustment Shares <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1994 $ 620.5 $ 6,286.1 $ 2,593.5 $ (314.7) $ (366.5) $ (463.3) Net income - - 395.2 - - - Dividends to shareowners - - (250.0) - - - Reduction of debt associated with Employee Stock Ownership Plans - - - 12.2 - - Foreign currency translation adjustment - - - - (166.1) - Purchase of treasury shares - - - - - (105.8) Issuance of treasury shares: Dividend Reinvestment Plan - 2.5 - - - 29.3 Other - (1.3) - - - 15.4 Other - - 2.1 - - - Balance, March 31, 1995 $ 620.5 $ 6,287.3 $ 2,740.8 $ (302.5) $ (532.6) $ (524.4) Balance, December 31, 1995 $ 620.5 $ 6,297.6 $ 672.4 $ (272.5) $ (580.9) $ (481.3) Net income - - 464.0 - - - Dividends to shareowners - - (261.9) - - - Reduction of debt associated with Employee Stock Ownership Plans - - - 12.8 - - Foreign currency translation adjustment - - - - (10.1) - Purchase of treasury shares - - - - - (75.0) Issuance of treasury shares: Dividend Reinvestment Plan - 9.6 - - - 24.8 Other - (2.2) - - - 17.7 Other - - 4.4 - - - Balance, March 31, 1996 $ 620.5 $ 6,305.0 $ 878.9 $ (259.7) $ (591.0) $ (513.8) See Notes to Consolidated Financial Statements. </TABLE> * * * * SELECTED FINANCIAL AND OPERATING DATA At March 31, or for the three months then ended: 1996 1995 Return on weighted average shareowners' equity * . . . . 28.80% 18.88% Debt ratio *. . . . . . . . . . . . . . . . . . . . . . . 53.66% 48.70% Network access lines in service (000) . . . . . . . . . 14,466 13,794 Access minutes of use (000,000) . . . . . . . . . . . . . 14,048 12,678 Long-distance messages billed (000) . . . . . . . . . . 243,034 243,792 Cellular customers (000) . . . . . . . . . . . . . . . . 3,807 3,092 Number of employees . . . . . . . . . . . . . . . . . . 59,540 58,380 * 1996 reflects the impact of the 1995 third quarter extraordinary loss from discontinuance of regulatory accounting on shareowners' equity. SBC COMMUNICATIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Dollars in millions except per share amounts 1. BASIS OF PRESENTATION - The consolidated financial statements have been prepared by SBC Communications Inc. (SBC) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the interim periods shown. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Certain reclassifications have been made to the 1995 consolidated financial statements to conform with the 1996 presentation. The results for the interim periods are not necessarily indicative of results for the full year. The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in SBC's 1995 Annual Report to Shareowners. Effective September 1995, Southwestern Bell Telephone Company (Telephone Company), SBC's largest subsidiary, discontinued its application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." 2. CONSOLIDATION - The consolidated financial statements include the accounts of SBC and its majority-owned subsidiaries. The 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. SUBSEQUENT EVENT - On April 1, 1996, SBC and Pacific Telesis Group (PAC) jointly announced a definitive agreement to merge an SBC subsidiary with PAC, in a transaction in which each share of PAC common stock will be exchanged for 0.733 of a share of SBC common stock, subject to adjustment as described in the merger agreement. After the merger, PAC will be a wholly-owned subsidiary of SBC. The transaction, which has been approved by the board of directors of each company, is intended to be accounted for as a pooling of interests and to be a tax-free reorganization. The merger agreement is subject to certain regulatory approvals as well as approval by the shareowners of each company at special meetings expected to be held within the next few months. SBC COMMUNICATIONS INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS SBC Communications Inc. (SBC) reported net income of $464.0, or $.76 per share, for the first quarter of 1996. Financial results for the first quarters of 1996 and 1995 are summarized as follows: First Quarter Percent Change 1996 vs. 1996 1995 1995 Operating revenues $ 3,196.7 $ 2,909.9 9.9% Operating expenses $ 2,396.7 $ 2,202.0 8.8% Net income $ 464.0 $ 395.2 17.4% The primary factors contributing to the increase in net income during the first quarter of 1996 were growth in demand for services and products at the Telephone Company and Southwestern Bell Mobile Systems (Mobile Systems) and an increase in SBC's earnings from its equity affiliate, Telefonos de Mexico, S.A. de C.V. (Telmex). SBC's operating revenues in the first quarter of 1996 increased $286.8, or 9.9%, over the first quarter of 1995. Components of operating revenues for the first quarters of 1996 and 1995 are as follows: First Quarter Percent Change 1996 vs. 1996 1995 1995 Local service Landline $ 1,120.8 $ 1,037.2 8.1% Wireless 611.8 502.7 21.7% Network access Interstate 533.6 497.4 7.3% Intrastate 270.4 245.9 10.0% Long-distance service 224.4 210.2 6.8% Directory advertising 104.2 115.0 (9.4)% Other 331.5 301.5 10.0% Total $ 3,196.7 $ 2,909.9 9.9% Landline local service revenues increased in the first quarter of 1996 due primarily to increases in demand, including 4.9% growth in the number of access lines since March 31, 1995, and increased demand for enhanced services, including Caller ID. Approximately 29% of access line growth was due to the sales of additional access lines to existing residential customers. Results for the first quarter of 1995 were negatively impacted by accruals for revenue sharing under the previous regulatory plan that was in effect through August 1995 in Texas. Wireless local service revenues increased in the first quarter of 1996 due primarily to a 23.1% increase in cellular customers since March 31, 1995, partially offset by a slight decline in average revenue per customer. Market penetration at the end of the first quarters of 1996 and 1995 was 9.4 and 7.6 customers per 100 residents, respectively, in Mobile Systems' service areas. Interstate network access revenues increased in the first quarter of 1996 due primarily to an increase in demand for access services. Growth in revenues from end user charges attributable to an increasing access line base also contributed to the increase. Intrastate network access revenues increased in the first quarter of 1996 due primarily to increases in demand, including usage by alternative intraLATA toll carriers. Long-distance service revenues increased in the first quarter of 1996 due to the inclusion in 1995 of accruals for rate reductions relating to an appealed 1992 rate order in Oklahoma. The settlement of the appeals in October 1995 eliminated the need for these accruals. Excluding the effect of these accruals, long-distance service revenues in the first quarter of 1996 decreased due to the continuing impact of competition. However, long-distance service message volumes in the first quarter of 1996 were relatively unchanged from the first quarter of 1995, as competition- related decreases were mostly offset by the higher message volumes caused by optional calling plans. Directory advertising revenues decreased in the first quarter of 1996 as a result of the January 1996 sale of SBC's publishing contracts for GTE Corporation's service areas to GTE Directories. Other operating revenues increased in the first quarter of 1996 due primarily to increased demand for the Telephone Company's non-regulated services and products, including Caller ID equipment. SBC's operating expenses in the first quarter of 1996 increased $194.7, or 8.8%, over the first quarter of 1995. Components of operating expenses for the first quarters of 1996 and 1995 are as follows: First Quarter Percent Change 1996 vs. 1996 1995 1995 Cost of services and products $ 933.1 $ 867.5 7.6% Selling, general and 917.7 802.3 14.4% administrative Depreciation and amortization 545.9 532.2 2.6% Total $ 2,396.7 $ 2,202.0 8.8% Cost of services and products increased for the first quarter of 1996 due to demand related increases at the Telephone Company, largely in the form of increases in materials, contract services and annual compensation increases. Increases at Mobile Systems, largely related to growth, were offset by the absence of costs related to directory printing contracts sold in January 1996. Selling, general and administrative expenses increased in the first quarter of 1996 largely due to growth-related increases at Mobile Systems and higher operating taxes, including the new Texas Infrastructure Fund established as part of legislation that became effective in September 1995. Interest expense decreased $13.7, or 10.2%, in the first quarter of 1996, due primarily to lower debt levels. Equity in net income of affiliates increased $45.1 in the first quarter of 1996. This increase was primarily due to higher earnings from SBC's investment in Telmex, due to stabilization of the peso and operational growth, indicated by increases in cellular customers and long-distance usage. 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 $76.3, or 40.4%, in the first quarter of 1996 due to higher earnings and the effect on taxes of the discontinuance of regulatory accounting in the third quarter of 1995. OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS REGULATORY ENVIRONMENT Telecommunications Reform Legislation Both the Missouri and Kansas legislatures recently passed bills designed to reform state telecommunications regulation and facilitate implementation of the federal Telecommunications Act of 1996 (the Act). A further description of the Act is contained in SBC's 1995 annual report to shareowners. Both bills would replace rate of return regulation with forms of price cap regulation. Basic local rates will be capped at their current levels for four years in Missouri and three years in Kansas. The Missouri bill provides for pricing flexibility and is designed to provide equal regulation for all competitors with the potential for price deregulation after five years unless the Missouri Public Service Commission finds that "effective competition" does not exist. The Kansas bill provides for reduced regulation, including the possibility for price deregulation if the Kansas Corporation Commission finds that an alternative provider of comparable telecommunications services exists. Other provisions of the bill include a revenue neutral rate rebalancing between intrastate access charges and local service rates. This rebalancing is designed to lower intrastate long-distance rates, making them more comparable to interstate rates. OTHER BUSINESS MATTERS Merger Agreement On April 1, 1996, SBC and Pacific Telesis Group (PAC) jointly announced a definitive agreement to merge an SBC subsidiary with PAC, in a transaction in which each share of PAC common stock will be exchanged for 0.733 of a share of SBC common stock, subject to adjustment as described in the merger agreement. After the merger, PAC will be a wholly-owned subsidiary of SBC. The transaction, which has been approved by the board of directors of each company, is intended to be accounted for as a pooling of interests and to be a tax-free reorganization. The merger agreement is subject to certain regulatory approvals as well as approval by the shareowners of each company at special meetings expected to be held within the next few months. LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 1996, as in 1995, SBC's primary source of funds continued to be cash provided by operating activities. This, combined with external financing and proceeds from the sale of directory printing contracts, was used primarily to fund capital expenditures and pay dividends. SBC had $570.8 of cash and cash equivalents available at March 31, 1996. SBC has entered into agreements with several banks for lines of credit totaling $1,055.0, all of which may be used to support commercial paper borrowings. These lines had not been utilized as of March 31, 1996. Commercial paper and similar borrowings as of March 31, 1996 totaled $1,438.9. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 2 Agreement and Plan of Merger, among Pacific Telesis Group, SBC Communication Inc. and SBC Communications (NV) Inc., dated as of April 1, 1996. (Exhibit 2 to Form 8-K (File No. 1-8610), dated April 1, 1996.) Exhibit 3 Restated Certificate of Incorporation of SBC Communications Inc., filed with the Secretary of State of Delaware on April 29, 1996. Exhibit 12 Computation of Ratios of Earnings to Fixed Charges. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the first quarter ended March 31, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SBC Communications Inc. May 7, 1996 /s/ Donald E. Kiernan Donald E. Kiernan Senior Vice President,Treasurer and Chief Financial Officer