FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1998
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 78205-2233
Telephone Number 210-821-4105
Securities registered pursuant to Section 12(b) of the Act: (See attached
Schedule A)
Securities registered pursuant to Section 12(g) of the Act: None.
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Based on composite closing sales price of $52 7/8 per share on February 26,
1999, the aggregate market value of all voting and non-voting stock held by
non-affiliates was $103,706,200,000.
As of February 26, 1999, 1,962,346,336 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of SBC Communications Inc.'s Annual Report to Shareowners for
the fiscal year ended December 31, 1998 (Parts I and II).
(2) Portions of SBC Communications Inc.'s Notice of 1999 Annual Meeting and
Proxy Statement dated March 12, 1999 (Parts III and IV).
SCHEDULE A
Securities Registered Pursuant To Section 12(b) Of The Act:
Name of each exchange
Title of each class on which registered
Common Shares (Par Value $1.00 Per Share) New York, Chicago and
Pacific Stock Exchanges
7.75 % Exchangeable Notes, New York Stock Exchange
Due March 15, 2001
7.56% Pacific Telesis Group New York Stock Exchange
Corporation-obligated mandatorily
redeemable preferred securities of
subsidiary trusts
8.50% Pacific Telesis Group New York Stock Exchange
Corporation-obligated mandatorily
redeemable preferred securities of
subsidiary trusts
TABLE OF CONTENTS
Item Page
- ----- ----
PART I
1. Business....................................................... 4
2. Properties..................................................... 18
3. Legal Proceedings.............................................. 18
4. Submission of Matters to a Vote of Security Holders............ 18
Executive Officers of the Registrant.............................. 19
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 20
6. Selected Financial and Operating Data.......................... 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 20
7A. Quantitative and Qualitative Disclosures about Market Risk..... 20
8. Financial Statements and Supplementary Data.................... 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 20
PART III
10. Directors and Executive Officers of the Registrant............. 21
11. Executive Compensation......................................... 21
12. Security Ownership of Certain Beneficial Owners and Management. 21
13. Certain Relationships and Related Transactions................. 21
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22
PART I
ITEM 1. BUSINESS
GENERAL
SBC Communications Inc. (SBC) is a holding company whose subsidiaries and
affiliates operate predominantly in the communications services industry.
SBC's subsidiaries and affiliates provide wireline and wireless
telecommunications services and equipment, directory advertising,
publishing and cable television services. SBC's principal Wireline
subsidiaries are Southwestern Bell Telephone Company (SWBell), providing
telecommunications services over approximately 16 million access lines in
Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area), and
Pacific Bell (PacBell), providing telecommunications services over
approximately 18 million access lines in California. SBC also provides
telecommunications services through The Southern New England Telephone
Company (SNETel) subsidiary over approximately 2 million access lines in
Connecticut, and over approximately 300,000 access lines in Nevada through
its Nevada Bell subsidiary. (SWBell, PacBell, SNETel and Nevada Bell are
collectively referred to as the Telephone Companies.) The Telephone
Companies provide local exchange services within authorized regions
(in-region) and are subject to regulation by each state in which they
operate and by the Federal Communications Commission (FCC). SBC was
incorporated under the laws of the State of Delaware in 1983 and has its
principal executive offices at 175 E. Houston, San Antonio, Texas
78205-2233 (telephone number 210-821-4105).
SBC was formed as one of the original seven regional holding companies (RHCs)
created to hold AT&T Corp.'s (AT&T) local telephone companies. AT&T divested
SBC by means of a spin-off of stock to its shareowners on January 1, 1984
(divestiture) resulting in SBC becoming a separate publicly traded company.
The divestiture was made pursuant to a consent decree, referred to as the
Modification of Final Judgment (MFJ), issued by the United States District
Court for the District of Columbia (District Court).
On February 8, 1996, the Federal Government enacted the Telecommunications
Act of 1996 (Telecom Act), a major, wide-ranging amendment to the
Communications Act of 1934.
By its specific terms, the Telecom Act supersedes the jurisdiction of the
District Court with regard to activities occurring after the date of
enactment. The FCC is given authority for all post-enactment conduct, with
the District Court retaining jurisdiction of pre-enactment conduct for a
five-year period. As a result of these provisions, on April 11, 1996 the
District Court issued its Opinion and Order terminating the MFJ and
dismissing all pending motions as moot, thereby effectively ending 13 years
regulation of RHCs under the MFJ.
In December 1997, the United States District Court for the Northern District
of Texas ruled that parts of the Telecom Act were unconstitutional on the
grounds that they improperly discriminate against certain subsidiaries of SBC
by imposing restrictions that prohibit certain of the Telephone Companies by
name from offering interLATA long distance and other services that other
Local Exchange Carriers are free to provide. In September 1998, the United
States Court of Appeals for the Fifth Circuit (5th Circuit) reversed this
decision and ruled that the challenged provisions of the Telecom Act were
constitutional. In January 1999, the United States Supreme Court declined to
hear an appeal of the 5th Circuit's decision.
Additional information relating to the Telecom Act is contained in the 1998
SBC Annual Report to Shareowners under the heading "Operating Environment and
Trends of the Business" beginning on page 11, and is incorporated herein by
reference pursuant to General Instruction G(2).
Business Combinations
Ameritech Corporation
On May 11, 1998, SBC announced a definitive agreement to merge an SBC
subsidiary with Ameritech Corporation (Ameritech) in a transaction in which
each share of Ameritech common stock will be converted into and exchanged for
1.316 shares of SBC common stock (equivalent to approximately 1,450 million
shares). After the merger, Ameritech will be a wholly-owned subsidiary of
SBC. The transaction, which has been approved by the board of directors and
shareowners of each company, is intended to be accounted for as a pooling of
interests and to be a tax-free reorganization. The merger is subject to
certain regulatory approvals including the FCC and state commissions in Ohio
and Illinois. If approvals are granted, the transaction is expected to close
in 1999. Additional information on this matter is contained in Note 3 of the
1998 SBC Annual Report to Shareowners, and is incorporated herein by
reference pursuant to General Instruction G(2).
Pacific Telesis Group
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 outstanding share
of PAC common stock was exchanged for 1.4629 shares of SBC common stock
(equivalent to approximately 626 million shares). With the merger, PAC
became a wholly-owned subsidiary of SBC. The transaction has been accounted
for as a pooling of interests and a tax-free reorganization. Additional
information on this matter is contained in Note 2 of the 1998 SBC Annual
Report to Shareowners, and is incorporated herein by reference pursuant to
General Instruction G(2).
Southern New England Telecommunications Corporation
On October 26, 1998, SBC and Southern New England Telecommunications
Corporation (SNET) completed the merger of an SBC subsidiary with SNET, in a
transaction in which each share of SNET common stock was exchanged for 1.7568
shares of SBC common stock (equivalent to approximately 120 million shares).
SNET became a wholly-owned subsidiary of SBC effective with the merger and
the transaction has been accounted for as a pooling of interests and a
tax-free reorganization. Additional information on this matter is contained
in Note 2 of the 1998 SBC Annual Report to Shareowners, and is incorporated
herein by reference pursuant to General Instruction G(2).
Post-merger initiatives
Several strategic decisions resulted from the PAC and SNET merger integration
processes. The decisions resulted from an extensive review of operations
throughout the merged company and include significant integration of
operations and consolidation of some administrative and support functions.
Additional information on this matter is contained in Note 2 of the 1998 SBC
Annual Report to Shareowners, and is incorporated herein by reference
pursuant to General Instruction G(2).
Reorganization
SBC is centralizing several key functions that will support the operations of
the Telephone Companies, including network planning, strategic marketing and
procurement. It is also consolidating a number of corporate-wide support
activities, including research and development, information technology,
financial transaction processing and real estate management. The Telephone
Companies will continue as separate legal entities. These initiatives
continue to result in the creation of some jobs and the elimination and
realignment of others, with many of the affected employees changing job
responsibilities and in some cases assuming positions in other locations.
SBC recognized charges during 1998 and 1997 in connection with the SNET and
PAC merger initiatives. Charges arising out of the merger relating to
relocation, retraining and other effects of consolidating certain operations
are being recognized in the periods those charges are incurred. Additional
information on these matters is contained in Note 2 of the 1998 SBC Annual
Report to Shareowners, and is incorporated herein by reference pursuant to
General Instruction G(2).
BUSINESS OPERATIONS
SBC is among the largest telecommunications companies in the United States,
with approximately 37 million access lines and approximately 6.9 million
wireless customers in the United States. SBC serves the nation's two most
populous states, California and Texas. SBC service areas includes 8 of the
nation's 10 largest metropolitan areas, 19 of the nation's 50 largest
metropolitan areas. SBC has investments in telecommunications businesses in
selected international markets, including Mexico, France, South Africa, Chile,
South Korea, Switzerland, Israel and Taiwan. SBC's broad operations offer
customers an expansive range of services and products, varying by market,
including: local exchange services, wireless communications, long distance
services, Internet services, telecommunications equipment, messaging, paging,
and directory advertising. Services and products are provided through several
subsidiaries. These services and products (which are described more fully
below) include wireline and wireless telecommunications services, sales of
advertising for and publication of yellow pages and white pages directories,
sales of customer premises, private business exchange (PBX) and wireless
equipment, enhanced services, Internet services, and cable television
services.
SBC's revenues are categorized for financial reporting purposes as landline
local service (substantially all of which was provided by the Telephone
Companies), wireless subscriber (provided by Southwestern Bell Mobile Systems,
Inc. (Mobile Systems), Pacific Bell Mobile Services (PBMS), SNET Cellular,
Inc. and SNET Mobility, Inc., collectively referred to as SBC Wireless),
network access (provided by the Telephone Companies), long distance service
(substantially all of which was provided by the Telephone Companies and SNET
America, Inc. (SAI)), directory advertising (principally provided by
Southwestern Bell Yellow Pages, Inc. (SWBYP), Pacific Bell Directory (PB
Directory), and SNET Information Services, Inc. (SNETIS) and other (including
equipment sales at SBC Wireless, the Telephone Companies, and SNET Diversified
Group, Inc. nonregulated products and services and billing and collection
services for interexchange carriers provided by the Telephone Companies,
Internet services provided by Pacific Bell Internet (PBI), Southwestern Bell
Internet Services (SBIS), and SNETIS, and cable television services provided
by SNET Personal Vision, Inc. (SNET Personal Vision)).
With the passage of the Telecom Act, SBC Wireless offers interLATA and
intraLATA wireless long distance services. In 1996, two SBC subsidiaries,
Southwestern Bell Communications Services, Inc. and Pacific Bell
Communications, began offering wireline interLATA long distance services to
customers in selected areas outside the Telephone Companies' authorized
regions (out-region). The Telephone Companies provide intraLATA long distance
services in-region. SAI provides interLATA long distance services primarily
to customers in Connecticut, and is prohibited from completing calls to SBC's
other in-region states.
The following table sets forth for SBC the percentage of total operating
revenues by any class of service which accounted for 10% or more of total
operating revenues in any of the last three fiscal years.
- ------------------------------------------------ -------------------------------
Percentage of Total
Operating Revenues
- ------------------------------------------------ -------------------------------
1998 1997 1996
- ------------------------------------------------ ---------- --------- ----------
Landline local service 39% 39% 38%
Wireless subscriber 13% 13% 12%
Network access 23% 23% 25%
Long distance 8% 9% 10%
- ------------------------------------------------ ---------- --------- ----------
Landline local services involve the transport of wireline telecommunications
traffic between telephones and other customer premises equipment (CPE)
located within the same local service calling area. Landline local services
include: basic local exchange service, certain extended area service,
dedicated private line services for voice and special services, directory
assistance and various vertical services, including custom calling services,
call control options, messaging and Caller ID services.
Wireless subscriber services involve the transport of wireless local area
traffic between wireless telephones and other CPE, wireless long distance,
and roaming services.
Until the passage of the Telecom Act, SBC's long distance services involved
the transport of intraLATA telecommunications traffic, except for certain
wireless service areas that cover more than one LATA, for which SBC had
obtained MFJ waivers. Beginning in 1996, SBC began providing both interLATA
and intraLATA long distance services to its wireless customers, as well as
wireline interLATA long distance services in selected out-region areas
according to the rules of the Telecom Act. With completion of the SNET merger
in 1998, SBC now also provides wireline interLATA long distance to its
in-region customers in Connecticut. Long distance services also include
other services such as Wide Area Telecommunications Service (WATS or 800
services) and other special services.
Network access services connect a subscriber's telephone or other equipment
to the transmission facilities of other carriers that provide long distance
(principally interLATA) and other communications services. Network access
services are either switched, which use a switched communications path
between the carrier and the customer, or special, which use a direct
nonswitched path.
Operating Segments
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
(FAS 131), which establishes standards for the way that public business
enterprises report information about operating segments in quarterly and
annual financial statements. FAS 131 changes segment reporting from an
industry segment basis to an operating segment basis defined based on how the
business is managed. SBC adopted FAS 131 in the fourth quarter of 1998.
Under the predecessor accounting standard, SBC operated in a single industry
segment. Under FAS 131, SBC has four reportable segments: Wireline,
Wireless, Directory and Other. The Wireline segment provides landline
telecommunications services, including local, network access and long
distance services, messaging and Internet services and sells customer premise
and private business exchange equipment. The Wireless segment provides
wireless telecommunications services, including local and long distance
services, and sells wireless equipment. The Directory segment sells
advertising for and publication of yellow pages and white pages directories
and electronic publishing. The Other segment includes SBC's international
investments and other domestic operating subsidiaries. Disclosures required
by FAS 131 are included in Note 9 of the 1998 SBC Annual Report to
Shareowners, and are incorporated herein by reference pursuant to General
Instruction G(2).
Wireline
Wireline is SBC's largest operating segment, providing approximately 77% of
SBC's operating revenues in 1998. The Telephone Companies provide landline
telecommunications services to approximately 23.3 million residential and
13.4 million business access lines in the eight states in which they
operate. During 1998 total access lines grew by 4%, of which 46% of the
increase was due to growth in California and over 32% of the increase was due
to growth in Texas.
During 1998, the Telephone Companies continued to expand their offering of
vertical services throughout their operating areas. These services include,
among other things, Caller ID, a feature which displays the telephone number
of the person calling and the caller's name in certain markets; Caller ID
Call Waiting, a feature which displays the telephone number and caller's
name in certain markets when the customer is on a call; Call Return, a
feature that redials the number of the last incoming call; Call Blocker, a
feature which allows customers to automatically reject calls from a
designated list of telephone numbers; and voice messaging.
Southwestern Bell Messaging Services, Inc. provides voice messaging services
under the registered trademark CallNotes to residential and business
customers. Pacific Bell Information Services, a subsidiary of PacBell, has
several registered trademark products, which include residential voice
messaging services (The Message Center), business messaging services (Pacific
Bell Voice Mail), and business call management services (Pacific Bell Call
Management). PBI, SBIS, and SNETIS provide Internet services in selected
in-region metropolitan areas.
Since 1996, the Telephone Companies have been offering certain local services
on a "wholesale" basis to competitors, as well as providing elements of the
Telephone Companies' networks on an "unbundled" basis for local competition.
These services are being offered as specified by the Telecom Act and state
actions and interconnection agreements. The Telecom Act and the regulations
promulgated by federal and state agencies to implement it have resulted in
SBC facing increased competition in significant portions of its business. At
December 31, 1998, SBC provided wholesale services to approximately 800,000
access lines. Management cannot quantify the impact to SBC's business in
1999 from local exchange competition, as uncertainty exists as to the breadth
and scope of competitors' offering of local exchange services to all portions
of the market in-region, and as certain regulations, tariffs and negotiations
governing such competition are not yet finalized.
Customer Premises Equipment and Other Equipment Sales
Equipment offerings at SWBell, PacBell, and SNET Diversified Group, Inc. range
from single-line and cordless telephones to sophisticated digital PBX systems,
all of which can be offered with the Telephone Companies' central office based
solutions. PBX is a private telephone switching system, usually located on a
customer's premises, which provides intra-premise telephone services as well
as access to the public switched network.
New Products
As part of its continuing strategy to be among the leaders in the
communications services industry, SBC is constantly developing new services
and products. It currently is introducing four new data products. These data
products include Asymmetrical Digital Subscriber Line (ADSL), Integrated
Pathway, Managed Frame Relay and Dedicated Business Internet. All four of
these new products are targeted primarily to meet the growing demand for data
communications products resulting from the increased use of advanced
information technology in the marketplace. ADSL enables customers to transfer
over existing telephone lines, data, graphics, audio and video files at
speeds up to 1.5 megabits per second. ADSL allows customers to
simultaneously make a phone call and access information via the Internet or
an office local area network. ADSL is the subject of a pending FCC review.
Additional information on the pending FCC review of ADSL is contained in the
1998 SBC Annual Report to Shareowners on page 12, and is incorporated herein
by reference pursuant to General Instruction G(2).
National-Local Strategy
Contingent upon completion of the Ameritech transaction, SBC plans to
implement a "national-local" strategy, in which it will offer local services
across the country in combination with major national and international
operations. The strategy allows SBC to expand from a regional company to a
company that provides services in "national-local" and global markets. SBC
believes this expansion will better position it to compete head-to-head with
incumbent local telephone companies, competitive local exchange carriers,
data networks, long distance carriers and global competitors. In February
1999, SBC announced that Boston, Massachusetts; Miami, Florida; and Seattle,
Washington will be the first markets in which SBC will compete under the
"national-local" strategy.
Wireless
SBC Wireless offers a wide variety of wireless services in 19 of the top 50
metropolitan markets across the United States using both traditional cellular
and new personal communication services (PCS) networks. Including both
networks, at the end of 1998, SBC Wireless operations provided local wireless
services to 6,851,000 customers throughout its wireless markets. In addition,
since the enactment of the Telecom Act, SBC began offering wireless long
distance services to its traditional cellular customers, and at year-end 1998
had been selected as the long distance carrier by approximately 4,601,000, or
78%, of its customers. SBC provides long distance services to all of its
PCS wireless customers.
SBC Wireless also has numerous "roaming agreements" with other wireless
carriers which allows its subscribers to use their wireless service
throughout the United States and Canada by accessing other carrier's networks
where SBC Wireless does not operate networks or hold wireless licenses.
SBC Wireless offers digital service, including advanced features in most of
the metropolitan areas where it is licensed to provide wireless service.
Mobile Systems first began providing commercial digital service in Chicago in
July 1993. Digital service improves sound quality, provides a greater degree
of privacy on individual calls, increases call-handling capacity of the
networks, allows additional service offerings, and reduces exposure to
billing fraud.
Cellular
At the end of 1998, wireless services were provided to 5,924,000 traditional
cellular customers. SBC provides traditional cellular services in 5 of the
nation's top 10 metropolitan areas, as follows: Washington, D.C.; Chicago,
Illinois; Boston, Massachusetts; Dallas-Fort Worth, Texas; and Houston, Texas.
Additionally, portions of the Connecticut wireless market fall within the New
York consolidated metropolitan service area (MSA). SBC is licensed to provide
service in 45 rural service areas (RSAs) and is currently providing service in
all of these markets. Each RSA is contiguous to an existing metropolitan
service area or another RSA operated by SBC, which allows for the expansion of
service in a way that may add value to customers' service. SBC also operates
one RSA in Arkansas under an interim operating authority granted by the FCC,
and operates several MSAs and RSAs in Arkansas related to cellular networks and
licenses received in exchange for certain SBC PCS licenses, discussed below.
In January 1997, Mobile Systems began doing business within the five-state area
as Southwestern Bell Wireless, Inc. Mobile Systems operates in out-region
areas under the name of Cellular One by means of licenses from Cellular One
Group, a partnership among affiliates of Mobile Systems, AT&T Wireless Services
and Vanguard Cellular Systems, Inc. These areas include MSAs, such as
Washington, D.C.; Chicago, Illinois; Albany, Buffalo, and Rochester, New York
and Boston, Massachusetts; and RSAs in Illinois, Massachusetts, New York,
Virginia and West Virginia. Cellular One offers, on a resale basis, wireline
interLATA long distance service in all out-region markets where it provides
local wireless service. In January 1997, Cellular One also began a trial
offering wireline local service, on a resale basis, in Rochester, New York.
SBC subsequently ended the Rochester trial and will no longer offer wireline
local service there.
SNET Cellular and its affiliates provide directly or indirectly retail and
wholesale wireless services and telecommunications equipment in the states of
Connecticut and Rhode Island, and portions of Massachusetts.
Mobile Systems also markets wireless communications equipment in each of its
service areas.
On January 20, 1999, SBC announced it has agreed to acquire Comcast Cellular
Corporation (Comcast Cellular), the wireless subsidiary of Comcast
Corporation, in a transaction valued at $1.674 billion. Under the terms of
the agreement, SBC will pay $400 million in cash and assume Comcast
Cellular's current debt of $1.274 billion. The transaction will be accounted
for through the purchase accounting method. Comcast Cellular offers analog
and digital wireless services to more than 800,000 subscribers in
Pennsylvania, Delaware, New Jersey and Illinois. The largest market in which
Comcast Cellular operates is Philadelphia, Pennsylvania. SBC for several
years has been operating the Illinois properties it is purchasing under a
previous agreement between the two companies. The transaction, which is
subject to regulatory approvals, is expected to be completed by the third
quarter of 1999.
PCS
In 1993, the FCC adopted an order allocating radio spectrum and outlining the
development of licenses for new PCS. PCS utilizes wireless
telecommunications digital technology at a higher frequency radio spectrum
than cellular, but using lower powered transmission equipment. Like
cellular, it is designed to permit access to a variety of communications
services regardless of subscriber location. SBC or affiliates hold PCS
licenses in the Major Trading Areas of Los Angeles-San Diego, California; San
Francisco-San Jose, California; and Tulsa, Oklahoma. The California licenses
cover substantially all of California and Nevada. SBC is currently operating
in all its major California-Nevada markets and Tulsa, Oklahoma. During 1996,
SBC received several AT&T cellular networks in Arkansas, in exchange for PCS
licenses previously held by SBC for Memphis, Tennessee and Little Rock,
Arkansas and other considerations.
PBMS was formed to offer PCS services across California and Nevada. The
network incorporates the Global System for Mobile Communications standard,
which is widely used internationally, and phones that it markets feature a
built-in pager and answering machine. PBMS began trials in August 1996,
began offering services in January 1997, and by mid-1997 provided widespread
offerings of PCS services to all of California and Nevada. At the end of
1998, PBMS provided wireless services to 809,000 customers over its PCS
networks. Mobile Systems also provided wireless services to 37,000 customers
over its PCS networks in Tulsa, Oklahoma.
In an FCC auction concluded in January 1997, SBC acquired the following
additional PCS licenses for Basic Trading Areas that are within the
five-state area: Springfield, Missouri; McAlester, Oklahoma; Joplin,
Missouri; Pittsburgh, Kansas; Temple-Killeen, Texas; Waco, Texas; Tyler,
Texas and Longview-Marshall, Texas.
Directory
SWBYP publishes more than 45 million books of white and yellow pages
directories, representing approximately 342 directories, principally within
the five-state area. PB Directory, the publisher of Pacific Bell SMART
Yellow Pages, publishes 35 million books, representing approximately 114
directories in California and Nevada. SNETIS publishes over 4 million books
of white and yellow pages directories, representing approximately 48
directories, principally throughout Connecticut and adjacent communities.
SBC recognizes all directory advertising revenues and expenses in the month
the related directory is published. SWBYP nine largest revenue-producing
yellow pages directories are currently published in the second half of SBC's
fiscal year, while PB Directory's publishing schedule is spread throughout
the year for its directories. SWBYP directories are printed by
R.R. Donnelley & Sons, PB Directory's directories are printed by World Color
Press, and SNETIS directories are printed by Quebecor Printing.
International
International operations are included in the Other segment.
Mexico
A consortium consisting of SBC International, Inc.; a subsidiary of France
Telecom; and Carso Global Telecom, S.A. de C.V. (Carso Global); and certain
Mexican investors hold through a trust all of the outstanding AA Shares of
Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's largest national
telecommunications company. The AA shares held by the consortium represent
approximately 90% of the full voting shares and 28% of the equity of Telmex.
Carso Global holds a 44.9% interest in the consortium and the right to direct
the trustee with respect to the election of a majority of the directors of
Telmex, while SBC International and the France Telecom subsidiary each holds
a 24.5% interest and the right to direct the trustee with respect to a
minority of the directors. SBC International also owns approximately 4.3% of
the L Shares, which have limited voting rights. As a result of repurchases of
L Shares by Telmex since 1994, SBC International has sold portions of its
Class L shares to Telmex in order to maintain its investment at below 10% of
Telmex' total equity capitalization. As of February 1, 1999, SBC
International's total interest in Telmex represents approximately 9.8% of the
outstanding equity. In 1997, SBC issued approximately $396 million in 7 3/4%
Exchangeable Notes, due March 2001, which may be redeemed upon maturity in
either cash or Telmex L Shares, at SBC's option. At December 31, 1998, the
outstanding notes represented 3.2% of Telmex' L Shares.
Telmex provides wireline and wireless telecommunications services throughout
Mexico. At the end of 1998, Telmex had 9.9 million access lines in service
and provided cellular service to approximately 2.1 million subscribers.
Telmex also provides interLATA telecommunications services in the United
States jointly with Sprint Communications, LLC, and holds 49% of Grupo
Televisa's cable television subsidiary, Cablevision.
France
In October 1994, SBC International formed a strategic alliance with Compagnie
Generale des Eaux (CGE), a French diversified public company which in 1998
changed its name to Vivendi. Through this alliance, SBC International
acquired an indirect 10% ownership of Societe Francaise du Radiotelephone
S.A. (SFR), a nationwide cellular company in France, and minority ownership
interests in other communications businesses controlled by CGE, and CGE
obtained an effective 10% interest in SBC's wireless operations in
Washington, D.C.-Baltimore, and surrounding rural markets. SBC and CGE both
made contributions to the alliance. In 1997, SBC International contributed
its indirect 10% ownership of SFR shares and an additional $240 million to
acquire a 15% interest in Cegetel, S.A., a new French company formed by CGE
to provide a broad base of telecommunications services throughout France.
Operations on a limited scale, began in 1998. At the end of 1998, SFR had
4.2 million wireless subscribers and 602,000 long distance subscribers.
Chile
In February 1995, SBC International purchased 40% of VTR S.A. (VTR), a
privately owned telecommunications holding company in Chile. Through the
purchase of shares from a minority investor, offset by the subsequent sale in
1997 of a portion of those shares, SBC International's ownership has increased
to 44%. VTR is 56% indirectly owned by Grupo Luksic, a large Chilean
conglomerate. Through its subsidiaries, VTR provides local and cable
television services in Chile. In December 1997, VTR sold its wireless service
operations. At the end of 1998, local services were provided to approximately
141,000 access lines and cable television services were provided to
approximately 384,000 subscribers. Agreements were reached in 1998 for the
disposition of SBC International's remaining interest in VTR, subject to
certain conditions. The transaction is expected to close in 1999.
United Kingdom
In October 1995, SBC International combined its United Kingdom cable
television operations, which included Midlands Cable Communications and
Northwest Cable Communications, with those of Telewest Communications, plc, a
publicly held joint venture between Tele-Communications International, Inc.
and MediaOne Group, Inc. (formerly U S WEST, Inc.) The resulting entity,
Telewest Communications plc, merged with General Cable in 1998 to form the
largest cable television operator in the United Kingdom and also provides
local exchange services. Prior to the disposition in 1998 of its entire
holdings in Telewest, SBC owned approximately 10% of the company. Additional
information on this matter is contained in Note 7 of the 1998 SBC Annual
Report to Shareowners, and is incorporated herein by reference pursuant to
General Instruction G(2).
Israel
SBC International has investments in Israel through a 50% interest in Aurec
Limited and a 22.7% interest in Amdocs Limited (Amdocs). Aurec has interests
in companies involved in the publication of yellow page directories, outdoor
advertising, insurance underwriting, long distance, network data solutions,
and cable television. At the end of 1998, Golden Channels, an Aurec
affiliate providing cable television in Israel, had passed 640,000 households
and provided service to approximately 437,000 households, a penetration rate
of approximately 68%.
In 1996, a consortium in which SBC International participated received one of
two licenses for international telecommunications service in Israel. Other
consortium members are STET (Italy's national telephone company), the
US/Israeli Aurec Group, and the Israeli Globescom and Kahn groups. Aurec
holds an 8.25% interest in the Med-1 undersea cable linking Israel, Cypress
and Italy.
Amdocs is a leading provider of product-driven information systems solutions
to major telecommunications companies in the United States and around the
world. In June of 1998, Amdocs issued 18 million shares in an international
initial public offering. The company began in 1982 as a joint venture
between a subsidiary of SBC and an Israeli partner. SBC International owned
25.8% of the shares before the offering and 22.7% thereafter. This reduction
in ownership reflects both dilution from the Initial Public Offering (IPO)
and the sale of shares pursuant to an option granted by SBC International to
the IPO underwriters.
Australia
In 1997, SBC International sold its directory interests in Australia to
Telstra Corporation Limited, the principal provider of telecommunications
services in Australia.
South Africa
In 1997, SBC International acquired an effective 18% stake in Telkom, S.A.
Limited (Telkom), South Africa's state-owned local exchange, long distance,
and cellular company. SBC International's partner in the acquisition is
Telekom Malaysia, which acquired a 12% stake in Telkom. Telkom provides
complete wireline and wireless telecommunications services within South
Africa. At the end of 1998, Telkom had more than 4.9 million access lines in
service. In addition, at the end of 1998, Vodacom Group (Pty) Ltd, in which
Telkom has a 50% interest, provided cellular services to 1.5 million
subscribers.
In the third quarter 1998, SBC International sold its 15.5% interest in
Mobile Telephone Networks (MTN), one of two South African national cellular
companies, to the remaining shareholders of MTN. SBC International was
required to divest its interest in MTN as part of its acquisition of Telkom.
Switzerland
In June 1997, SBC International purchased a 40% interest in diAx, a joint
venture formed to provide long distance telephone service in Switzerland.
SBC's partner in the joint venture is diAx Holdings, a consortium of Swiss
utility and insurance companies. Service was launched in May 1998, and at
the end of 1998, diAx provided services to 233,000 access lines (via equal
access).
In December 1997, SBC International formed a joint venture with diAx Holdings
for the purpose of submitting a bid for a wireless license. SBC
International's ownership interest in this joint venture, diAx Mobile, is
40%, with the remaining ownership interest being held by diAx Holdings. In
April 1998, diAx Mobile was also awarded a wireless license by the Swiss
government. Wireless service offerings began in late December 1998. The
award of the license is currently in litigation, as an unsuccessful bidder
for the license has challenged the award to diAx Mobile.
China
In December 1997, SBC International signed a Construction and Maintenance
Agreement with China Telecom and twelve other telecommunications companies to
construct a direct undersea cable link between the United States and China.
The cable is expected to be completed by the year 2000.
Japan
In the third quarter of 1998, SBC signed an agreement to participate in
building a state-of-the-art undersea communications pipeline directly linking
Japan and the United States. SBC will be one of 12 initial parties with an
ownership stake in the Japan-U.S. Cable Network and responsibility for
oversight, maintenance and administration. The consortium has agreed to
invest more than $1 billion in the network for the first phase of
construction. The network should be up and running in mid-year 2000.
South Korea
SBC has wireless interests in South Korea where its affiliate provided
wireless service to approximately 2.1 million subscribers at the end of 1998.
Taiwan
SBC International owns a 19.4% interest in a consortium that formed TransAsia
Telecommunications, Inc., a new cellular service provider in the southern
region of Taiwan. Service offerings commenced in January 1998, and at the
end of 1998, TransAsia Telecommunications, Inc. provided cellular service to
approximately 186,000 subscribers.
East Asia Financial Risks
Presently, SBC has limited investments in Eastern Asia and the Pacific Rim
and therefore does not anticipate a significant financial impact from recent
financial economic turmoil.
DOMESTIC VIDEO SERVICES
SBC also announced during 1997 that it is scaling back its limited direct
investment in certain video services in the areas also served by PacBell and
SWBell. As part of this curtailment, SBC halted construction on the Advanced
Communications Network (ACN) in California. As part of an agreement with the
ACN vendor, SBC paid the liabilities of the ACN trust that owns and finances
ACN construction and incurred costs to shut down all construction previously
conducted under the trust and received certain consideration from the
vendor. SBC also curtailed several other video-related activities, including
its broadband network video trials in Richardson, Texas and San Jose,
California. SBC and its joint venture partners are winding up the Tele-TV
joint venture in southern California.
Media Ventures, Inc. (Media Ventures), another SBC subsidiary, owned two
cable television systems serving the suburban Washington, D.C. area along
with a partner, Prime Cable (Prime). Media Ventures became the general
partner and retained an approximate 95% ownership interest in the Partnership
until 1998. Prime contributed $20 million to the Partnership and managed the
cable systems on behalf of the Partnership. SBC sold its Media Ventures'
interest in the Partnership to Prime and other investors in the third quarter
of 1998. In October 1998, SBC completed the sale of its interests in Prime
Cable of Chicago, Inc. to Prime and other investors. A PAC subsidiary had
acquired these interests prior to the merger with SBC.
In the fourth quarter of 1998, SBC sold 90% of the stock of subsidiaries that
operate a wireless video business in southern California to E.L. Acquisition,
Inc., a subsidiary of Prime.
During 1995, SBC, through SBC Interactive Media, Inc. (SBC Interactive), a
wholly-owned subsidiary of SBC, became an equal partner in Americast, a
venture with Ameritech Corporation, BellSouth Corporation, GTE, and The Walt
Disney Company, to design, market and deliver video programming and
interactive services. In 1996, SNET became a minority partner in this
venture. In mid-1997, SBC Interactive notified the venture of its withdrawal
of operations in territories served by SWBell. On October 7, 1997 the
remaining partners in the venture attempted to initiate arbitration against
SBC Interactive regarding the validity of its withdrawal. On October 15,
1997, SBC Interactive filed a declaratory judgement action in and sought a
preliminary injunction from Delaware Chancery Court to halt the arbitration
attempt. On December 24, 1997, the Chancery Court directed that the
arbitration proceed, and on January 22, 1998, SBC appealed that ruling. This
matter is still being litigated and is not material to the financial
statements.
SNET Personal Vision operates a cable television system in Connecticut, which
began deploying cable service in the first quarter of 1997. At the end of
1998, SNET Personal Vision provided service to approximately 24,000
households.
Additional information related to SBC's video operations is contained in Note
2 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by
reference pursuant to General Instruction G(2).
GOVERNMENT REGULATION
In the in-region states, the Telephone Companies are subject to regulation by
state commissions which have the power to regulate, in varying degrees,
intrastate rates and services, including local, long distance and network
access services. The Telephone Companies are also subject to the jurisdiction
of the FCC with respect to interstate and international rates and services,
including interstate access charges. Access charges are designed to compensate
the Telephone Companies for the use of their facilities for the origination or
termination of long distance and other communications by other carriers.
Additional information relating to federal and state regulation of the
Telephone Companies is contained in the 1998 SBC Annual Report to Shareowners
under the heading "Regulatory Environment" on page 11, and is incorporated
herein by reference pursuant to General Instruction G(2).
SBC's cable systems are subject to federal and local regulation, including
regulation by the FCC and local franchising authorities, concerning rates,
service and programming access.
IMPORTANCE, DURATION AND EFFECT OF LICENSES
The FCC authorizes the licenses for multiple wireless carriers in each
geographic market. The cellular licenses, of which there are only two in
each geographic region have a standard duration of ten years. Upon
application and a showing of compliance with FCC use and conduct standards,
licenses may be renewed. Renewal applications were filed and granted for the
following MSA markets during 1998: Bloomington-Normal, Illinois; Glen Falls,
New York; Laredo, Texas; Little Rock-North Little Rock, Arkansas; Pittsfield,
Massachusetts; and Pine Bluff, Arkansas. Renewal applications for eight RSA
markets will be filed in the following states during 1999: Illinois;
Missouri; New York; Oklahoma and Texas. Renewals of these licenses are
anticipated to be granted in late 1999 or early 2000.
Under the auction process of an FCC order outlining the development of PCS,
licenses with durations of ten years were awarded in 51 major markets. SBC's
licenses for Los Angeles-San Diego, California, San Francisco-San Jose,
California and Tulsa, Oklahoma expire in 2005. These licenses, upon
application and a showing of compliance with FCC use and conduct standards,
may be renewed.
Cable television systems generally are operated under nonexclusive permits or
"franchises" granted by local governmental authorities. Each franchise is
renewable upon a showing of compliance with established local and federal
standards. SBC sold its suburban Washington, D.C. cable systems and all
related franchises were transferred as part of the sale of the properties in
Montgomery County, Maryland; Arlington County, Virginia; and the City of
Gaithersburg, Maryland. During 1995, SBC received a franchise to operate a
cable system in Richardson, Texas, which expires in September 2013 and had
acquired a franchise agreement in the PAC merger with the city of San Jose,
California. In 1998, SBC reached agreement with the cities of San Jose,
California and Richardson, Texas to terminate the franchises that they had
granted SBC and its affiliates for video trials. On September 6, 1996, SNET
Personal Vision received an 11-year license that covers the state of
Connecticut. A number of SBC subsidiaries hold FCC channel licenses for
wireless video services. These subsidiaries also have numerous leases with
Instructional Television Fixed Service channel licensees to use their excess
channel capacity. The channels under these licenses and leases are primarily
in southern California.
MAJOR CUSTOMER
No customer accounted for more than 10% of SBC's consolidated revenues in
1998, 1997 or 1996.
COMPETITION
Wireline and Wireless
Information relating to wireline and wireless competition is contained in the
1998 SBC Annual Report to Shareowners under the heading "Competition"
beginning on page 15, and is incorporated herein by reference pursuant to
General Instruction G(2).
International
Information relating to international competition is contained in the 1998
SBC Annual Report to Shareowners under the heading "Competition" on page 15,
and is incorporated herein by reference pursuant to General Instruction G(2).
Directory
Information relating to directory advertising and publishing competition is
contained in the 1998 SBC Annual Report to Shareowners under the heading
"Competition" on page 15, and is incorporated herein by reference pursuant to
General Instruction G(2).
Customer Premises Equipment, Wireless Equipment and Other Equipment Sales
SBC faces significant competition from numerous companies in marketing its
telecommunications equipment.
RESEARCH AND DEVELOPMENT
Certain company-sponsored basic and applied research was conducted at Bell
Communications Research, Inc. (Bellcore). The Telephone Companies owned a
two-seventh interest in Bellcore, with the remainder owned by the other four
remaining RHCs. In November 1997, the RHCs sold Bellcore to a third party but
continue to have a research agreement with Bellcore. The RHCs have retained
the activities of Bellcore that coordinate the Federal Government's
telecommunications requirements for national security and emergency
preparedness.
Applied research is also conducted at SBC Technology Resources, Inc. (TRI), a
subsidiary of SBC. TRI provides research, technology planning and evaluation
services to SBC and its subsidiaries.
EMPLOYEES
As of December 31, 1998, SBC and its subsidiaries employed 129,850 persons.
Approximately two-thirds of the employees are represented by the
Communications Workers of America (CWA). New agreements between the CWA and
the Telephone Companies were reached in April 1998, and September 1998
for SNET, covering an estimated 80,000 employees through April 1,
2001. Among other items, the agreements specify an 11% increase in wages
over the life of the contracts. A new three-year agreement (which covers an
estimated 2,000 employees) was reached in 1998 between the CWA and SWBYPS,
that is effective December 5, 1998 through December 7, 2001. In August
1998, PB Directory reached a new four-year agreement with the International
Brotherhood of Electrical Workers, covering approximately 1,000 employees in
northern and southern California. Among other items, both the SWBYPS and PB
Directory agreements include an approximate 11% increase in compensation
over the life of the contracts. The CWA also represents an estimated 3,000
employees in other subsidiaries of SBC.
RECENT DEVELOPMENTS
Reciprocal Compensation Ruling
In February 1999, the FCC ruled that a substantial portion of Internet
communications is interstate traffic and therefore subject to federal
jurisdiction. The FCC noted that carriers were bound by existing
interconnection contracts as interpreted by state commissions. The FCC will
issue rules determining the extent, if any, such communications are subject
to reciprocal compensation. The FCC also ruled that, in the context of
interpreting particular interconnection agreements, the state commissions
might determine that reciprocal compensation was appropriately based on the
agreement of the parties or other factors. SBC believes that the FCC ruling
should prevent state commissions from imposing reciprocal compensation on
this traffic.
Ameritech Ohio Agreement
On February 23, 1999, SBC and Ameritech signed an agreement with the staff of
the Public Utilities Commission of Ohio (PUCO), the Ohio Consumers' Counsel,
the Edgemont Neighborhood Coalition and Parkview Areawide Seniors (a consumer
group representing senior citizens in Northern Ohio) to recommend approval of
the merger between SBC and Ameritech. Time Warner Telecom and CoreComm,
competitive providers of local service in Ohio, have also signed the
agreement as non-opposing stipulating parties. The agreement provides for
certain commitments from SBC and Ameritech, including capping rates for basic
local service until January 2002; maintaining a specified level of full-time
equivalent employees in Ohio for two years; establishing and maintaining
minimum customer service standards for two years subsequent to the merger
close, including potential penalties for non-compliance with the minimum
standards; providing residential unbundled loop discounts and making various
charitable contributions within three years of the merger. The agreement
requires approval by the PUCO before implementation.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this form contains forward-looking statements that
are subject to risks and uncertainties. SBC claims the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
The following factors could cause SBC's future results to differ materially
from those expressed in the forward-looking statements: (1) adverse
economic changes in the markets served by SBC or changes in available
technology; (2) the final outcome of various FCC rulemakings and judicial
review, if any, of such rulemakings; (3) the final outcome of various state
regulatory proceedings in SBC's eight-state area, and judicial review, if
any, of such proceedings; and (4) the timing of entry and the extent of
competition in the local and intraLATA toll markets in SBC's eight-state
area. Readers are cautioned that other factors discussed in this form,
although not enumerated here, also could materially impact SBC's future
earnings.
ITEM 2. PROPERTIES
The properties of SBC do not lend themselves to description by character and
location of principal units. At December 31, 1998, 93% of the property,
plant and equipment of SBC was owned by the Wireline subsidiaries. Network
access lines represented 42% of the Wireline subsidiaries' investment in
telephone plant; central office equipment represented 40%; land and
buildings represented 10%; other miscellaneous property, comprised
principally of furniture and office equipment and vehicles and other work
equipment, represented 5%; and information origination/termination equipment
represented 3%.
ITEM 3. LEGAL PROCEEDINGS
Six putative class actions in Texas, Missouri, Oklahoma, and Kansas that
involved the provision by SWBell of maintenance and trouble diagnosis services
relating to telephone inside wire located on customer premises have been
settled during 1998. These actions alleged that SWBell's sales practices in
connection with these services violated antitrust, fraud and/or deceptive
trade practices statutes. The trial court has approved the settlement, which
is not expected to materially affect the financial results of SBC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareowners of SBC was held on December 10, 1998, in
San Antonio, Texas. Shareowners representing 1,535,760,506 shares of common
stock were present in person or were represented at the meeting by proxy
where two items were submitted for vote.
Shareowners approved at the meeting the issuance of shares of common stock of
SBC pursuant to the Agreement and Plan of Merger among Ameritech, SBC and an
SBC subsidiary, dated as of May 10, 1998, pursuant to which Ameritech would
become a wholly-owned subsidiary of SBC. The vote was 1,321,416,117 FOR and
21,533,264 AGAINST, with 12,326,431 ABSTAINING.
Shareowners approved and adopted a proposal to amend the Bylaws of SBC to
provide the maximum number of persons that may serve as directors on the Board
of Directors of SBC be increased to 25 from 21. The vote was 1,465,067,133
FOR and 54,245,254 AGAINST, with 16,448,119 ABSTAINING.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position Held
Since
Edward E. Whitacre Jr. 57 Chairman and Chief Executive Officer 1/1990
J. Cliff Eason 51 President - SBC International 6/1997
Royce S. Caldwell 60 President - SBC Operations 7/1995
Cassandra C. Carr 54 Senior Executive Vice President - 10/1998
External Affairs
James D. Ellis 55 Senior Executive Vice President and 3/1989
General Counsel
Charles E. Foster 62 Group President - SBC 7/1995
Karen E. Jennings 48 Senior Vice President - Human Resources 10/1998
James S. Kahan 51 Senior Vice President - Corporate 7/1993
Development
Donald E. Kiernan 58 Senior Vice President, Treasurer and 7/1993
Chief Financial Officer
Stanley T. Sigman 51 President and Chief Executive Officer 4/1997
SBC Wireless Inc.
All of the above executive officers have held high-level managerial positions
with SBC or its subsidiaries for more than the past five years, except for
Ms. Jennings, who has held high-level managerial positions since 1995. Prior
to that, Ms. Jennings held responsible managerial positions with SBC.
Executive officers are not appointed to a fixed term of office.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The number of shareowners of record as of December 31, 1998 and 1997 were
1,005,621 and 1,059,158. Other information required by this Item is included
in the 1998 SBC Annual Report to Shareowners under the headings "Quarterly
Financial Information" on page 37, "Selected Financial and Operating Data" on
page 5, and "Stock Trading Information" on page 41, which are incorporated
herein by reference pursuant to General Instruction G(2).
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Information required by this Item is included in the 1998 SBC Annual Report
to Shareowners under the heading "Selected Financial and Operating Data" on
page 5 which is incorporated herein by reference pursuant to General
Instruction G(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Information required by this Item is included in the 1998 SBC Annual Report
to Shareowners on page 6 through page 19, which is incorporated herein by
reference pursuant to General Instruction G(2).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is included in the 1998 SBC Annual Report
to Shareowners under the heading "Market Risk" on page 17 through page 19,
which is incorporated herein by reference pursuant to General Instruction
G(2).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is included in the 1998 SBC Annual Report
to Shareowners on page 20 through page 37, which is incorporated herein by
reference pursuant to General Instruction G(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No changes in accountants or disagreements with accountants on any accounting
or financial disclosure matters occurred during the period covered by this
report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure at the end of Part I of this report
since the registrant did not furnish such information in its definitive proxy
statement prepared in accordance with Schedule 14A. Other information
required by this Item 10 is included in the registrant's definitive proxy
statement, dated March 12, 1999, under the headings "Board of Directors"
beginning on page 4 and "Section 16(a) Beneficial Ownership Reporting
Compliance" beginning on page 31 which is incorporated herein by reference
pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the registrant's definitive
proxy statement, dated March 12, 1999, under the headings "Compensation of
Directors" from page 13 through page 14, and "Compensation Committee
Interlocks and Insider Participation", "Executive Compensation", "Pension
Plans", and "Contracts with Management" from page 19 through page 31, which
are incorporated herein by reference pursuant to General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is included in the registrant's definitive
proxy statement, dated March 12, 1999, under the heading "Common Stock
Ownership of Directors and Officers" on page 15, which is incorporated herein
by reference pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is included in the registrant's definitive
proxy statement, dated March 12, 1999, under the heading "Compensation of
Directors" from page 13 through page 14 and "Contracts with Management" from
page 30 through 31, which are incorporated herein by reference pursuant to
General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
Page
----
(1) Report of Independent Auditors.......................... *
Financial Statements covered by Report of Independent Auditors:
Consolidated Statements of Income....................... *
Consolidated Balance Sheets............................. *
Consolidated Statements of Cash Flows................... *
Consolidated Statements of Shareowners' Equity.......... *
Notes to Consolidated Financial Statements.............. *
*Incorporated herein by reference to the appropriate portions of the
registrant's annual report to shareowners for the fiscal year ended
December 31, 1998. (See Part II.)
Page
----
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts.................. 26
Financial statement schedules other than those listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not required
or applicable.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission (SEC), are incorporated herein by reference as
exhibits hereto. Unless otherwise indicated, all exhibits so
incorporated are from File No. 1-8610.
Exhibit
Number
2-a Agreement and Plan of Merger, among Pacific Telesis Group, SBC
Communications Inc. and SBC Communications (NV) Inc., dated as of
April 1, 1996. (Exhibit 2 to Form 8-K, dated April 1, 1996.)
2-b Agreement and Plan of Merger, among Southern New England
Telecommunications Corporation, SBC Communications Inc., and SBC
(CT), dated as of January 4, 1998. (Exhibit 2 to Form 8-K, dated
January 4, 1998.)
2-c Agreement and Plan of Merger among Ameritech Corporation, SBC and
SBC Delaware, Inc., dated as of May 10, 1998. (Exhibit 2 to Form
8-K, dated May 10, 1998.)
3-a Restated Certificate of Incorporation, filed with the Secretary
of State of Delaware on April 28, 1998. (Exhibit 3-a to Form
10-Q dated March 31, 1998.)
3-b Certificate of Designation, filed with the Secretary of State of
Delaware on March 31, 1997.
3-c Bylaws dated June 26, 1998.
4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument
which defines the rights of holders of long-term debt of the
registrant or any of its consolidated subsidiaries is filed
herewith. Pursuant to this regulation, the registrant hereby
agrees to furnish a copy of any such instrument to the SEC upon
request.
4-b Support Agreement dated November 10, 1986, between SBC and SBC
Communications Capital Corporation. (Exhibit 4-b to Registration
Statement No. 33-11669.)
4-c Resolutions guaranteeing certain obligations of Pacific Telesis
Group. (Exhibit 4-g to Form 10-K for 1997.)
10-a Short Term Incentive Plan. (Exhibit 10-a to Form 10-K for 1997.)
10-b Senior Management Long Term Incentive Plan. (Exhibit 10-b to
Form 10-K for 1992.)
10-c Supplemental Life Insurance Plan. (Exhibit 10-c to Form 10-K for
1997.)
10-d Supplemental Retirement Income Plan. (Exhibit 10-d to Form 10-K
for 1997.)
10-e Senior Management Deferred Compensation Plan (effective for Units
of Participation Having a Unit Start Date Prior to January 1,
1988), revised July 30, 1993. (Exhibit 10.5 to Registration
Statement No. 33-54795.)
10-f Senior Management Deferred Compensation Plan of 1988 (effective
for Units of Participation Having a Unit Start Date of January 1,
1988 or later), revised July 30, 1993. (Exhibit 10.6 to
Registration Statement No. 33-54795.)
10-g Senior Management Long Term Disability Plan. (Exhibit 10-f to
Form 10-K for 1986.)
10-h Salary and Incentive Award Deferral Plan. (Exhibit 10-h to Form
10-K for 1997.)
10-i Financial Counseling Program. (Exhibit 10-i to Form 10-K for
1997.)
10-j Supplemental Health Plan. . (Exhibit 10-j to Form 10-K for 1997.)
10-k Retirement Plan for Non-Employee Directors. (Exhibit 10-k to
Form 10-K for 1997.)
10-l Form of Indemnity Agreement, effective July 1, 1986, between SBC
and its directors and officers. (Appendix 1 to Definitive Proxy
Statement dated March 18, 1987.)
10-m Forms of Change of Control Severance Agreements for officers of
SBC and certain officers of SBC's subsidiaries (Exhibit 10-p to
Form 10-K for 1988.)
10-n Forms of Change of Control Severance Agreements for officers of
SBC and certain officers of SBC's subsidiaries (Approved November
21, 1997). (Exhibit 10-n to Form 10-K for 1997.)
10-o Stock Savings Plan. (Exhibit 10-o to Form 10-K for 1997.)
10-p 1992 Stock Option Plan. (Exhibit 10-p to Form 10-K for 1997.)
10-q Officer Retirement Savings Plan. (Exhibit 10-q to Form 10-K for
1997.)
10-r 1996 Stock and Incentive Plan.
10-s Non-Employee Director Stock and Deferral Plan. (Exhibit 10-s to
Form 10-K for 1997.)
10-t Pacific Telesis Group Deferred Compensation Plan for Nonemployee
Directors. (Exhibit 10gg to Form 10-K for 1996 of Pacific
Telesis Group (Reg. 1-8609).)
10-t(i) Resolutions amending the Plan, effective November 21,
1997. (Exhibit 10-v(i) to Form 10-K for 1997.)
10-u Pacific Telesis Group Outside Directors' Deferred Stock Unit Plan.
(Exhibit 10oo to Form 10-K for 1995 of Pacific Telesis Group
(Reg. 1-8609).)
10-v Pacific Telesis Group 1996 Directors' Deferred Compensation Plan.
(Exhibit 10qq to Form 10-K for 1996 of Pacific Telesis Group
(Reg. 1-8609).)
10-v(i) Resolutions amending the Plan, effective November 21,
1997. (Exhibit 10-v(i) to Form 10-K for 1997.)
10-w Pacific Telesis Group 1994 Stock Incentive Plan. (Attachment A
to Pacific Telesis Group's 1994 Proxy Statement filed March 11,
1994, and amended March 14 and March 25, 1994.)
10-w(i) Resolutions amending the Plan, effective January 1,
1995. (Attachment A to Pacific Telesis Group's 1995
Proxy Statement, filed March 13, 1995.)
10-x Pacific Telesis Group Nonemployee Director Stock Option Plan.
(Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed
February 26, 1990.)
10-x(i) Resolutions amending the Plan, effective April 1, 1994.
(Exhibit 10xx(i) to Form 10-K for 1996 of Pacific
Telesis Group (Reg. 1-8609).)
12 Computation of Ratios of Earnings to Fixed Charges.
13 Portions of SBC's Annual Report to shareowners for the fiscal
year ended December 31, 1998. Only the information incorporated
by reference into this Form 10-K is included in the exhibit.
21 Subsidiaries of SBC.
23-a Consent of Ernst & Young LLP.
23-b Consent of PricewaterhouseCoopers LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
99-a Report of Independent Accountants PricewaterhouseCoopers LLP.
99-b Annual Report on Form 11-K for the SBC Savings Plan for the year
1998 to be filed under Form 10 K/A.
99-c Annual Report on Form 11-K for the SBC Savings and Security Plan
for the year 1998 to be filed under Form 10-K/A.
99-d Annual report on Form 11-K for the Pacific Telesis Group
Supplemental Retirement and Savings Plan for Nonsalaried
Employees for the year 1998.
99-e Annual report on Form 11-K for the Pacific Telesis Group
Supplemental Retirement and Savings Plan for Salaried and
Nonsalaried Employees (LESOP) for the year 1998.
99-f Annual report on Form 11-K for the SNET Bargaining Unit Retirement
Savings Plan for the year 1998.
99-g Annual report on Form 11-K for the SNET Management Retirement
Savings Plan for the year 1998.
SBC will furnish to shareowners upon request, and without charge, a copy of
the annual report to shareowners and the proxy statement, portions of which
are incorporated by reference in the Form 10-K. SBC will furnish any other
exhibit at cost.
(b) Reports on Form 8-K:
On October 15, 1998, SBC filed a Form 8-K, including an Item 5. Other
Events, and an Item 7. Financial Statements and Exhibits. In the report,
SBC disclosed a press release discussing its third quarter 1998 earnings and
selected financial information for the periods ended September 30, 1998 and
1997.
On October 26, 1998, SBC filed a Form 8-K, including an Item 5. Other
Events, and an Item 7. Exhibits. In the report, SBC disclosed that it had
completed the merger with Southern New England Telecommunications
Corporation.
On October 30, 1998, SBC filed a Form 8-K, including an Item 5. Other
Events. In the report, SBC disclosed that its subsidiary, Pacific Bell
announced on October 29, 1998 it was commencing a fixed spread repurchase
offer for any and all of its outstanding 8.50% debentures due August 15,
2031; 7.75% debentures due September 15, 2032; and 7.50% debentures due
February 1, 2033.
On November 19, 1998, SBC filed a Form 8-K, including an Item 7. Financial
Statements and Exhibits. In the report, SBC disclosed unaudited financial
statements to reflect the proposed business combination of SBC and Ameritech
Corporation as and for the nine months ended September 30, 1998.
<TABLE>
SBC COMMUNICATIONS INC. Schedule II - Sheet 1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectibles
Dollars in Millions
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
(1) (2)
Charged
Balance at Charged to Other Balance
Beginning of to Costs and Accounts Deductions at End of
Description Period Expenses Note -Note (a) -Note (b) Period
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year 1998.............................. $ 430 513 278 749 $ 472
Year 1997.............................. $ 339 566 388 863 $ 430
Year 1996.............................. $ 303 438 254 656 $ 339
<FN>
(a) Amounts previously written off which were credited directly to this
account when recovered.
(b) Amounts written off as uncollectible.
</FN>
</TABLE>
<PAGE>
<TABLE>
SBC COMMUNICATIONS INC. Schedule II - Sheet 2
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Accumulated Amortization of Intangibles
Dollars in Millions
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
(1) (2)
Balance at Charged Balance
Beginning of Charged to Other at End of
Description Period to Expense Accounts Deductions Period
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year 1998.............................. $ 1,047 136 1 443(a) $ 741
Year 1997.............................. $ 638 410 5 6 $ 1,047
Year 1996.............................. $ 554 139 2 57(b) $ 638
<FN>
(a) Primarily related to the disposition of SBC Media Ventures, Inc. and an
impairment of an investment in wireless video.
(b) Primarily related to the disposition of Associated Directory Services,
Inc.
</FN>
</TABLE>
<PAGE>
<TABLE>
SBC COMMUNICATIONS INC. Schedule II - Sheet 3
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Reserve for Restructuring
Dollars in Millions
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
(1) (2)
Balance at Charged Charged Balance
Beginning of to Costs and to Other Deductions at End of
Description Period Expenses Accounts -Note (a) Period
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year 1998.............................. $ 7 - - 7 $ -
Year 1997.............................. $ 142 - - 135 $ 7
Year 1996.............................. $ 337 - - 195 $ 142
<FN>
(a) The 1996 amount reflects $(64) of costs for enhanced retirement benefits
paid from pension fund assets which do not require current outlays of
SBC's funds. This 1996 reversal of $64 resulted from revised estimates
of these retirement costs. The 1996 amount also includes non-cash net
pension and postretirement settlement gain charged against the
restructuring reserve of $66.
</FN>
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 12th day
of March, 1999.
SBC COMMUNICATIONS INC.
By /s/ Donald E. Kiernan
(Donald E. Kiernan
Senior Vice President, Treasurer and
Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officer:
Edward E. Whitacre, Jr.*
Chairman and
Chief Executive Officer
Principal Financial and
Accounting Officer:
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
/s/ Donald E. Kiernan
Directors: (Donald E. Kiernan, as attorney-in-fact
and on his own behalf as Principal
Edward E. Whitacre, Jr.* Financial Officer and Principal
Clarence C. Barksdale* Accounting Officer)
James E. Barnes*
August A. Busch III*
Royce S. Caldwell* March 12, 1999
Ruben R. Cardenas*
William P. Clark*
Martin K. Eby, Jr.*
Herman E. Gallegos*
Jess T. Hay*
Bobby R. Inman*
Charles F. Knight*
Mary S. Metz*
Haskell M. Monroe, Jr.*
Toni Rembe*
S. Donley Ritchey*
Joyce M. Roche'*
Richard M. Rosenberg*
Carlos Slim Helu'*
Patricia P. Upton*
* by power of attorney
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission (SEC), are incorporated herein by reference as
exhibits hereto. Unless otherwise indicated, all exhibits so
incorporated are from File No. 1-8610.
Exhibit
Number
2-a Agreement and Plan of Merger, among Pacific Telesis Group, SBC
Communications Inc. and SBC Communications (NV) Inc., dated as of
April 1, 1996. (Exhibit 2 to Form 8-K, dated April 1, 1996.)
2-b Agreement and Plan of Merger, among Southern New England
Telecommunications Corporation, SBC Communications Inc., and SBC
(CT), dated as of January 4, 1998. (Exhibit 2 to Form 8-K, dated
January 4, 1998.)
2-c Agreement and Plan of Merger among Ameritech Corporation, SBC and
SBC Delaware, Inc., dated as of May 10, 1998. (Exhibit 2 to Form
8-K, dated May 10, 1998.)
3-a Restated Certificate of Incorporation, filed with the Secretary
of State of Delaware on April 28, 1998. (Exhibit 3-a to Form
10-Q dated March 31, 1998.)
3-b Certificate of Designation, filed with the Secretary of State of
Delaware on March 31, 1997.
3-c Bylaws dated June 26, 1998.
4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument
which defines the rights of holders of long-term debt of the
registrant or any of its consolidated subsidiaries is filed
herewith. Pursuant to this regulation, the registrant hereby
agrees to furnish a copy of any such instrument to the SEC upon
request.
4-b Support Agreement dated November 10, 1986, between SBC and SBC
Communications Capital Corporation. (Exhibit 4-b to Registration
Statement No. 33-11669.)
4-c Resolutions guaranteeing certain obligations of Pacific Telesis
Group. (Exhibit 4-g to Form 10-K for 1997.)
10-a Short Term Incentive Plan. (Exhibit 10-a to Form 10-K for 1997.)
10-b Senior Management Long Term Incentive Plan. (Exhibit 10-b to
Form 10-K for 1992.)
10-c Supplemental Life Insurance Plan. (Exhibit 10-c to Form 10-K for
1997.)
10-d Supplemental Retirement Income Plan. (Exhibit 10-d to Form 10-K
for 1997.)
10-e Senior Management Deferred Compensation Plan (effective for Units
of Participation Having a Unit Start Date Prior to January 1,
1988), revised July 30, 1993. (Exhibit 10.5 to Registration
Statement No. 33-54795.)
10-f Senior Management Deferred Compensation Plan of 1988 (effective
for Units of Participation Having a Unit Start Date of January 1,
1988 or later), revised July 30, 1993. (Exhibit 10.6 to
Registration Statement No. 33-54795.)
10-g Senior Management Long Term Disability Plan. (Exhibit 10-f to
Form 10-K for 1986.)
10-h Salary and Incentive Award Deferral Plan. (Exhibit 10-h to Form
10-K for 1997.)
10-i Financial Counseling Program. (Exhibit 10-i to Form 10-K for
1997.)
10-j Supplemental Health Plan. . (Exhibit 10-j to Form 10-K for 1997.)
10-k Retirement Plan for Non-Employee Directors. (Exhibit 10-k to
Form 10-K for 1997.)
10-l Form of Indemnity Agreement, effective July 1, 1986, between SBC
and its directors and officers. (Appendix 1 to Definitive Proxy
Statement dated March 18, 1987.)
10-m Forms of Change of Control Severance Agreements for officers of
SBC and certain officers of SBC's subsidiaries (Exhibit 10-p to
Form 10-K for 1988.)
10-n Forms of Change of Control Severance Agreements for officers of
SBC and certain officers of SBC's subsidiaries (Approved November
21, 1997). (Exhibit 10-n to Form 10-K for 1997.)
10-o Stock Savings Plan. (Exhibit 10-o to Form 10-K for 1997.)
10-p 1992 Stock Option Plan. (Exhibit 10-p to Form 10-K for 1997.)
10-q Officer Retirement Savings Plan. (Exhibit 10-q to Form 10-K for
1997.)
10-r 1996 Stock and Incentive Plan.
10-s Non-Employee Director Stock and Deferral Plan. (Exhibit 10-s to
Form 10-K for 1997.)
10-t Pacific Telesis Group Deferred Compensation Plan for Nonemployee
Directors. (Exhibit 10gg to Form 10-K for 1996 of Pacific
Telesis Group (Reg. 1-8609).)
10-t(i) Resolutions amending the Plan, effective November 21,
1997. (Exhibit 10-v(i) to Form 10-K for 1997.)
10-u Pacific Telesis Group Outside Directors' Deferred Stock Unit Plan.
(Exhibit 10oo to Form 10-K for 1995 of Pacific Telesis Group
(Reg. 1-8609).)
10-v Pacific Telesis Group 1996 Directors' Deferred Compensation Plan.
(Exhibit 10qq to Form 10-K for 1996 of Pacific Telesis Group
(Reg. 1-8609).)
10-v(i) Resolutions amending the Plan, effective November 21,
1997. (Exhibit 10-v(i) to Form 10-K for 1997.)
10-w Pacific Telesis Group 1994 Stock Incentive Plan. (Attachment A
to Pacific Telesis Group's 1994 Proxy Statement filed March 11,
1994, and amended March 14 and March 25, 1994.)
10-w(i) Resolutions amending the Plan, effective January 1,
1995. (Attachment A to Pacific Telesis Group's 1995
Proxy Statement, filed March 13, 1995.)
10-x Pacific Telesis Group Nonemployee Director Stock Option Plan.
(Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed
February 26, 1990.)
10-x(i) Resolutions amending the Plan, effective April 1, 1994.
(Exhibit 10xx(i) to Form 10-K for 1996 of Pacific
Telesis Group (Reg. 1-8609).)
12 Computation of Ratios of Earnings to Fixed Charges.
13 Portions of SBC's Annual Report to shareowners for the fiscal
year ended December 31, 1998. Only the information incorporated
by reference into this Form 10-K is included in the exhibit.
21 Subsidiaries of SBC.
23-a Consent of Ernst & Young LLP.
23-b Consent of PricewaterhouseCoopers LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
99-a Report of Independent Accountants PricewaterhouseCoopers LLP.
99-b Annual Report on Form 11-K for the SBC Savings Plan for the year
1998 to be filed under Form 10 K/A.
99-c Annual Report on Form 11-K for the SBC Savings and Security Plan
for the year 1998 to be filed under Form 10-K/A.
99-d Annual report on Form 11-K for the Pacific Telesis Group
Supplemental Retirement and Savings Plan for Nonsalaried
Employees for the year 1998.
99-e Annual report on Form 11-K for the Pacific Telesis Group
Supplemental Retirement and Savings Plan for Salaried and
Nonsalaried Employees (LESOP) for the year 1998.
99-f Annual report on Form 11-K for the SNET Bargaining Unit Retirement
Savings Plan for the year 1998.
99-g Annual report on Form 11-K for the SNET Management Retirement
Savings Plan for the year 1998.
Exhibit 3-c
As amended June 26, 1998
SBC COMMUNICATIONS INC.
Incorporated under the Laws of the State of Delaware, October 5, 1983
Bylaws
Article I
Stockholders
Section 1. Annual Meeting
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other
business as may properly come before the meeting, shall be held at such
place, on such date, and at such time as the Board of Directors shall fix
each year.
Section 2. Special Meeting
Special meetings of the stockholders may be called at any time, either
by the Board of Directors or by the Chairman of the Board, and the Chairman
of the Board shall call a special meeting whenever requested in writing to do
so by stockholders representing two-thirds of the shares of the corporation,
then outstanding, and entitled to vote at such meeting. This request must
specify the time, place and object of the proposed meeting.
Section 3. Notice of Meetings
Written notice of all meetings of the stockholders shall be given to
each stockholder entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date on which the meeting is to be
held. The notice shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the
meeting is called. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail with postage thereon prepaid,
addressed to the stockholder at his address as it appears on the stock
transfer books of the corporation. Any previously scheduled meeting of the
stockholders may be postponed by resolution of the Board of Directors upon
public notice given prior to the time previously scheduled for such meeting
of stockholders.
When a meeting is adjourned to another place, date, or time, written notice
need not be given of the meeting when reconvened, if the place, date, and time
thereof are announced at the meeting at which the adjournment is taken. If the
date of the meeting to be reconvened is more than thirty (30) days after the
date for which notice of the meeting was originally given or if a new record
date is fixed for the meeting, written notice of the place, date and time of the
meeting to be reconvened shall be given in conformity herewith. At any
reconvened meeting, any business may be transacted that might have been
transacted at the original meeting.
Section 4. Quorum
At any meeting of the stockholders, the holders of forty percent (40%)
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for the transaction of business.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of the stock entitled to
vote who are present, in person or by proxy, may adjourn the meeting to
another place, date, or time.
Section 5. Organization
The Chairman of the Board, or a Director or officer as the Chairman of
the Board may designate, shall act as chairman of the stockholders' meeting.
The chairman of the meeting shall designate an officer to act as a secretary
for the meeting in the absence of the corporation's Secretary.
Section 6. Proxies and Voting
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy.
Each holder of common stock shall have one vote for every share of
stock that is registered in the stockholder's name on the record date for the
meeting.
All voting may be by a voice vote, provided that upon demand of a
stockholder entitled to vote in person or by proxy, a recorded vote of all
shares of stock at the meeting shall be taken.
Directors shall be elected by a plurality of the votes cast. All other
matters shall be determined by a majority of the votes cast, unless a greater
number is required by law or the Certificate of Incorporation for the action
proposed.
Section 7. Nomination of Directors
Only persons who are nominated in accordance with the following
procedures shall be eligible for election as Directors. Nomination of
persons for election to the Board of Directors may be made at any annual
meeting of stockholders (a) by or at the direction of the Board of Directors
or any duly authorized committee thereof or (b) by any stockholder of the
corporation entitled to vote for the election of Directors at the annual
meeting. In addition to any other applicable requirements, a nomination made
by a stockholder shall be pursuant to timely notice in proper written form to
the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be received
at the principal executive offices of the corporation not less than sixty
(60) days nor more than ninety (90) days prior to the date of the annual
meeting; provided, however, that in the event that less than seventy (70)
days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder must be received not later
than ten (10) days following the day on which notice or public disclosure of
the date of the annual meeting was mailed or made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to
nominate for election as Director (i) the name, age, business address, and
residence address of the person, (ii) the principal occupation or employment
of the person, (iii) the class or series and number of shares of capital
stock of the corporation which are owned beneficially or of record by the
person, and (iv) any other information relating to the person that is
required to be disclosed in solicitations of proxies for election of
Directors pursuant to Section 14 of the Securities Exchange Act of 1934, as
amended, and (b) as to the stockholder giving the notice (i) the name and
record address of such stockholder, (ii) the class or series and number of
shares of capital stock of the corporation which are owned beneficially or of
record by such stockholder, and (iii) any other information relating to such
stockholder that would be required to be disclosed in a proxy statement or
other filings required to be made in connection with solicitation of proxies
for the election of Directors pursuant to Section 14 of the Securities
Exchange Act of 1934, as amended. Such notice must be accompanied by a
written consent of each proposed nominee to being named as a nominee and to
serve as a Director if elected.
No person shall be eligible for election as a Director of the
corporation unless nominated in accordance with the procedures set forth in
this Section 7. If the Chairman determines that a nomination was not made in
accordance with the foregoing procedure, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall
be disregarded.
Section 8. Conduct of Annual Meeting
No business may be transacted at an annual meeting of stockholders,
other than business that is either (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of
Directors (or any duly authorized committee thereof), (b) otherwise properly
brought before the meeting by or at the direction of the Board of Directors
(or any duly authorized committee thereof), or (c) otherwise properly brought
before the meeting by a stockholder as of the record date for the
determination of stockholders entitled to vote at such annual meeting. In
addition to any other applicable requirements for business to be properly
brought before an annual meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
Corporation.
To be timely, a stockholder's notice to the Secretary must be received
at the principal executive offices of the corporation not less than sixty
(60) days nor more than ninety (90) days prior to the date of the annual
meeting; provided, however, that in the event that less than seventy (70)
days' notice or prior public disclosure of the date of the annual meeting is
given or made to the stockholder, notice by the stockholder must be received
not later than the close of business on the tenth day following the day in
which such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made, whichever first occurs.
To be in proper written form, stockholder's notice to the Secretary
must set forth, as to each matter such stockholder proposes to bring before
the annual meeting, (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and record address of such
stockholder, (iii) the class or series and number of shares of capital stock
of the corporation which are owned beneficially or of record of such
stockholder, and (iv) any material interest of the stockholder in such
business.
No business shall be conducted at the annual meeting of stockholders
except in accordance with the procedures set forth in this Section 8;
provided, however, that nothing in this Section 8 shall be deemed to preclude
discussion by any stockholder of any business properly brought before the
annual meeting. If the Chairman determines that business was not properly
brought before the annual meeting in accordance with the foregoing
procedures, the Chairman shall declare to the meeting that the business was
not brought properly before the meeting and such business shall not be
transacted.
Article II
Board of Directors
Section 1. Number and Terms of Office
The business and affairs of the corporation shall be under the
direction of a Board of Directors.
The number of Directors shall be not more than twenty-five (25), as
determined by a majority vote of the total number of Directors then serving
in office, provided, however, that such maximum number of Directors may be
reduced (but not thereafter raised) to a maximum number of not less than
twenty-one (21) Directors by a majority vote of the total number of Directors
then serving in office.
Directors shall be divided into three classes designated as Group A,
Group B, and Group C. The three classes of Directors shall each consist of
an equal number of Directors or a number of Directors as nearly equal as
possible. When the total number of Directors is divided by three and one
remains, the Director remaining shall be assigned to Group A. When the total
number of Directors is divided by three and two remain, they shall be
assigned one to Group A and one to Group B. The number of Directors in any
one class may not exceed the number of Directors in any other class by more
than one, except as may result from the phasing-in of a decrease in Directors
under Section 2 of this Article II.
The Board of Directors appointed by the incorporators shall serve until
the first stockholders' meeting. At the first meeting of stockholders after
organization of the corporation, Directors to serve in Group A shall be
elected to a term of one year; Directors to serve in Group B shall be elected
to a term of two years; and Directors to serve in Group C shall be elected to
a full term of three years. Thereafter, at each annual meeting of the
stockholders, Directors shall be elected to a full term of three years to
succeed those in the Director group whose terms expire at that annual meeting.
Section 2. Increases and Decreases in Directors
The Board of Directors may increase or decrease the number of
Directors, subject to the maximum limits provided in Section 1 of this
Article II, by a vote of a majority of the total number of Directors. Any
vacancies created by an increase in the number of Directors shall be filled
as provided in Section 3 of this Article II and be distributed among the
Director groups in accordance with Section 1 of this Article II. Any
decrease in the authorized number of Directors shall be phased in by reducing
the number of Directors in the first Director group whose terms expire
subsequent to the decrease to the number required to be in that group by
Section 1 of this Article II at the end of the phasing-in period, and by
similarly reducing the number of Directors in the other Director groups upon
expiration of their terms, so that when the terms of Directors in all three
Director groups have successively expired subsequent to the decrease, each
Director group shall have the distribution of Directors required by Section 1
of this Article II of these Bylaws.
Section 3. Vacancies
If the position of any Director is or becomes vacant, a majority of the
Directors remaining in office may appoint a successor to serve the full or
remaining term, as the case may be, of the other Directors in the group in
which the vacancy occurred or was created.
Section 4. Regular Meetings
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall be
established by the Board of Directors. A notice of each regular meeting
shall not be required.
Section 5. Special Meetings
Special meetings of the Board of Directors may be called by one-third
of the Directors or by the Chairman of the Board and shall be held at such
place, on such date, and at such time as the Directors calling the meeting or
the Chairman of the Board shall fix. Notice of a special meeting shall be
given to each Director in any of the following ways: in person, by telephone
or by delivery of a written notice or facsimile communication to the
Director's business or residence. Notice given in writing or by facsimile
communication to the Director's business or residence must be delivered at
least twenty-four (24) hours before such meeting. Notice given by telephone
or in person shall be given at least twelve (12) hours prior to the time set
for the meeting. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board of Directors need be
specified in the notice of such meeting. A written waiver of any notice,
signed by a Director, whether before or after the time of the event for which
notice is to be given, shall be equivalent to the notice required to be given
to such person.
Section 6. Quorum
At any meeting of the Board of Directors, a majority of the total
number of the Directors shall constitute a quorum.
Section 7. Committees of the Board of Directors
The corporation elects to be governed by the provisions of Section
141(c)(2) of the General Corporation of the State of Delaware, as amended
effective July 1, 1996. The Board of Directors may from time to time
designate committees of the Board of Directors, with such lawfully delegable
powers and duties as it thereby confers, to serve at the pleasure of the
Board of Directors and shall elect a Director or Directors to serve as the
member or members, designating, if it desires, other Directors as alternate
members who may replace any absent or disqualified members at any meeting of
the committee. Any committee so designated may exercise the power and
authority of the Board of Directors as permitted by law. In the absence or
disqualification of any member of any committee and any alternate member
designated to replace such member, the members of the committee present at
the meeting and not disqualified from voting may by unanimous vote appoint
another member of the Board of Directors to act at the meeting in the place
of the absent or disqualified member.
Each committee may determine procedural rules for the conduct of its
meetings and business, and shall act in accordance therewith, unless
otherwise provided by the Board of Directors in the resolution establishing
the committee.
Article III
Officers of the Company
Section 1. Generally
The officers of the corporation shall consist of a Chairman of the
Board, a President, one or more Vice Presidents, a Secretary, a Treasurer,
and a Vice President-Chief Financial Officer appointed by the Board of
Directors. The Board of Directors may also appoint one or more Assistant
Secretaries, Assistant Treasurers, and such other officers and agents as the
Board of Directors may desire. Officers shall be appointed by the Board of
Directors at its first meeting after every annual meeting of stockholders.
Each officer or agent appointed by the Board of Directors shall hold office
until a successor is elected and qualified or until such person's earlier
resignation or removal. Any number of offices may be held by the same person.
Section 2. Duties of the Chairman of the Board
The Chairman of the Board shall preside at all meetings of the
stockholders and of the Board of Directors.
Unless otherwise directed by the Board of Directors, the Chairman of
the Board, or such other officer or agent as the Chairman of the Board may
designate, shall have authority to vote and otherwise act on behalf of the
corporation, in person or by proxy, at any meeting of stockholders, or with
respect to any action of stockholders of any other corporation in which this
corporation may hold securities, and otherwise to exercise any and all rights
and powers that this corporation may possess by reason of its ownership of
securities in any other corporation.
Section 3. Duties of the President
The President shall perform the duties as usually pertain to the office
and such other duties as may from time to time be assigned.
Section 4. Duties of Vice Presidents
Each Vice President shall perform the duties as usually pertain to the
office to which appointed and such other duties as may from time to time be
assigned.
Section 5. Duties of Secretary and Assistant Secretaries
The Secretary shall make a record of the proceedings of all meetings of
the stockholders, Board of Directors and any committee of Directors, in books
to be kept for that purpose. The Secretary shall also give and publish all
necessary notices of all meetings, have custody of the corporate seal and
affix it when authorized, and preserve and keep all general contracts, papers
and documents. In general, the Secretary shall perform all duties incident
to the office of Secretary and such other duties as from time to time may be
assigned.
Each Assistant Secretary shall perform such duties of the Secretary as
may from time to time be assigned.
Section 6. Duties of Treasurer and Assistant Treasurers
The Treasurer shall have charge of all monies, funds and securities
which may come into the Treasurer's possession, maintain deposits of the
corporation's monies and funds in such depositories as the Board of
Directors, the Chairman of the Board or the President shall approve, make
disbursements of such monies and funds under direction of the Board of
Directors, the Chairman of the Board, or the President, keep an account of
all receipts and disbursements, and make such reports as may be required.
The Treasurer shall also maintain a record of the outstanding shares of stock
in the corporation, a stock transfer record and a list of the stockholders of
the corporation. In general, the Treasurer shall perform all duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned.
Each Assistant Treasurer shall perform such duties of the Treasurer as
may from time to time be assigned.
Section 7. Duties of the Vice President-Chief Financial Officer
The Vice President-Chief Financial Officer shall be the principal
officer in charge of the accounts of the corporation and shall perform all
duties incident to the office of Vice President-Chief Financial Officer and
such other duties as from time to time may be assigned.
Section 8. Delegation of Authority
The Board of Directors may from time to time assign or delegate the
powers, authorities or duties of the Chairman of the Board, the President or
any officer or agent to any other officers or agents, notwithstanding any
provision hereof.
Article IV
Indemnification
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative (including any action or
suit by or in the right of the corporation) by reason of the fact that such
person is or was a Director, officer or employee of the corporation, or,
while such person is or was a Director, officer or employee of the
corporation, such person is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit, or proceeding, but in each case only if and to the extent
permitted under applicable state or federal law.
The indemnification provided herein shall not be deemed exclusive of
any other rights to which those indemnified may be entitled, and shall
continue as to a person who has ceased to be a Director, officer, employee,
or agent, and shall inure to the benefit of the heirs and personal
representatives of such a person.
Article V
Stock
Section 1. Stock Certificates; Uncertificated Shares
The shares of the corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not
apply to shares represented by a certificate until such certificate is
surrendered to the corporation. Notwithstanding the adoption of such a
resolution by the Board of Directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the corporation
by the Chairman or Vice-Chairman of the Board of Directors, or the President
or Vice-President, and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of such corporation representing the
number of shares registered in certificate form. Any or all of the
signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be
issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Section 2. Transfers of Stock
Transfers of stock shall be made only on the stock transfer record of
the corporation and upon surrender of the certificate previously issued
therefor which is outstanding and not canceled, except in the case of
uncertificated shares.
Section 3. Transfer on Death Directions
At the request of a stockholder residing in a state that permits
transfer on death directions by law, the Treasurer shall record on the
stockholder's certificate, or, in the case of uncertificated shares, upon the
account statements evidencing the shares, a direction to transfer the
stockholder's interest in the corporation to a person designated by the
stockholder on death of the stockholder. The Treasurer shall execute such
direction upon proof of death of the stockholder, surrender of the
outstanding certificate with the direction written thereon, and under such
regulations as may be prescribed by the Treasurer.
Article VI
Business Combinations
Section 1. Vote Required for Certain Business Combinations
A. In addition to any vote of stockholders required by law or these
Bylaws, and except as otherwise expressly provided in Section 2 of this
Article VI, any Business Combination (as hereinafter defined) shall
require the affirmative vote of the holders of at least 66_ percent of
the then outstanding shares of capital stock of the corporation
entitled to vote generally in the election of Directors (the "Voting
Stock"), voting together as a single class. Such affirmative vote
shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or in
any agreement with any national securities exchange or otherwise.
B. The term "Business Combination" shall mean:
i. Any merger or consolidation of the corporation or any subsidiary
(as hereinafter defined) with (a) any Interested Stockholder (as
hereinafter defined) or (b) any other corporation which is, or
after such merger or consolidation would be, an Affiliate (as
hereinafter defined) of an Interested Stockholder; or
ii. Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in either one or in a series of transactions) to or
with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the corporation or
any subsidiary having an aggregate Fair Market Value (as
hereinafter defined) of $10,000,000 or more; or
iii. The issuance or transfer by the corporation or any subsidiary (in
either one or in a series of transactions) of any securities of
the corporation or any subsidiary to any Interested Stockholder
or any Affiliate of any Interested Stockholder for cash,
securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $10,000,000 or more; or
iv. The adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
v. Any reclassification of securities (including any reverse stock
split), or recapitalization of the corporation, or any merger or
consolidation of the corporation with any of its subsidiaries or
any other transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect,
directly or indirectly, of increasing the proportionate share of
the outstanding shares of any class of equity or convertible
securities of the corporation or any subsidiary which is directly
or indirectly owned by any Interested Stockholder or any
Affiliate of any Interested Stockholder.
Section 2. Exceptions to Vote Required by Section 1
The provisions of Section 1 of this Article VI shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by law and any other
provision of these Bylaws, if:
A. The Business Combination is approved by a majority of the Continuing
Directors (as hereinafter defined); or
B. All of the following conditions are met:
i. The aggregate amount of the cash and the Fair Market Value of any
consideration other than cash as of the date of the consummation
of the Business Combination to be received per share by holders
of common stock in such Business Combination or by holders of
shares of any other class of outstanding Voting Stock shall be at
least equal to the highest amount determined under sub-clauses
(a), (b), and (c) below:
a. The highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees)
paid by the Interested Stockholder for any shares of common
stock acquired by it (1) within the two-year period
immediately prior to the first public announcement of the
proposal of the Business Combination (the "Announcement
Date") or (2) in the transaction in which it became an
Interested Stockholder, whichever is higher; and
b. The Fair Market Value per share of common stock on the day
after the Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder,
whichever is higher; and
c. The price per share equal to the Fair Market Value per
share of common stock determined pursuant to paragraph
B(i)(b) above, multiplied by the ratio of (1) the highest
per share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of common stock it
acquired within the two-year period immediately prior to
the Announcement Date to (2) the Fair Market Value per
share of common stock on the first day in such two-year
period upon which the Interested Stockholder acquired any
shares of common stock; and
ii. The consideration to be received by holders of a particular class
of outstanding Voting Stock shall be in cash or in the same form
as the Interested Stockholder has previously paid for shares of
such class of Voting Stock. If the Interested Stockholder has
paid for shares of any class of Voting Stock with varying forms
of consideration, the form of consideration for such class of
Voting Stock shall be either cash or the form of consideration
used by the Interested Stockholder to acquire the largest number
of shares of such class of Voting Stock previously acquired by
it; and
iii. After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination:
a. Except as approved by a majority of the Continuing
Directors, there shall have been no failure to declare and
pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding
preferred stock; and
b. There shall have been (1) no reduction in the annual rate
of dividends paid on the common stock (except as necessary
to reflect any subdivision of the common stock), except as
approved by a majority of the Continuing Directors, and (2)
an increase in such annual rate of dividends as necessary
to reflect any reclassification (including any reverse
stock split), recapitalization, reorganization or any
similar transaction which has the effect of reducing the
number of outstanding shares of the common stock, unless
the failure so to increase such annual rate is approved by
a majority of the Continuing Directors; and
c. Such Interested Stockholder shall have not become the
beneficial owner of any additional shares of Voting Stock
except as part of the transaction which resulted in such
Interested Stockholder becoming an Interested Stockholder;
and
iv. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (or
any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to the stockholders of the
corporation at least thirty (30) days prior to the consummation
of such Business Combination, whether or not such proxy or
information statement is required pursuant thereto.
Section 3. Definitions
For the purposes of this Article VI:
A. A "person" shall mean any individual, firm, corporation or other entity.
B. "Interested Stockholder" shall mean any person (other than the
corporation or any subsidiary (as hereinafter defined) and other than
any profit sharing, thrift, employee stock ownership, retirement or
other employee benefit plan of the corporation or any subsidiary of any
trustee of or fiduciary with respect to any such plan when acting in
such capacity) who or which:
i. Is the beneficial owner (as hereinafter defined), directly or
indirectly, of more than 10 percent (10%) of any shares of the
Voting Stock of the corporation; or
ii. Is an Affiliate (as hereinafter defined) of the corporation and
at any time within the two-year period immediately prior to the
date in question was the beneficial owner, directly or
indirectly, of 10 percent (10%) or more of any shares of the
Voting Stock of the corporation; or
iii. Is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by
any Interested Stockholder, if such assignment or succession
shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning
of the Securities Act of 1933.
C. A person shall be deemed a "beneficial owner" of any shares of Voting
Stock:
i. Which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
ii. Which such person or any of its Affiliates or Associates has (a)
the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants, or options or
otherwise, or (b) the right to vote pursuant to any agreement,
arrangement or understanding; or
iii. Which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of any
shares of Voting Stock.
D. "Affiliate" or "Associate" shall have the same meanings set forth for
such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as in effect on March 1, 1983.
E. "Subsidiary" means any corporation of which a majority of any class of
equity security is owned, directly or indirectly, by the corporation;
provided, however, that for the purposes of the definition of
Interested Stockholder set forth in paragraph B of this Section 3, the
term "subsidiary" shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly, by the
corporation.
F. "Continuing Director" means any member of the Board of Directors of the
corporation who is unaffiliated with the Interested Stockholder and was
a member of the Board prior to the time that the Interested Stockholder
became an Interested Stockholder and any successor of a Continuing
Director who is unaffiliated with the Interested Stockholder and is
recommended or elected to succeed a Continuing Director by a majority
of Continuing Directors then on the Board.
G. "Fair Market Value" means: (1) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the
date in question of a share of such stock on the Composite Tape for New
York Stock Exchange-Listed Stocks, or, if such stock is not quoted on
the Composite Tape, on the New York Stock Exchange, or, if such stock
is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of
1934 on which such stock is listed, or, if such stock is not listed on
any such exchange, the highest closing bid quotation with respect to a
share of such stock during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc.,
Automated Quotations System or any system then in use, or if no such
quotations are available, the fair market value on the date in question
of a share of such stock as determined by the majority of the
Continuing Directors in good faith; and (2) in the case of property
other than cash or stock, the fair market value of such property on the
date in question as determined by a majority of the Continuing
Directors in good faith.
H. In the event of any Business Combination in which the corporation
survives, the phrase "any consideration other than cash" as used in
paragraph B(i) of Section 2 of this Article VI shall include the shares
of common stock and/or the shares of any other class of outstanding
Voting Stock retained by the holders of such shares.
Section 4. Certain Determinations
The Continuing Directors of the corporation shall have the power and
duty to determine for the purposes of this Article VI, on the basis of
information known to them after reasonable inquiry: (a) whether a person is
an Interested Stockholder; (b) the number of shares of Voting Stock
beneficially owned by any person; (c) whether a person is an Affiliate or
Associate of another person; and (d) whether the assets which are the subject
of any Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the corporation or any subsidiary in
any Business Combination has, an aggregate Fair Market Value of $10,000,000
or more.
Section 5. No Effect on Fiduciary Obligations of Interested Stockholders
Nothing contained in this Article VI shall be construed to relieve any
Interested Stockholder from any fiduciary obligation otherwise imposed by law.
Article VII
Miscellaneous
Section 1. Facsimile Signatures
In addition to the provision for the use of facsimile signatures on
stock certificates as provided in Section 1 of Article V, facsimile
signatures of any officer or officers of the corporation may be used whenever
and as authorized by the Board of Directors.
Section 2. Corporate Seal
The Board of Directors shall provide a suitable seal for the
corporation that contains the name of the corporation and the state of
incorporation, which seal shall be kept by the Secretary.
Section 3. Fiscal Year
The fiscal year of the corporation shall be identical with the calendar
year unless otherwise established by the Board of Directors.
Section 4. Time Periods
In applying any provision of these Bylaws which requires that an act be
done or not be done in a specified number of days prior to an event, or that
an act be done during a period of a specified number of days prior to an
event, calendar days shall be used. The day of the doing of the act shall be
excluded and the day of the event shall be included.
Article VIII
Amendments
These Bylaws may be amended or repealed in accordance with the
Certificate of Incorporation by the Board of Directors at any meeting or by
the stockholders at any meeting.
1996 Stock & Incentive Plan Final
Exhibit 10-r
[SBC LOGO] SBC Communications Inc.
1996 STOCK AND INCENTIVE PLAN
Plan Effective: January 1, 1996
As amended through: June 2, 1998
TABLE OF CONTENTS
Article 1 Establishment and Purpose............................................1
1.1 Establishment of the Plan...............................................1
1.2 Purpose of the Plan.....................................................1
1.3 Effective Date of the Plan..............................................1
Article 2 Definitions..........................................................1
Article 3 Administration.......................................................5
3.1 The Committee...........................................................5
3.2 Authority of the Committee..............................................6
Article 4 Shares Subject to the Plan...........................................6
4.1 Number of Shares........................................................6
4.2 Lapsed Awards...........................................................7
4.3 Adjustments in Authorized Plan Shares...................................7
Article 5 Eligibility and Participation........................................7
5.1 Eligibility.............................................................7
5.2 Actual Participation....................................................8
Article 6 Stock Options........................................................8
6.1 Grant of Options........................................................8
6.2 Form of Issuance........................................................8
6.3 Exercise Price..........................................................9
6.4 Duration of Options.....................................................9
6.5 Vesting of Options......................................................9
6.6 Exercise of Options.....................................................9
6.7 Payment.................................................................9
6.8 Termination of Employment..............................................11
6.9 Employee Transfers.....................................................12
6.10 Restrictions on Exercise and Transfer of Options.......................12
6.11 Competition............................................................12
Article 7 Restricted Stock....................................................13
7.1 Grant of Restricted Stock..............................................13
7.2 Restricted Stock Agreement.............................................13
7.3 Transferability........................................................13
7.4 Other Restrictions.....................................................13
7.5 Removal of Restrictions................................................14
7.6 Voting Rights, Dividends and Other Distributions.......................14
7.7 Termination of Employment Due to Death or Disability...................14
7.8 Termination of Employment for Other Reasons............................14
7.9 Employee Transfers.....................................................14
7.10 Other Grants...........................................................15
Article 8 Performance Units and Performance Shares............................15
8.1 Grants of Performance Units and Performance Shares.....................15
8.2 Value of Performance Shares and Units..................................15
8.3 Performance Period.....................................................16
8.4 Performance Goals......................................................16
8.5 Dividend Equivalents on Performance Shares.............................18
8.6 Form and Timing of Payment of Performance Units and Performance Shares.18
8.7 Termination of Employment Due to Death, Disability, or Retirement......19
8.8 Termination of Employment for Other Reasons............................19
8.9 Termination of Employment for Cause....................................19
8.10 Nontransferability.....................................................19
Article 9 Beneficiary Designation.............................................20
Article 10 Deferrals..........................................................20
10.1 Deferrals..............................................................20
10.2 Deferral of Performance Unit and Performance Share Distributions.......20
Article 11 Employee Matters...................................................21
11.1 Employment Not Guaranteed..............................................21
11.2 Participation..........................................................21
11.3 Claims and Appeals.....................................................21
Article 12 Change in Control..................................................22
Article 13 Amendment, Modification, and Termination...........................22
13.1 Amendment, Modification, and Termination...............................22
13.2 Awards Previously Granted..............................................22
Article 14 Withholding........................................................22
14.1 Tax Withholding........................................................22
14.2 Share Withholding......................................................23
Article 15 Successors.........................................................23
Article 16 Legal Construction.................................................23
16.1 Gender and Number......................................................23
16.2 Severability...........................................................23
16.3 Requirements of Law....................................................24
16.4 Securities Law Compliance..............................................24
16.5 Governing Law..........................................................24
SBC Communications Inc.
1996 Stock and Incentive Plan
Article 1 Establishment and Purpose.
1.1 Establishment of the Plan. SBC Communications Inc., a Delaware
corporation (the "Company" or "SBC"), hereby establishes an
incentive compensation plan (the "Plan"), as set forth in this
document.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the
success and enhance the value of the Company by linking the
personal interests of Participants to those of the Company's
shareowners, and by providing Participants with an incentive for
outstanding performance.
The Plan is further intended to attract and retain the
services of Participants upon whose judgment, interest, and
special efforts the successful operation of SBC and its
subsidiaries is dependent.
1.3 Effective Date of the Plan. The Plan shall become effective on
January 1, 1996; however, grants may be made before that time
subject to becoming effective on or after that date. During the
first year this Plan is effective, Awards shall be issued only to
the extent the potential payout of Shares shall not exceed 10% of
the Shares approved for issuance under this Plan.
Article 2 Definitions.
Whenever used in the Plan, the following terms shall have the
meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized:
(a) "Award" means, individually or collectively, a grant
under this Plan of Nonqualified Stock Options,
Incentive Stock Options, Restricted Stock, Performance
Units, or Performance Shares.
(b) "Award Agreement" means an agreement which may be
entered into by each Participant and the Company,
setting forth the terms and provisions applicable to
Awards granted to Participants under this Plan.
(c) "Board" or "Board of Directors" means the SBC Board of
Directors.
(d) "Cause" shall mean willful and gross misconduct on the
part of an Employee that is materially and demonstrably
detrimental to the Company or any Subsidiary as
determined by the Committee in its sole discretion.
(e) "Change in Control" shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than a
trustee or other fiduciary holding securities under an
employee benefit plan of the Company or a corporation
owned directly or indirectly by the shareowners of the
Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the
Company representing twenty percent (20%) or more of
the total voting power represented by the Company's
then outstanding voting securities, or (ii) during any
period of two (2) consecutive years, individuals who at
the beginning of such period constitute the Board of
Directors of the Company and any new Director whose
election by the Board of Directors or nomination for
election by the Company's shareowners was approved by a
vote of at least two-thirds (2/3) of the Directors then
still in office who either were Directors at the
beginning of the period or whose election or nomination
for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the
shareowners of the Company approve a merger or
consolidation of the Company with any other
corporation, other than a merger or consolidation which
would result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving
entity) at least eighty percent (80%) of the total
voting power represented by the voting securities of
the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the
shareowners of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale
or disposition by the Company of all or substantially
all the Company's assets.
(f) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(g) "Committee" means the committee or committees, as
specified in Article 3, appointed by the Board to
administer the Plan with respect to grants of Awards.
(h) "Director" means any individual who is a member of the
SBC Board of Directors.
(i) "Disability" shall mean the Participant's inability to
perform the Participant's normal Employment functions
due to any medically determinable physical or mental
disability, which can last or has lasted 12 months or
is expected to result in death.
(j) "Employee" means any management employee of the Company
or of one of the Company's Subsidiaries. "Employment"
means the employment of an Employee by the Company or
one of its Subsidiaries. Directors who are not
otherwise employed by the Company shall not be
considered Employees under this Plan.
(k) "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, or any successor
Act thereto.
(l) "Exercise Price" means the price at which a Share may
be purchased by a Participant pursuant to an Option, as
determined by the Committee.
(m) "Fair Market Value" shall mean the closing price of
Shares on the relevant date, or (if there were no
sales on such date) the next preceding trading date,
all as reported in the New York Stock Exchange
Composite Trading listings, or in a similar report
selected by the Committee. A trading day is any day
that the Stock is traded on the New York Stock Exchange.
(n) "Incentive Stock Option" or "ISO" means an option to
purchase Shares from SBC, granted under this Plan,
which is designated as an Incentive Stock Option and is
intended to meet the requirements of Section 422 of the
Code.
(o) "Insider" shall mean an Employee who is, on the
relevant date, an officer, director, or ten percent
(10%) beneficial owner of the Company, as those terms
are defined under Section 16 of the Exchange Act.
(p) "Key Executive Officer Short Term Award" means a
Performance Unit expressed in dollars.
(q) "Nonqualified Stock Option" or "NQSO" means the option
to purchase Shares from SBC, granted under this Plan,
which is not intended to be an Incentive Stock Option.
(r) "Option" or "Stock Option" shall mean an Incentive
Stock Option or a Nonqualified Stock Option, and shall
include a Restoration Option.
(s) "Participant" means a person who holds an outstanding
Award granted under the Plan.
(t) "Performance Unit" and "Performance Share" shall each
mean an Award granted to an Employee pursuant to
Article 8 herein.
(u) "Plan" means this 1996 Stock and Incentive Plan. The
Plan may also be referred to as the "SBC 1996 Stock and
Incentive Plan" or as the "SBC Communications Inc. 1996
Stock and Incentive Plan."
(v) "Restricted Stock" means an Award of Stock granted to
an Employee pursuant to Article 7 herein.
(w) "Restriction Period" means the period during which
Shares of Restricted Stock are subject to restrictions
or conditions under Article 7.
(x) "Retirement" or to "Retire" shall mean the termination
of a Participant's employment with the Company or one
of its Subsidiaries, for any reason other than death,
Disability or for Cause, on or after the earlier of the
following dates, or as otherwise provided by the
Committee: (1) the date the Participant would be
eligible to retire with an immediate pension under the
rules of the SBC Supplemental Retirement Income Plan,
whether or not actually a participant in such plan; or
(2) the date the Participant has attained one of the
following combinations of age and service at
termination of employment on or after April 1, 1997,
except as otherwise indicated below:
Net Credited Service Age
10 Years of more 65 or older
20 years or more 55 or older
25 years or more 50 or older
30 years or more Any age
With respect to a Participant who is granted an EMP
Service Pension under and pursuant to the provisions of
the SBC Pension Benefit Plan - Nonbargained Program upon
termination of employment, the terms "Retirement" or to
"Retire" shall include such Participant's termination
of employment.
(y) "Rotational Work Assignment Company ("RWAC") shall mean
any entity with which SBC Communications Inc. or any of
its Subsidiaries may enter into an agreement to provide
an employee for a rotational work assignment.
(z) "Shares" or "Stock" means the shares of common stock of
the Company.
(aa) "Subsidiary" shall mean any corporation in which the
Company owns directly, or indirectly through
subsidiaries, more than fifty percent (50%) of the total
combined voting power of all classes of Stock, or any
other entity (including, but not limited to,
partnerships and joint ventures) in which the Company
owns more than fifty percent (50%) of the combined
equity thereof.
(bb) "Window Period" means the period beginning on the third
business day following the date of public release of the
Company's quarterly sales and earnings information, and
ending on the twelfth business day following such date.
Article 3 Administration.
3.1 The Committee. Administration of the Plan shall be bifurcated as
follows:
(a) With respect to Insiders, the Plan and all Awards
hereunder shall be administered only by the Human
Resources Committee of the Board or such other
Committee as may be appointed by the Board for this
purpose (the "Disinterested Committee"), where each
Director on such Disinterested Committee is a
"Disinterested Person" (or any successor designation
for determining who may administer plans, transactions
or awards exempt under Section 16(b) of the Exchange
Act), as that term is used in Rule 16b-3 under the
Exchange Act, as that rule may be modified from time to
time.
(b) The Disinterested Committee and such other Committee as
the Board may create, if any, specifically to
administer the Plan with respect to non-Insiders (the
"Non-Insider Committee") shall each have full authority
to administer the Plan and all Awards hereunder with
respect to all persons who are not Insiders, except as
otherwise provided herein or by the Board. Either
Committee may be replaced by the Board at any time.
3.2 Authority of the Committee. The Committee shall have full power
except as limited by law and subject to the provisions herein, to
select the recipients of Awards, to determine the size and types
of Awards; to determine the terms and conditions of such Awards
in a manner consistent with the Plan; to construe and interpret
the Plan and any agreement or instrument entered into under the
Plan; to establish, amend, or waive rules and regulations for the
Plan's administration; and (subject to the provisions of Article
13 herein) to amend the terms and conditions of any outstanding
Award to the extent such terms and conditions are within the
discretion of the Committee as provided in the Plan. Further,
the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan.
No Award other than Restoration Options may be made under the
Plan after December 31, 2010.
All determinations and decisions made by the Committee
pursuant to the provisions of the Plan and all related orders or
resolutions of the Board shall be final, conclusive, and binding
on all persons, including the Company, its stockholders,
Employees, Participants, and their estates and beneficiaries.
Subject to the terms of this Plan, the Committee is
authorized, and shall not be limited in its discretion, to use
any of the Performance Criteria specified herein in its
determination of Awards under this Plan.
Article 4 Shares Subject to the Plan.
4.1 Number of Shares. Subject to adjustment as provided in Section
4.3 herein, the number of Shares available for grant under the
Plan shall not exceed 30 million Shares of Stock. No more than
10% of the Shares approved for issuance under this Plan may be
Shares of Restricted Stock. No more than 40% of the Shares
approved for issuance under this Plan may be issued to
Participants as a result of Performance Share or Restricted Stock
Awards. The Shares granted under this Plan may be either
authorized but unissued or reacquired Shares. The Disinterested
Committee shall have full discretion to determine the manner in
which Shares available for grant are counted in this Plan.
Without limiting the discretion of the Committee under this
section, unless otherwise provided by the Committee, the
following rules will apply for purposes of the determination of
the number of Shares available for grant under the Plan or
compliance with the foregoing limits:
(a) The grant of a Stock Option or a Restricted Stock Award
shall reduce the Shares available for grant under the
Plan by the number of Shares subject to such Award.
However, to the extent the Participant uses previously
owned Shares to pay the Exercise Price or any taxes, or
Shares are withheld to pay taxes, these Shares shall be
available for regrant under the Plan.
(b) With respect to Performance Shares, the number of
Performance Shares granted under the Plan shall be
deducted from the number of Shares available for grant
under the Plan. The number of Performance Shares which
cannot be, or are not, converted into Shares and
distributed (including deferrals) to the Participant
(after any applicable tax withholding) following the
end of the Performance Period shall increase the number
of Shares available for regrant under the Plan by an
equal amount.
(c) With respect to Performance Units representing a fixed
dollar amount that may only be settled in cash, the
Performance Units Award shall not affect the number of
Shares available under the Plan.
4.2 Lapsed Awards. If any Award granted under this Plan is canceled,
terminates, expires, or lapses for any reason, Shares subject to
such Award shall be again available for the grant of an Award
under the Plan.
4.3 Adjustments in Authorized Plan Shares. In the event of any
merger, reorganization, consolidation, recapitalization,
separation, liquidation, Stock dividend, split-up, Share
combination, or other change in the corporate structure of the
Company affecting the Shares, an adjustment shall be made in the
number and class of Shares which may be delivered under the Plan
(including individual limits), and in the number and class of
and/or price of Shares subject to outstanding Awards granted
under the Plan, and/or the number of outstanding Options, Shares
of Restricted Stock, and Performance Shares constituting
outstanding Awards, as may be determined to be appropriate and
equitable by the Committee, in its sole discretion, to prevent
dilution or enlargement of rights.
Article 5 Eligibility and Participation.
5.1 Eligibility. All management Employees are eligible to
participate in this Plan.
5.2 Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible
Employees, those to whom Awards shall be granted and shall
determine the nature and amount of each Award. No Employee is
entitled to receive an Award unless selected by the Committee.
Article 6 Stock Options.
6.1 Grant of Options. Subject to the terms and provisions of the
Plan, Options may be granted to Employees at any time and from
time to time, and under such terms and conditions, as shall be
determined by the Committee. The Committee shall have discretion
in determining the number of Shares subject to Options granted to
each Employee; provided, however, that the maximum number of
Shares subject to Options which may be granted to any single
Employee during any calendar year shall not exceed 2% of the
Shares approved for issuance under this Plan. The Committee may
grant ISOs, NQSOs, or a combination thereof; provided, however,
that no ISO may be issued after January 1, 2006. The Committee
may authorize the automatic grant of additional Options
("Restoration Options") when a Participant exercises already
outstanding Options, or options granted under a prior option
plan of the Company, on such terms and conditions as it shall
determine. Unless otherwise provided by the Committee, the
number of Restoration Options granted to a Participant with
respect to the exercise of an option (including an Option under
this Plan) shall not exceed the number of Shares delivered by the
Participant in payment of the Exercise Price of such option,
and/or in payment of any tax withholding resulting from such
exercise, and any Shares which are withheld to satisfy
withholding tax liability arising out of such exercise. A
Restoration Option shall have an Exercise Price of not less than
100% of the per Share Fair Market Value on the date of grant of
such Restoration Option, and shall be subject to all the terms
and conditions of the original grant, including the expiration
date, and such other terms and conditions as the Committee in its
sole discretion shall determine.
6.2 Form of Issuance. Each Option grant may be issued in the form of
an Award Agreement and/or may be recorded on the books and
records of the Company for the account of the Participant. If an
Option is not issued in the form of an Award Agreement, then the
Option shall be deemed granted as determined by the Committee.
The terms and conditions of an Option shall be set forth in the
Award Agreement, in the notice of the issuance of the grant, or
in such other documents as the Committee shall determine. Such
terms and conditions shall include the Exercise Price, the
duration of the Option, the number of Shares to which an Option
pertains (unless otherwise provided by the Committee, each Option
may be exercised to purchase one Share), and such other
provisions as the Committee shall determine, including, but not
limited to whether the Option is intended to be an ISO or a NQSO.
6.3 Exercise Price. Unless a greater Exercise Price is determined by
the Committee, the Exercise Price for each Option Awarded under
this Plan shall be equal to one hundred percent (100%) of the
Fair Market Value of a Share on the date the Option is granted.
6.4 Duration of Options. Each Option shall expire at such time as
the Committee shall determine at the time of grant (which
duration may be extended by the Committee); provided, however,
that no Option shall be exercisable later than the tenth (10th)
anniversary date of its grant.
6.5 Vesting of Options. Options shall vest at such times and under
such terms and conditions as determined by the Committee;
provided, however, unless a later vesting period is provided by
the Committee at or before the grant of an Option, one-third of
the Options will vest on each of the first three anniversaries of
the grant; if one Option remains after equally dividing the grant
by three, it will vest on the first anniversary of the grant, if
two Options remain, then one will vest on each of the first two
anniversaries. The Committee shall have the right to accelerate
the vesting of any Option; however, the Chairman of the Board or
the Senior Vice President-Human Resources, or their respective
successors, or such other persons designated by the Committee,
shall have the authority to accelerate the vesting of Options for
any Participant who is not an Insider.
6.6 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve, which
need not be the same for each grant or for each Participant.
Options shall be exercised by providing notice to the
designated agent selected by the Company (if no such agent has
been designated, then to the Company), in the manner and form
determined by the Company, which notice shall be irrevocable,
setting forth the exact number of Shares with respect to which
the Option is being exercised and including with such notice
payment of the Exercise Price. When Options have been
transferred, the Company or its designated agent may require
appropriate documentation that the person or persons exercising
the Option, if other than the Participant, has the right to
exercise the Option. No Option may be exercised with respect to
a fraction of a Share.
6.7 Payment. The Exercise Price shall be paid in full at the time of
exercise. No Shares shall be issued or transferred until full
payment has been received therefor.
Payment may be made:
(a) in cash, or
(b) unless otherwise provided by the Committee at any time,
and subject to such additional terms and conditions
and/or modifications as the Committee or the Company
may impose from time to time, and further subject to
suspension or termination of this provision by the
Committee or Company at any time, by:
(i) delivery of Shares of Stock owned by the
Participant in partial (if in partial payment,
then together with cash) or full payment;
provided, however, as a condition to paying any
part of the Exercise Price in Stock, at the time
of exercise of the Option, the Participant must
establish to the satisfaction of the Company that
the Stock tendered to the Company must have been
held by the Participant for a minimum of six (6)
months preceding the tender; or
(ii) if the Company has designated a stockbroker to act
as the Company's agent to process Option
exercises, issuance of an exercise notice together
with instructions to such stockbroker irrevocably
instructing the stockbroker: (A) to immediately
sell (which shall include an exercise notice that
becomes effective upon execution of a limit order)
a sufficient portion of the Shares to pay the
Exercise Price of the Options being exercised and
the required tax withholding, and (B) to deliver
on the settlement date the portion of the proceeds
of the sale equal to the Exercise Price and tax
withholding to the Company. In the event the
stockbroker sells any Shares on behalf of a
Participant, the stockbroker shall be acting
solely as the agent of the Participant, and the
Company disclaims any responsibility for the
actions of the stockbroker in making any such
sales. No Stock shall be issued until the
settlement date and until the proceeds (equal to
the Option Price and tax withholding) are paid to
the Company.
If payment is made by the delivery of Shares of Stock, the
value of the Shares delivered shall be equal to the Fair Market
Value of the Shares on the day preceding the date of exercise of
the Option.
Restricted Stock may not be used to pay the Option Price.
6.8 Termination of Employment.
Unless otherwise provided by the Committee, the following
limitations on exercise of Options shall apply upon termination
of Employment:
(a) Termination by Death or Disability. In the event the
Employment of a Participant shall terminate by reason
of death or Disability, all outstanding Options granted
to that Participant shall immediately vest as of the
date of termination of Employment and may be exercised,
if at all, no more than three (3) years from the date
of the termination of Employment, unless the Options,
by their terms, expire earlier. However, in the event
the Participant was eligible to Retire at the time of
termination of Employment, notwithstanding the
foregoing, the Options may be exercised, if at all, no
more than five (5) years from the date of the
termination of Employment, unless the Options, by their
terms, expire earlier.
(b) Termination for Cause. If the Employment of a
Participant shall be terminated by the Company for
Cause, all outstanding Options held by the Participant
shall immediately be forfeited to the Company and no
additional exercise period shall be allowed, regardless
of the vested status of the Options.
(c) Retirement or Other Termination of Employment. If the
Employment of a Participant shall terminate for any
reason other than the reasons set forth in (a) or (b),
above, all outstanding Options which are vested as of
the effective date of termination of Employment may be
exercised, if at all, no more than five (5) years from
the date of termination of Employment if the
Participant is eligible to Retire, or one (1) year from
the date of the termination of Employment if the
Participant is not eligible to Retire, as the case may
be, unless in either case the Options, by their terms,
expire earlier. In the event of the death of the
Participant after termination of Employment, this
paragraph (c) shall still apply and not paragraph (a),
above.
(d) Options not Vested at Termination. Except as provided
in paragraph (a), above, all Options held by the
Participant which are not vested on or before the
effective date of termination of Employment shall
immediately be forfeited to the Company (and shall once
again become available for grant under the Plan).
(e) Notwithstanding the foregoing, the Committee may, in
its sole discretion, establish different terms and
conditions pertaining to the effect of termination of
Employment, but no such modification shall shorten the
terms of Options issued prior to such modification.
6.9 Employee Transfers. For purposes of the Plan, transfer of
employment of a Participant between the Company and any one of
its Subsidiaries (or between Subsidiaries) or between the Company
or a Subsidiary and a RWAC, to the extent the period of
employment at a RWAC is equal to or less than five (5) years,
shall not be deemed a termination of Employment. Provided,
however, for purposes of this Article 6, termination of
employment with a RWAC without a concurrent transfer to the
Company or any of its Subsidiaries shall be deemed a termination
of Employment as that term is used herein. Similarly,
termination of an entity's status as a Subsidiary or as a RWAC
shall be deemed a termination of Employment of any Participants
employed by such Subsidiary or RWAC.
6.10 Restrictions on Exercise and Transfer of Options. Unless
otherwise provided by the Committee:
(a) During the Participant's lifetime, the Participant's
Options shall be exercisable only by the Participant or
by the Participant's guardian or legal representative.
After the death of the Participant, except as otherwise
provided by SBC's Rules for Employee Beneficiary
Designations, an Option shall only be exercised by the
holder thereof (including, but not limited to, an
executor or administrator of a decedent's estate) or
his or her guardian or legal representative.
(b) No Option shall be transferable except: (i) in the case
of the Participant, only upon the Participant's death
and in accordance with the SBC Rules for Employee
Beneficiary Designations; and (ii) in the case of any
holder after the Participant's death, only by will or
by the laws of descent and distribution.
6.11 Competition. Notwithstanding anything in this Article 6 to the
contrary, prior to a Change in Control, in the event the
Committee determines, in its sole discretion, that a Participant
is engaging in competitive activity with the Company, any
Subsidiary, or any business in which any of the foregoing have a
substantial interest (the "SBC Businesses"), the Committee may
cancel any Option granted to such Participant, whether or not
vested, in whole or in part. Such cancellation shall be
effective as of the date specified by the Committee. Competitive
activity shall mean any business or activity in the same
geographical market where a substantially similar business
activity is being carried on by an SBC Business, including, but
not limited to, representing or providing consulting services to
any person or entity that is engaged in competition with an SBC
Business or that takes a position adverse to an SBC Business.
However, competitive activity shall not include, among other
things, owning a nonsubstantial interest as a shareholder in a
competing business.
The determination of whether a Participant has engaged in
competitive activity with the Company shall be determined by the
Committee in good faith and in its sole discretion.
Article 7 Restricted Stock.
7.1 Grant of Restricted Stock. Subject to the terms and provisions
of the Plan, the Committee, at any time and from time to time,
may grant Shares of Restricted Stock to eligible Employees in
such amounts and upon such terms and conditions as the Committee
shall determine. In addition to any other terms and conditions
imposed by the Committee, vesting of Restricted Stock may be
conditioned upon the attainment of Performance Goals based on
Performance Criteria in the same manner as provided in Section
8.4, herein, with respect to Performance Shares. No Employee may
receive, in any calendar year, in the form of Restricted Stock
more than one-third of 1% of the Shares approved for issuance
under this Plan.
7.2 Restricted Stock Agreement. The Committee may require, as a
condition to an Award, that a recipient of a Restricted Stock
Award enter into a Restricted Stock Award Agreement, setting
forth the terms and conditions of the Award. In lieu of a
Restricted Stock Award Agreement, the Committee may provide the
terms and conditions of an Award in a notice to the Participant
of the Award, on the Stock certificate representing the
Restricted Stock, in the resolution approving the Award, or in
such other manner as it deems appropriate.
7.3 Transferability. Except as otherwise provided in this Article 7,
the Shares of Restricted Stock granted herein may not be sold,
transferred, pledged, assigned, or otherwise alienated or
hypothecated until the end of the applicable Restriction Period
established by the Committee, which shall not be less than a
period of three years.
7.4 Other Restrictions. The Committee shall impose such other
conditions and/or restrictions on any Shares of Restricted Stock
granted pursuant to the Plan as it may deem advisable including,
without limitation, a requirement that Participants pay a
stipulated purchase price for each Share of Restricted Stock
and/or restrictions under applicable Federal or state securities
laws; and may legend the certificates representing Restricted
Stock to give appropriate notice of such restrictions.
The Company shall also have the right to retain the
certificates representing Shares of Restricted Stock in the
Company's possession until such time as all conditions and/or
restrictions applicable to such Shares have been satisfied.
7.5 Removal of Restrictions. Except as otherwise provided in this
Article 7, Shares of Restricted Stock covered by each Restricted
Stock grant made under the Plan shall become freely transferable
by the Participant after the last day of the Restriction Period
and completion of all conditions to vesting, if any. However,
unless otherwise provided by the Committee, the Committee, in its
sole discretion, shall have the right to immediately waive all or
part of the restrictions and conditions with regard to all or
part of the Shares held by any Participant at any time.
7.6 Voting Rights, Dividends and Other Distributions. During the
Restriction Period, Participants holding Shares of Restricted
Stock granted hereunder may exercise full voting rights and shall
receive all regular cash dividends paid with respect to such
Shares. Except as provided in the following sentence, in the
sole discretion of the Committee, other cash dividends and other
distributions paid to Participants with respect to Shares of
Restricted Stock may be subject to the same restrictions and
conditions as the Shares of Restricted Stock with respect to
which they were paid. If any such dividends or distributions are
paid in Shares, the Shares shall be subject to the same
restrictions and conditions as the Shares of Restricted Stock
with respect to which they were paid.
7.7 Termination of Employment Due to Death or Disability. In the
event the Employment of a Participant shall terminate by reason
of death or Disability, all Restriction Periods and all
restrictions imposed on outstanding Shares of Restricted Stock
held by the Participant shall immediately lapse and the
Restricted Stock shall immediately become fully vested as of the
date of termination of Employment.
7.8 Termination of Employment for Other Reasons. If the Employment
of a Participant shall terminate for any reason other than those
specifically set forth in Section 7.7 herein, all Shares of
Restricted Stock held by the Participant which are not vested as
of the effective date of termination of Employment immediately
shall be forfeited and returned to the Company.
7.9 Employee Transfers. For purposes of the Plan, transfer of
employment of a Participant between the Company and any one of
its Subsidiaries (or between Subsidiaries) or between the Company
or a Subsidiary and a RWAC, to the extent the period of
employment at a RWAC is equal to or less than five (5) years,
shall not be deemed a termination of Employment. Provided,
however, for purposes of this Article, termination of employment
with a RWAC without a concurrent transfer to the Company or any
of its Subsidiaries shall be deemed a termination of Employment
as that term is used herein. Similarly, termination of an
entity's status as a Subsidiary or as a RWAC shall be deemed a
termination of Employment of any Participants employed by such
Subsidiary or RWAC.
7.10 Other Grants. Subject to the terms and provisions of the Plan,
the Committee, at any time and from time to time, may make grants
of cash or other property to eligible Employees in such amounts
and upon such terms and conditions as the Committee shall
determine. If the grant is in the form of stock or shares in a
company other than SBC: (a) the award shall be subject to tax
withholding in accordance with Article 14, hereof, in the same
manner as Stock, and (b) for purposes of deferrals under Article
10, hereof, the award shall be treated as Shares except that any
dividends or dividend equivalents thereon shall be paid out
unless otherwise provided by the Committee, which may, among
other things, provide that the dividends or dividend equivalents
be deferred in the same manner as a cash award.
Article 8 Performance Units and Performance Shares.
8.1 Grants of Performance Units and Performance Shares. Subject to
the terms of the Plan, Performance Shares and Performance Units
may be granted to eligible Employees at any time and from time to
time, as determined by the Committee. The Committee shall have
complete discretion in determining the number of Performance
Units and/or Performance Shares Awarded to each Participant.
8.2 Value of Performance Shares and Units.
(a) A Performance Share is equivalent in value to a Share
of Stock. In any calendar year, no individual may be
Awarded Performance Shares having a potential payout of
Shares of Stock exceeding two-thirds of 1% of the
Shares approved for issuance under this Plan.
(b) A Performance Unit shall be equal in value to a fixed
dollar amount determined by the Committee. In any
calendar year, no individual may be Awarded Performance
Units having a potential payout equivalent exceeding
the Fair Market Value of two-thirds of 1% of the Shares
approved for issuance under this Plan. The number of
Shares equivalent to the potential payout of a
Performance Unit shall be determined by dividing the
maximum cash payout of the Award by the Fair Market
Value per Share on the effective date of the grant. In
the event the Committee denominates a Performance Unit
Award in dollars instead of Performance Units, the
Award may be referred to as a Key Executive Officer
Short Term Award. In all other respects, the Key
Executive Officer Short Term Award will be treated in
the same manner as Performance Units under this Plan.
8.3 Performance Period. The Performance Period for Performance
Shares and Performance Units is the period over which the
Performance Goals are measured. The Performance Period is set by
the Committee for each Award; however, in no event shall an Award
have a Performance Period of less than one year.
8.4 Performance Goals. For each Award of Performance Shares or
Performance Units, the Committee shall establish performance
objectives ("Performance Goals") for the Company, its
Subsidiaries, and/or divisions of any of foregoing, based on the
Performance Criteria and other factors set forth in (a) through
(d), below. Performance Goals shall include payout tables,
formulas or other standards to be used in determining the extent
to which the Performance Goals are met, and, if met, the number
of Performance Shares and/or Performance Units which would be
converted into Stock and/or cash (or the rate of such conversion)
and distributed to Participants in accordance with Section 8.6.
All Performance Shares and Performance Units which may not be
converted under the Performance Goals or which are reduced by the
Committee under Section 8.6 or which may not be converted for any
other reason after the end of the Performance Period shall be
canceled at the time they would otherwise be distributable. When
the Committee desires an Award to qualify under Section 162(m) of
the Code, as amended, the Committee shall establish the
Performance Goals for the respective Performance Shares and
Performance Units prior to or within 90 days of the beginning of
the service relating to such Performance Goal, and not later than
after 25% of such period of service has elapsed. For all other
Awards, the Performance Goals must be established before the end
of the respective Performance Period.
(a) The Performance Criteria which the Committee is
authorized to use, in its sole discretion, are any of
the following criteria or any combination thereof:
(1) Financial performance of the Company (on a
consolidated basis), of one or more of its
Subsidiaries, and/or a division of any of the
foregoing. Such financial performance may be
based on net income and/or Value Added (after-tax
cash operating profit less depreciation and less a
capital charge).
(2) Service performance of the Company (on a
consolidated basis), of one or more of its
Subsidiaries, and/or of a division of any of the
foregoing. Such service performance may be based
upon measured customer perceptions of service
quality.
(3) The Company's Stock price; return on
shareholders' equity; total shareholder return
(Stock price appreciation plus dividends, assuming
the reinvestment of dividends); and/or earnings
per share.
(4) With respect to the Company (on a consolidated
basis), to one or more of its Subsidiaries, and/or
to a division of any of the foregoing: sales;
costs; market share of a product or service;
return on net assets; return on assets; return on
capital; profit margin; and/or operating revenues,
expenses or earnings.
(b) If the performance of more than one Subsidiary is being
measured to determine the attainment of performance
goals, then a weighted average of the Subsidiaries'
results shall be used, as determined by the Committee,
including, but not limited to, basing such weighting
upon the revenues, assets or net income for each
Subsidiary for any year prior to the Performance Period
or by using budgets to weight such Subsidiaries.
(c) Except to the extent otherwise provided by the
Committee in full or in part, if any of the following
events occur during a Performance Period and would
directly affect the determination of whether or the
extent to which Performance Goals are met, they shall
be disregarded in any such computation: changes in
accounting principles; extraordinary items; changes in
tax laws affecting net income and/or Value Added;
natural disasters, including floods, hurricanes, and
earthquakes; and intentionally inflicted damage to
property which directly or indirectly damages the
property of the Company or its Subsidiaries. No such
adjustment shall be made to the extent such adjustment
would cause the Performance Shares or Performance Units
to fail to satisfy the performance based exemption of
Section 162(m) of the Code.
8.5 Dividend Equivalents on Performance Shares. Unless reduced or
eliminated by the Committee, a cash payment in an amount equal to
the dividend payable on one Share will be made to each
Participant for each Performance Share which on the record date
for the dividend had been awarded to the Participant and not
converted, distributed (or deferred) or canceled.
8.6 Form and Timing of Payment of Performance Units and Performance
Shares. As soon as practicable after the applicable Performance
Period has ended and all other conditions (other than Committee
actions) to conversion and distribution of a Performance Share
and/or Performance Unit Award have been satisfied (or, if
applicable, at such other time determined by the Committee at or
before the establishment of the Performance Goals for such
Performance Period), the Committee shall determine whether and
the extent to which the Performance Goals were met for the
applicable Performance Units and Performance Shares. If
Performance Goals have been met, then the number of Performance
Units and Performance Shares to be converted into Stock and/or
cash and distributed to the Participants shall be determined in
accordance with the Performance Goals for such Awards, subject to
any limits imposed by the Committee. Unless the Participant has
elected to defer all or part of his Performance Units or
Performance Shares as provided in Article 10, herein, payment of
Performance Units and Performance Shares shall be made in a
single lump sum, as soon as reasonably administratively possible
following the determination of the number of Shares or amount of
cash to which the Participant is entitled. Performance Units
will be distributed to Participants in the form of cash.
Performance Shares will be distributed to Participants in the
form of 50% Stock and 50% Cash, or at the Participant's election,
100% Stock or 100% Cash. In the event the Participant is no
longer an Employee at the time of the distribution, then the
distribution shall be 100% in cash, provided the Participant may
elect to take 50% or 100% in Stock. At any time prior to the
distribution of the Performance Shares and/or Performance Units
(or if distribution has been deferred, then prior to the time the
Awards would have been distributed), unless otherwise provided by
the Committee, the Committee shall have the authority to reduce
or eliminate the number of Performance Units or Performance
Shares to be converted and distributed or to mandate the form in
which the Award shall be paid (i.e., in cash, in Stock or both,
in any proportions determined by the Committee).
Unless otherwise provided by the Committee, any election to
take a greater amount of cash or Stock with respect to
Performance Shares must be made in the calendar year prior to the
calendar year in which the Performance Shares are distributed (or
if distribution has been deferred, then in the year prior to the
year the Performance Shares would have been distributed absent
such deferral). In addition, if required in order to exempt the
transaction from the provisions of Section 16(b) of the Exchange
Act, any election by an Insider to take a greater amount in cash
must be made during a Window Period and shall be subject to
Committee approval.
For the purpose of converting Performance Shares into cash
and distributing the same to the holders thereof (or for
determining the amount of cash to be deferred), the value of a
Performance Share shall be the average of the Fair Market Values
of Shares for the period of five (5) trading days ending on the
valuation date. The valuation date shall be the first business
day of the second month in the year of distribution (or the year
it would have been distributed were it not deferred), except that
in the case of distributions due to death or Disability, the
valuation date shall be the first business day of the month in
which the Committee determines the distribution. Performance
Shares to be distributed in the form of Stock will be converted
at the rate of one (1) Share of Stock per Performance Share.
8.7 Termination of Employment Due to Death, Disability, or
Retirement. If the Employment of a Participant shall terminate
by reason of death or Disability, the Participant shall receive a
lump sum payout of all outstanding Performance Units and
Performance Shares calculated as if all unfinished Performance
Periods had ended with 100% of the Performance Goals achieved,
payable in the year following the date of termination of
Employment. In the event of Retirement, the full Performance
Units and Performance Shares shall be converted and distributed
based on and subject to the achievement of the Performance Goals
and in accordance with all other terms of the Award and this
Plan.
8.8 Termination of Employment for Other Reasons. If the Employment
of a Participant shall terminate for other than a reason set
forth in Section 8.7 (and other than for Cause), the number of
Performance Units and Performance Shares to be converted and
distributed shall be converted and distributed based upon the
achievement of the Performance Goals and in accordance with all
other terms of the Award and the Plan; however, the Participant
may receive no more than a prorated payout of all Performance
Units and Performance Shares, based on the portions of the
respective Performance Periods that have been completed.
8.9 Termination of Employment for Cause. In the event that a
Participant's Employment shall be terminated by the Company for
Cause, all Performance Units and Performance Shares shall be
forfeited by the Participant to the Company.
8.10 Nontransferability. Performance Units and Performance Shares may
not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, other than in accordance with the SBC
Rules for Employee Beneficiary Designations.
Article 9 Beneficiary Designation.
In the event of the death of a Participant, distributions or
Awards under this Plan, other than Restricted Stock, shall pass
in accordance with the SBC Rules for Employee Beneficiary
Designations.
Article 10 Deferrals.
10.1 Deferrals. Unless otherwise provided by the Committee, a
Participant may defer all or part of the Stock or cash to be
received upon conversion and distribution of Performance Units or
Performance Shares. In the event of the termination of
Employment of a Participant prior to becoming eligible for
Retirement, no deferrals under this Article shall be permitted
and any previously deferred Performance Shares or Performance
Units, and earnings thereon, shall be distributed as soon as
administratively possible.
10.2 Deferral of Performance Unit and Performance Share
Distributions. Prior to the calendar year in which Performance
Units or Performance Shares are to be distributed (or if
deferred, prior to the calendar year the Awards would have been
distributed), Participants may elect to defer the receipt of a
Performance Unit or Performance Share distribution upon such
terms as the Committee deems appropriate. Unless otherwise
provided by the Committee, Participants may elect to defer
receipt of all or part of a Performance Unit or Performance Share
for distribution in a lump sum in February of any calendar year
following the year in which the Awards would otherwise be
distributed, or to be distributed in up to 15 annual installments
(each installment shall be equal to the total Shares or cash in
the Award divided by the number of remaining installments),
payable each calendar year in the month determined by the
Participant, beginning as soon as administratively possible after
Retirement or in a later month in the calendar year of
Retirement, or in the calendar year immediately thereafter.
(a) Deferred amounts which would otherwise have been
distributed in cash shall be credited to the
Participant's account and shall bear interest from the
date the Awards would otherwise have been paid. The
interest will be credited quarterly to the account at
the declared rate determined by the Company from time
to time, which shall not be less than one-fourth of the
annual Moody's Corporate Bond Yield Average-Monthly
Average Corporates, as published by Moody's Investor
Service, Inc., (or successor thereto) for the month of
September before the calendar year in question.
(b) Deferred amounts which would otherwise have been
distributed in Shares by the Company shall be credited
to the Participant's account as deferred Shares. The
Participant's account shall also be credited on each
dividend payment date for Shares with an amount
equivalent to the dividend payable on the number of
Shares equal to the number of deferred Shares in the
Participant's account on the record date for such
dividend. Such amount shall then be converted to a
number of additional deferred Shares determined by
dividing such amount by the price of Shares, as
determined in the following sentence. The price of
Shares related to any dividend payment date shall be
the average of the Fair Market Values of Shares for the
period of five (5) trading days ending on such dividend
payment date, or the period of five (5) trading days
immediately preceding such dividend payment date if the
New York Stock Exchange is closed on the dividend
payment date.
(c) At any time during the calendar year prior to the
calendar year during which an Award deferred under the
provisions of this Article 10 is scheduled for
distribution, a Participant may further defer the
commencement of the distribution of such Award to a
subsequent calendar year and upon such further
deferral, change the number of installments applicable
to the distribution of the Award. Amounts that are
further deferred pursuant to this Article 10 shall
continue to be subject to all provisions of this Plan
including further distribution modifications as
provided herein.
Article 11. Employee Matters.
11.1 Employment Not Guaranteed. Nothing in the Plan shall interfere
with or limit in any way the right of the Company or any
Subsidiary to terminate any Participant's Employment at any time,
nor confer upon any Participant any right to continue in the
employ of the Company or one of its Subsidiaries.
11.2 Participation. No Employee shall have the right to be selected
to receive an Award under this Plan, or, having been so selected,
to be selected to receive a future Award.
11.3 Claims and Appeals. Any claim under the Plan by a Participant or
anyone claiming through a Participant shall be presented to the
Committee. Any person whose claim under the Plan has been denied
may, within sixty (60) days after receipt of notice of denial,
submit to the Committee, a written request for review of the
decision denying the claim. The Committee shall determine
conclusively for all parties all questions arising in the
administration of the Plan.
Article 12 Change in Control.
Upon the occurrence of a Change in Control:
(a) Any and all Options granted hereunder immediately shall
become vested and exercisable;
(b) Any Restriction Periods and all restrictions imposed on
Restricted Shares shall lapse and they shall
immediately become fully vested;
(c) The 100% Performance Goal for all Performance Units and
Performance Shares relating to incomplete Performance
Periods shall be deemed to have been fully achieved and
shall be converted and distributed in accordance with
all other terms of the Award and this Plan; provided,
however, notwithstanding anything to the contrary in
this Plan, no outstanding Performance Unit or
Performance Share may be reduced.
Article 13. Amendment, Modification, and Termination.
13.1 Amendment, Modification, and Termination. The Board may at any
time suspend or terminate the Plan in whole or in part; the
Disinterested Committee may at any time and from time to time,
alter or amend the Plan in whole or in part.
13.2 Awards Previously Granted. No termination, amendment, or
modification of the Plan shall adversely affect in any material
way any Award previously granted under the Plan, without the
written consent of the Participant holding such Award.
Article 14 Withholding.
14.1 Tax Withholding. The Company shall deduct or withhold an amount
sufficient to satisfy Federal, state, and local taxes (including
the Participant's employment tax obligations) required by law to
be withheld with respect to any taxable event arising or as a
result of this Plan ("Withholding Taxes").
14.2 Share Withholding. With respect to withholding required upon the
exercise of Options, upon the lapse of restrictions on Restricted
Stock, upon the distribution of Performance Shares in the form of
Stock, or upon any other taxable event hereunder involving the
transfer of Stock to a Participant, the Company shall withhold
Stock having a Fair Market Value on the date the tax is to be
determined in an amount equal to the Withholding Taxes on such
Stock.
Any fractional Share of Stock payable to a Participant shall
be withheld as additional Federal withholding, or, at the option
of the Company, paid in cash to the Participant.
Unless otherwise determined by the Committee, when the method
of payment for the Exercise Price is from the sale by a
stockbroker pursuant to Section 6.7(b)(ii), herein, of the Stock
acquired through the Option exercise, then the tax withholding
shall be satisfied out of the proceeds. For administrative
purposes in determining the amount of taxes due, the sale price
of such Stock shall be deemed to be the Fair Market Value of the
Stock.
Prior to the end of any Performance Period a Participant may
elect to have a greater amount of Stock withheld from the
distribution of Performance Shares to pay withholding taxes;
provided, however, the Committee may prohibit or limit any
individual election or all such elections at any time. In
addition, if required in order to exempt the transaction from the
provisions of Section 16(b) of the Exchange Act, any such
election by an Insider must be made during a Window Period and
shall be subject to Committee approval.
Article 15 Successors.
All obligations of the Company under the Plan, with respect
to Awards granted hereunder, shall be binding on any successor to
the Company, whether the existence of such successor is the
result of a direct or indirect purchase, merger, consolidation,
or otherwise, of all or substantially all of the business and/or
assets of the Company.
Article 16 Legal Construction.
16.1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the
feminine; the plural shall include the singular and the singular
shall include the plural.
16.2 Severability. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or
invalid provision had not been included.
16.3 Requirements of Law. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any governmental
agencies or national securities exchanges as may be required.
16.4 Securities Law Compliance. With respect to Insiders,
transactions under this Plan are intended to comply with all
applicable conditions or Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the plan or action
by the Committee fails to comply with a condition of Rule 16b-3
or its successors, it shall not apply to the Insiders or
transactions thereby.
16.5 Governing Law. To the extent not preempted by Federal law, the
Plan, and all agreements hereunder, shall be construed in
accordance with and governed by the laws of the State of Texas.
<TABLE>
EXHIBIT 12
SBC COMMUNICATIONS INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Accounting Changes* $ 6,318 $ 2,558 $ 5,283 $ 4,670 $ 4,403
Add: Interest Expense 993 1,043 901 1,043 1,010
Dividends on Preferred Securities 80 80 60 - -
1/3 Rental Expense 147 129 115 85 93
------------ ----------- ----------- ----------- -----------
Adjusted Earnings $ 7,538 $ 3,810 $ 6,359 $ 5,798 $ 5,506
============ =========== =========== =========== ===========
Total Interest Charges $ 1,052 $ 1,168 $ 1,043 $ 1,048 $ 1,010
Dividends on Preferred Securities 80 80 60 - -
1/3 Rental Expense 147 129 115 85 93
------------ ----------- ----------- ----------- -----------
Adjusted Fixed Charges $ 1,279 $ 1,377 $ 1,218 $ 1,133 $ 1,103
============ =========== =========== =========== ===========
Ratio of Earnings to Fixed Charges 5.89 2.77 5.22 5.12 4.99
<FN>
* Undistributed earnings on investments accounted for under the equity method
have been excluded.
</FN>
</TABLE>
Selected Financial and Operating Data
Dollars in millions except per share amounts
- --------------------------------------------------------------------------------
At December 31 or for the year
ended: 1998 1 1997 2 1996 1995 1994
- --------------------------------------------------------------------------------
Financial Data
- --------------------------------------------------------------------------------
Operating revenues $ 28,777$ 26,681 $ 25,202 $ 23,356 $ 22,555
- --------------------------------------------------------------------------------
Operating expenses $ 21,891$ 23,103 $ 18,976 $ 17,878 $ 17,216
- --------------------------------------------------------------------------------
Operating income $ 6,886 $ 3,578 $ 6,226 $ 5,478 $ 5,339
- --------------------------------------------------------------------------------
Interest expense $ 993 $ 1,043 $ 901 $ 1,043 $ 1,010
- --------------------------------------------------------------------------------
Equity in net income of affiliates $ 236 $ 201 $ 207 $ 120 $ 226
- --------------------------------------------------------------------------------
Income taxes $ 2,306 $ 984 $ 2,070 $ 1,632 $ 1,575
- --------------------------------------------------------------------------------
Income from continuing operations
before extraordinary loss and
cumulative effect of accounting
changes 3 $ 4,068 $ 1,674 $ 3,387 $ 3,132 $ 2,962
- --------------------------------------------------------------------------------
Net income (loss) $ 4,023 $ 1,674 $ 3,477 $ (3,577)$ 2,985
================================================================================
Earnings per common share:
Income from continuing operations
before extraordinary loss and
cumulative effect of accounting
changes 3 $ 2.08 $ 0.86 $ 1.73 $ 1.60 $ 1.53
- --------------------------------------------------------------------------------
Net income (loss) $ 2.06 $ 0.86 $ 1.78 $ (1.83)$ 1.54
================================================================================
Earnings per common share-Assuming
Dilution:
Income from continuing operations
before extraordinary loss and
cumulative effect of accounting
changes 3 $ 2.05 $ 0.85 $ 1.72 $ 1.60 $ 1.53
- --------------------------------------------------------------------------------
Net income (loss) $ 2.03 $ 0.85 $ 1.77 $ (1.82)$ 1.54
================================================================================
Total assets $45,066 $ 44,836 $ 42,057 $ 40,361 $ 49,525
- --------------------------------------------------------------------------------
Long-term debt $11,612 $ 13,176 $ 12,100 $ 11,592 $ 11,698
- --------------------------------------------------------------------------------
Construction and capital
expenditures $ 5,927 $ 6,230 $ 5,855 $ 4,729 $ 4,262
- --------------------------------------------------------------------------------
Free cash flow 4 $ 2,454 $ 1,366 $ 2,046 $ 2,572 $ 3,058
- --------------------------------------------------------------------------------
Dividends declared per common
share 5 $ 0.935 $ 0.895 $ 0.86 $ 0.825 $ 0.79
- --------------------------------------------------------------------------------
Book value per common share $ 6.52 $ 5.38 $ 5.22 $ 4.50 $ 7.36
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges 5.89 2.77 5.22 5.12 4.99
- --------------------------------------------------------------------------------
Debt ratio 48.86% 57.07% 56.83% 63.04% 48.71%
- --------------------------------------------------------------------------------
Weighted Average Common Shares
Outstanding (000,000) 1,957 1,945 1,956 1,955 1,936
- --------------------------------------------------------------------------------
Weighted Average Common Shares
Outstanding With Dilution
(000,000) 1,984 1,962 1,967 1,963 1,940
- --------------------------------------------------------------------------------
End of Period Common Shares
Outstanding (000,000) 1,959 1,954 1,942 1,960 1,952
- --------------------------------------------------------------------------------
Operating Data
- --------------------------------------------------------------------------------
Network access lines in
service (000) 37,252 35,727 34,003 32,385 31,173
- --------------------------------------------------------------------------------
Access minutes of use (000,000) 148,560 139,470 128,716 112,874 100,800
- --------------------------------------------------------------------------------
Wireless customers (000) 6,851 5,951 4,827 3,995 3,158
- --------------------------------------------------------------------------------
Number of employees 129,850 128,100 119,270 117,260 120,140
- --------------------------------------------------------------------------------
1 As detailed in management's discussion and analysis of Results of Operations,
1998 results include charges for strategic initiatives related to the merger
with Southern New England Telecommunications Corporation (SNET) and gains on
sales of certain non-core businesses. Excluding these items, SBC reported an
adjusted income from continuing operations before extraordinary loss and
cumulative effect of accounting change of $4,117 and an adjusted net income
of $4,072 for 1998.
2 As detailed in management's discussion and analysis of Results of Operations,
1997 results include charges for several items including strategic initiatives
and ongoing merger integration costs, gain on the sale of SBC's interests in
Bell Communications Research, Inc. and a first quarter after-tax settlement
gain. Excluding these items, SBC reported an adjusted net income of $3,450
for 1997.
3 1998, Early retirement of debt and Change in directory accounting; 1996,
Change in directory accounting; 1995, Discontinuance of Regulatory Accounting;
and 1994, Income from spun-off operations.
4 Free cash flow is net cash provided by operating activities less construction
and capital expenditures.
5 Dividends declared by SBC's Board of Directors; these amounts do not include
dividends declared and paid by Pacific Telesis Group and SNET prior to their
respective mergers.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Dollars in millions except per share amounts
SBC Communications Inc. (SBC) is a holding company whose subsidiaries and
affiliates operate predominantly in the communications services industry.
SBC's subsidiaries and affiliates provide landline and wireless
telecommunications services as well as equipment and directory advertising
both domestically and worldwide.
The consolidated financial results reflect SBC's mergers with Southern New
England Telecommunications Corporation (SNET) in 1998 and Pacific Telesis
Group (PAC) in 1997 as pooling of interests (see Note 2 of Notes to
Consolidated Financial Statements).
SBC's principal wireline subsidiaries are Southwestern Bell Telephone Company
(SWBell), providing telecommunications services in Texas, Missouri, Oklahoma,
Kansas and Arkansas (five-state area), Pacific Bell (PacBell, which also
includes Pacific Bell Information Services), The Southern New England
Telephone Company (SNETel) and Nevada Bell (collectively referred to as the
Telephone Companies). SBC's principal wireless subsidiaries are Southwestern
Bell Mobile Systems, Inc. (Mobile Systems), Pacific Bell Mobile Services
(PBMS) and SNET Cellular, Inc. SBC's principal directory subsidiaries are
Southwestern Bell Yellow Pages, Inc. (SWBYP), Pacific Bell Directory (PB
Directory) and SNET Information Services, Inc. The Telephone Companies are
subject to regulation by each of the states in which they operate and by the
Federal Communications Commission (FCC).
This discussion should be read in conjunction with the consolidated financial
statements and the accompanying notes.
Results of Operations
Summary
Financial results, including percentage changes from the prior year, are
summarized as follows:
- -------------------------------------------------------------------------------
Percent Change
-----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Operating revenues $ 28,777 $ 26,681 $ 25,202 7.9% 5.9%
Operating expenses $ 21,891 $ 23,103 $ 18,976 (5.2)% 21.7%
Income before
extraordinary loss and
cumulative effect of
accounting change $ 4,068 $ 1,674 $ 3,387 - -
Extraordinary loss $ (60) - - - -
Cumulative effect of
accounting change $ 15 - $ 90 - -
Net income $ 4,023 $ 1,674 $ 3,477 - -
===============================================================================
In 1998 and 1996, SBC reflected a cumulative effect of accounting change
related to accounting for directory revenues and expenses (see Note 1 of
Notes to Consolidated Financial Statements). In 1998, SBC incurred an
extraordinary loss related to the early retirement of debt at PacBell (see
Note 10 of Notes to Consolidated Financial Statements).
Results for 1998 and 1997 also include several items that SBC normalizes for
management purposes. For 1998, normalizing items included $219 of gains on
sales of certain non-core businesses, principally the required disposition of
SBC's interest in Mobile Telephone Networks (MTN), a South African national
cellular company, due to SBC's investment in Telkom SA Limited (Telkom), and
$268 of charges related to strategic initiatives resulting from the merger
integration process with SNET. For 1997, normalizing items included $1,899
of costs related to strategic initiatives resulting from the merger
integration process with PAC, the impact of several second quarter 1997
regulatory rulings and charges for ongoing merger integration costs (see Note
2 of Notes to Consolidated Financial Statements for further discussion of
merger integration costs), as well as $33 of gain on the sale of the
Telephone Companies' interests in Bell Communications Research, Inc.
(Bellcore) and $90 of first quarter 1997 settlement gain at PAC associated
with lump-sum pension payments that exceeded the projected service and
interest costs for 1996 retirements. Collectively these items decreased
income before extraordinary loss and cumulative effect of accounting change
by $49 and $1,776 in 1998 and 1997. Excluding these items, 1998 income
before extraordinary loss and cumulative effect of accounting change would
have been $4,117, or 19.3% higher than 1997 earnings of $3,450. The
corresponding diluted per share amounts would be $2.08 in 1998, or 18.2%
higher than $1.76 in 1997.
Excluding these items, the 1998 increase in income before extraordinary loss
and cumulative effect of accounting change was due primarily to broad-based
growth in demand for SBC's Wireline, Wireless and Directory operations.
Results for 1998 also reflect reduced dilution from Personal Communications
Services (PCS) operations in California and Nevada. Demand growth was also
the primary factor contributing to the 1997 increases, partially offset by a
high level of expenses for the introduction of PCS in California and Nevada.
Segment Results
SBC has four reportable segments: Wireline, Wireless, Directory and Other.
The Wireline segment provides landline telecommunications services, including
local, network access and long distance services, messaging and Internet
services and sells customer premise and private business exchange equipment.
The Wireless segment provides wireless telecommunications services, including
local and long distance services, and sells wireless equipment. The
Directory segment sells advertising for and publication of yellow pages and
white pages directories and electronic publishing. The Other segment
includes SBC's international investments and other domestic operating
subsidiaries. (See Note 9 of Notes to Consolidated Financial Statements.)
SBC evaluates performance of these segments based on income before income
taxes, adjusted for normalizing items. Normalizing items for 1998 and 1997
are described above. There were no normalizing items for 1996.
Collectively, these normalizing items had the effect of reducing operating
revenues in 1998 and 1997 by $8 and $188 and increasing operating expenses in
1998 and 1997 by $422 and $2,550, as well as affecting non-operating income
and expenses. If all of the normalizing items were included in their
respective segments, the effect would be to increase (reduce) each segment's
income before income tax in 1998 and 1997 as follows: Wireline $(306) and
$(2,007); Wireless $(49) and $(100); Directory $12 and $(75); and Other $268
and $0. The following sections will discuss SBC's operations excluding these
normalizing items.
Operating Revenues
Following are SBC's normalized operating revenues, including segment totals
and percentage changes from the prior year (reductions of $8 in 1998 and $188
in 1997 are excluded):
- --------------------------------------------------------------------------------
Percent Change
-----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Wireline $ 22,210 $ 20,926 $ 19,919 6.1% 5.1%
Wireless 4,185 3,697 3,137 13.2 17.9
Directory 2,393 2,286 2,145 4.7 6.6
Other 85 57 43 49.1 32.6
Corporate, adjustments &
eliminations (88) (97) (42) (9.3) -
==============================================================
Total Normalized Operating
Revenues $ 28,785 $ 26,869 $ 25,202 7.1% 6.6%
================================================================================
Wireline
Wireline operating revenues increased $1,284, or 6.1%, in 1998 and $1,007, or
5.1%, in 1997. Components of Wireline operating revenues, including
percentage changes from the prior year, are as follows:
- --------------------------------------------------------------------------------
Percent Change
-----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Local service $ 11,154 $ 10,434 $ 9,513 6.9% 9.7%
Network access:
Interstate 4,612 4,494 4,354 2.6 3.2
Intrastate 1,917 1,884 1,851 1.8 1.8
Long distance service 2,353 2,351 2,523 0.1 (6.8)
Other 2,174 1,763 1,678 23.3 5.1
=============================================================
Total Wireline $ 22,210 $ 20,926 $ 19,919 6.1% 5.1%
================================================================================
Local Service revenues increased $720, or 6.9%, in 1998 and $921, or
9.7%, in 1997 due primarily to increases in demand which totaled $656
and $799 in 1998 and 1997, including increases in access lines and
vertical services revenues. The number of access lines increased by
4.3% and 5.1% in 1998 and 1997. Approximately 40% and 31% of access
line growth in 1998 and 1997 was due to sales of additional access lines
to existing residential customers. In both years, approximately 46% of
the access line growth was in California and 32% was in Texas. Access
lines in Texas and California account for approximately 75% of the
Telephone Companies' access lines. Vertical services revenues, which
include custom calling options, Caller ID, voice mail and other enhanced
services, increased by approximately 20% in both years and totaled
approximately $1,892 and $1,582 in 1998 and 1997.
Additionally, local service revenues increased as a result of several
regulatory actions that also had the effect of decreasing one or more
other types of operating revenues. In 1998 and 1997, federal payphone
regulation, introduction of extended area service plans and the
introduction of the California High Cost Fund (CHCFB) collectively
increased local service revenues by approximately $157 and $211, and
decreased long distance revenue by approximately $53 and $117,
interstate network access revenue by $20 and $53, intrastate network
access revenue by approximately $24 and $26 and other operating revenue
by approximately $7 and $0. The net effect on Wireline operating
revenue was an increase of $53 and $15 in 1998 and 1997. The California
Public Utilities Commission (CPUC) has stated that the CHCFB is intended
to directly subsidize the provision of service to high-cost areas and
allow PacBell to set competitive rates for other services.
These increases in local service revenues were partially offset by
decreases of approximately $43 and $18 resulting from cellular
interconnection rate reductions in 1998 and 1997. Rate reductions under
CPUC price cap orders also reduced 1997 local service revenues by
approximately $56.
Network Access Interstate network access revenues increased $118, or
2.6%, in 1998 and $140, or 3.2%, in 1997 due largely to increases in
demand for access services by interexchange carriers, and growth in
revenues from end-user charges attributable to an increasing access line
base, which collectively resulted in an increase of approximately $420
and $361 in 1998 and 1997. Partially offsetting these increases were
the effects of rate reductions of approximately $189 in 1998 and $120 in
1997 related to the FCC's productivity factor adjustment, access reform
and other changes and regulatory shifts related to payphone deregulation
of approximately $20 and $53 as noted in local service above.
Additional decreases in 1998 totaling approximately $76 resulted from an
increase in universal service fund net payments implemented in the first
quarter of 1998 that exceeded the 1997 net payments of long-term
support, which were designed to subsidize universal service. The net
federal universal fund payments and receipts will be exogenous factors
in future federal price cap filings. Interstate network access revenues
in 1997 also had a net decrease of approximately $42 due to the reversal
of 1996 revenue sharing and proposed 1996 tariff decrease estimates at
the Telephone Companies.
Intrastate network access revenues increased $33 in both 1998 and 1997,
due largely to increases in demand totaling approximately $79 and $121
in 1998 and 1997, including usage by alternative intraLATA toll
carriers. These increases in 1998 and 1997 were partially offset by
state regulatory rate reductions at PacBell and SWBell totaling
approximately $23 and $50 and the effects of the CHCFB described above
in local service totaling approximately $24 and $26.
Long Distance Service revenues were relatively unchanged in 1998 and
decreased approximately $172, or 6.8%, in 1997. Long distance service
revenues decreased due to the effect of the regulatory shifts discussed
in local service above of approximately $53 and $117 in 1998 and 1997
related to the CHCFB, introduction of extended area service plans and
payphone deregulation, price competition from alternative intraLATA toll
carriers of approximately $43 and $100 in 1998 and 1997 at SWBell and
SNETel and regulatory rate reductions of approximately $34 in 1997.
These decreases were offset in 1998 and partially offset in 1997 by
revenues from increased toll messages and demand at PacBell totaling
approximately $48 and $45 in 1998 and 1997 and increased customer
migration to SNET All Distance (trademark), an interstate and intrastate
toll service, of approximately $20 and $42 in 1998 and 1997. In addition,
revenues in 1998 increased by approximately $22 due to the net effect of
regulatory rate orders and local exchange carrier billing settlements.
Other operating revenues increased $411, or 23.3%, in 1998 and $85, or
5.1%, in 1997 due primarily to increased sales from nonregulated
products and services at the Telephone Companies totaling approximately
$201 and $72 in 1998 and 1997, increased equipment sales at the
Telephone Companies of approximately $92 and $6 in 1998 and 1997 and
revenues from new business initiatives, primarily Internet services,
totaling approximately $71 and $39 in 1998 and 1997. In addition, net
payments for state universal funds of approximately $15 in 1998
contributed to the increase. These increases were partially offset in
1998 by approximately $7 related to the CHCFB, discussed in local
service above.
Wireless
Wireless operating revenues increased $488, or 13.2%, in 1998 and $560, or
17.9%, in 1997. Components of Wireless operating revenues, including
percentage changes from the prior year, are as follows:
- --------------------------------------------------------------------------------
Percent Change
-----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Subscriber $ 3,783 $ 3,372 $ 2,907 12.2% 16.0%
Other 402 325 230 23.7 41.3
==============================================================
Total Wireless $ 4,185 $ 3,697 $ 3,137 13.2% 17.9%
================================================================================
Subscriber revenues consist of wireless local service and long distance.
Wireless subscriber revenues increased $411, or 12.2%, in 1998 and $465,
or 16%, in 1997 due primarily to growth in the number of customers of
15.1% and 23.3%, partially offset by declines in average revenue per
customer. Increases in 1997 wireless subscriber revenues of
approximately $103 also resulted from the introduction of PCS operations
in California, Nevada and Oklahoma. At December 31, 1998, SBC had
5,924,000 traditional cellular customers, 81,000 resale customers and
846,000 PCS customers. At December 31, 1997, SBC had 5,526,000
traditional cellular customers, 60,000 resale customers and 365,000 PCS
customers.
Other wireless revenues increased $77, or 23.7%, in 1998 and $95, or
41.3%, in 1997 due primarily to increases in equipment revenue
attributable to growth in the number of customers and conversion to
digital equipment.
Directory
Directory operating revenues increased $107, or 4.7%, in 1998 and $141, or
6.6%, in 1997. Directory operating revenues, including percentage changes
from the prior year, are as follows:
- --------------------------------------------------------------------------------
Percent Change
-----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
================================================================================
Total Directory $ 2,393 $ 2,286 $ 2,145 4.7% 6.6%
================================================================================
Directory operating revenues increased in 1998 due mainly to increased
demand, including benefits from merger initiatives. Also contributing to the
increase was approximately $17 from directory rescheduling from the first
quarter of 1999 into the fourth quarter of 1998. Directory advertising
revenues increased in 1997 due mainly to increased demand and the publication
of directories in 1997 that were not published in 1996 due to rescheduling.
Operating Expenses
Following are SBC's normalized operating expenses, including percentage
changes from the prior year(additions of $422 in 1998 and $2,550 in 1997
are excluded):
- --------------------------------------------------------------------------------
Percent Change
----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Operations and support:
Wireline $ 12,711 $ 12,291 $ 11,464 3.4% 7.2%
Wireless 2,786 2,610 1,994 6.7 30.9
Directory 1,227 1,230 1,159 (0.2) 6.1
Other 152 93 46 63.4 -
Corporate, adjustments &
eliminations (363) (368) (153) (1.4) -
- ----------------------------------------------------------------
Total operations and support 16,513 15,856 14,510 4.1 9.3
Depreciation and amortization * 4,956 4,697 4,466 5.5 5.2
- ----------------------------------------------------------------
Total Normalized Operating
Expenses $ 21,469 $ 20,553 $ 18,976 4.5% 8.3%
================================================================================
* See Note 9 of Notes to Consolidated Financial Statements for breakdown by
segment.
Wireline
Operations and support expenses increased $420, or 3.4%, in 1998 and
$827, or 7.2%, in 1997. Increases for 1998 include costs of
approximately $262 related to progress in the merger implementation
process including centralizing support functions and other merger
initiatives at SWBell and PacBell. Offsetting these increased costs
were reductions in 1998 primarily related to realization of merger
initiative benefits that totaled approximately $317. These reductions
included lower use of contract labor, primarily at PacBell, lower costs
associated with customer number portability and reduced research and
development costs. Operations and support expense also increased in
1998 due to costs associated with reciprocal compensation for the
termination of Internet traffic of approximately $136 at the Telephone
Companies (see "Federal Regulation" for further discussion about
reciprocal compensation). Increased expenses in 1998 of approximately
$55 related to new business initiatives, primarily voice mail, Internet,
long distance and cable. Additional costs in 1998 totaling
approximately $172 related to increased wages and salaries, benefits,
materials and right to use fees. Comparisons to 1997 are also impacted
by the absence of the recognition of 1997 pension settlement gains
relating to 1997 retirees after the merger with PAC totaling
approximately $136.
Increases in 1997 include costs for wages, salaries, benefits, sales
commissions and contract labor totaling approximately $327. Increases
in 1997 also include costs associated with customer number portability
after the merger with PAC, interconnection, other regulatory mandated
network enhancements and materials of approximately $414. Increased
expenses in 1997 of approximately $156 related to new business
initiatives, primarily voice mail, Internet, long distance and cable.
These increases were partially offset by a reduction related to the
recognition of pension settlement gains discussed above.
Wireless
Wireless expenses increased $176, or 6.7%, in 1998 and $616, or 30.9%,
in 1997 due primarily to growth in the number of customers and increased
equipment sales. The large increase in 1997 expenses includes
approximately $362 of expenses from the introduction of PCS operations.
These increases were partially offset by decreased customer acquisition
costs of 11% and 4% in 1998 and 1997.
Directory
Directory expenses remained relatively unchanged in 1998 as lower costs
resulting from the merger integration process, including decreased
employee-related costs, were offset by expenses from increased demand
and directory rescheduling discussed in directory operating revenue
above. Directory expenses increased in 1997 due mainly to increased
demand and the publication of directories in 1997 that were not
published in 1996 due to rescheduling.
Depreciation and Amortization expense is primarily in the Wireline and
Wireless segments. In total, depreciation and amortization increased
$259, or 5.5%, in 1998 due primarily to increased depreciation expense
of $201 in the Wireline segment and $41 in the Wireless segment
resulting from overall higher plant levels. The increase in 1998 was
partially offset by reduced depreciation at PacBell related to analog
switching equipment of $42. Total depreciation and amortization
increased $231, or 5.2%, in 1997. The increase was due to increased
depreciation expense of $193 in the Wireline segment and $141 in the
Wireless segment resulting from overall higher plant levels. The
wireless increase was due primarily to the launch of PCS operations.
Reduced depreciation of $107 at PacBell related to analog switching
equipment partially offset the increase.
Interest Expense on a consolidated basis for 1998 decreased by $50, or 4.8%,
in 1998 and increased by $142, or 15.8%, in 1997. Interest expense for 1998
includes $3 of one-time charges for SNET merger-approval costs and 1997
includes $27 associated with one-time charges, primarily interest on the PAC
merger-approval costs. Excluding these charges, interest expense for 1998
decreased $26, or 2.6%, and increased $115, or 12.8%, for 1997. The 1998
decrease was due primarily to reductions in interest expense resulting from
lower average debt levels and lower weighted average interest rates,
partially offset by lower capitalization of interest during construction.
The 1997 increase was due primarily to increased average debt levels.
Equity in Net Income of Affiliates increased $35 in 1998 and decreased $6 in
1997. The 1998 increase reflects increased equity in net income of $78 from
SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's
national telecommunications company, SBC's May 1997 investment in Telkom and
SBC's wireless operations. Also contributing to the increase were lower
losses resulting from reduced involvement in Tele-TV. These increases were
partially offset by a reduction of $53 in contribution from investments in
Switzerland, France and Israel, primarily resulting from expenditures on long
distance and wireless in Switzerland and long distance in France and Israel.
The 1997 decrease reflects decreased equity in net income of $49 from
Telmex. This lower income resulted from the change in the functional
currency used by SBC to record its interest in Telmex from the peso to the
U.S. dollar beginning in 1997 and SBC's reduced ownership percentage after
the sale of Telmex L shares. Results also reflect preoperating expenses of
$32 in several international investments, including long distance in France,
Switzerland and Israel and cellular communications in Taiwan, and decreased
contribution of $13 from SBC's wireless operations. These decreases were
mainly offset by equity in net income of $58 from Telkom and $27 in lower
losses from Tele-TV.
SBC's earnings from foreign affiliates will continue to be generally
sensitive to exchange rate changes in the value of the respective local
currencies. SBC's foreign investments are recorded under U.S. generally
accepted accounting principles, which include adjustments for the purchase
method of accounting and exclude certain adjustments required for local
reporting in specific countries, such as inflation adjustments.
Other Income (Expense) - Net for 1998 and 1997 includes amounts that SBC
management normalized for reviewing results. Normalizing amounts for 1998
include $358 in gains on the sale of non-core businesses, primarily the
required disposition of SBC's interest in MTN and the sale of SBC Media
Ventures, Inc., pending from the prior year. Amounts for 1997 reflect gains
of $54 from the sale of SBC's interests in Bellcore and $32 in second quarter
charges related to SBC's strategic initiatives, primarily writeoffs of
nonoperating plant. Absent these items, other income (expense) for 1998,
1997 and 1996 was $(113), $(100) and $(75).
During 1998, several offsetting transactions impacted other income and
expense contributing to the normalized increase of net other expense of $13.
SBC recognized other expense of $237 related to an impairment of an
international investment and investments in certain wireless technologies,
primarily wireless video. Also increasing other expense were higher minority
interest, lower interest income and call premiums and unamortized discounts
on early retirement of debt at SWBell that totaled $67 more than the previous
year. Offsetting these decreases were other income related to a special
dividend of $158 received from a software affiliate and gains of $127
recognized on the sales and the charitable contribution of SBC's
available-for-sale investment in Telewest Communications plc (see Note 7 of
Notes to Consolidated Financial Statements for further discussion of the
gains). Movement in the market value of Telmex L shares requires a market
valuation adjustment on certain SBC debt redeemable either in cash or Telmex
L shares. Additionally, Telmex under their repurchase program from time to
time repurchases enough shares in the market that SBC is required to sell
part of its Telmex L share holdings to Telmex to remain under 10% ownership
of Telmex. The net of these activities contributed $90 more to other income
than in 1997. Also affecting comparisons with 1997 was approximately $64 in
royalties and gains recognized in 1997.
During 1997, there were also several offsetting transactions contributing to
the normalized increase in net other expense of $25. Higher minority
interest, including distributions paid on an additional $500 of Trust
Originated Preferred Securities (TOPrS) sold by PAC in June 1996, and lower
interest income resulted in $43 more net expense than in 1996. The net
activity related to market movement on Telmex L shares increased other
expense by $47 more than in 1996. Partially offsetting these net other
expenses were royalty payments associated with software developed by an
affiliate and other investment gains totaling $64.
Income Taxes for 1998 include taxes related to the sale of certain non-core
businesses discussed in other income (expense) - net and tax benefits
associated with merger integration initiatives relating to SNET. Income
taxes for 1997 reflect the tax effect of charges for strategic initiatives
resulting from SBC's comprehensive review of operations and the impact of
several regulatory rulings. Income taxes for 1997 also included taxes on the
first quarter pension settlement gain discussed in operations and support.
The net effective tax rate on these items was lower as a result of
non-deductible items included in the charge and valuation adjustments to
certain deferred tax assets which may not be utilized due to restrictions
associated with the merger. Excluding these items, income taxes for 1998 and
1997 would have been $2,332 and $1,951. Income taxes for 1998 were higher
due primarily to higher income before income taxes. Income taxes for 1997,
excluding the non-recurring items, were slightly lower than income taxes for
1996 of $2,070.
Extraordinary Loss In 1998, SBC recorded an extraordinary loss of $60
related to the refinancing of $684 of long-term debt at PacBell.
Cumulative Effect of Accounting Change As discussed in Note 1 of Notes to
Consolidated Financial Statements, SNET Information Services, Inc. and PB
Directory changed their methods of recognizing directory publishing revenues
and related expenses effective January 1, 1998 and January 1, 1996,
respectively. The cumulative after-tax effect of applying the new method to
prior years for SNET Information Services, Inc. was recognized as of January
1, 1998 as a one-time, non-cash gain applicable to continuing operations of
$15, or $0.01 per share. The gain is net of deferred taxes of $11. The
one-time gain recognized as of January 1, 1996 for PB Directory was $90, net
of deferred taxes of $53, or $0.05 per share. Management believes the change
to the issue basis method is preferable because it is the method generally
followed in the publishing industry, including SWBYP, and better reflects the
operating activity of the businesses. These accounting changes are not
expected to have a significant effect on net income in future periods.
Operating Environment and Trends of the Business
Regulatory Environment
Overview
The telecommunications industry is in a period of dynamic transition from a
tightly regulated industry overseen by multiple regulatory bodies to a
market-driven industry monitored by state and federal agencies. The
Telephone Companies' wireline telecommunications operations remain subject to
regulation by the eight state regulatory commissions for intrastate services
and by the FCC for interstate services.
Consolidation of companies is occurring within the marketplace for local
telephone service and across other telecommunications services, such as long
distance, cellular, cable television, Internet and other data transmission
services. Companies operating in some of these markets are also expanding
into others, such as the provision of local service by long distance
companies. Additionally, new technologies are also affecting the way people
view and use communications services.
The telecommunications industry is also changing internationally, as
government-owned telephone monopolies are being privatized in many countries
and competitive entrants are authorized. U.S.-controlled companies may
acquire or form investment, joint venture or strategic relationships with
these newly privatized companies or their new competitors involving any or
all of the range of telecommunications services. Foreign-controlled
companies also may acquire or form such relationships with U.S. companies.
SBC is aggressively representing its interests before federal and state
regulatory bodies, courts, Congress and state legislatures. SBC will
continue to evaluate the increasingly competitive nature of its business, and
develop appropriate competitive, legislative and regulatory strategies.
Wireline
Federal Regulation
Through affiliates, SBC offers landline interLATA long distance services to
customers in selected areas outside the Telephone Companies' operating
areas. Further, SBC offers interLATA long distance services to customers in
Connecticut through SNET America, Inc. (SAI). Under the Telecommunications
Act of 1996 (Telecom Act), before being permitted to offer landline interLATA
long distance service in any state within the regulated operating areas of
SWBell, PacBell and Nevada Bell, SBC must apply for and obtain state-specific
approval from the FCC. The FCC's approval, which involves consultation with
the United States Department of Justice and the appropriate state commission,
requires favorable determinations that certain of the Telephone Companies
have entered into interconnection agreement(s) that satisfy a 14-point
"competitive checklist" with predominantly facilities-based carrier(s) that
serve residential and business customers or, alternatively, that certain of
the Telephone Companies have a statement of terms and conditions effective in
that state under which they offer the "competitive checklist" items. The FCC
must also make favorable public interest and structural separation
determinations in connection with each application. See "State Regulation"
for status of the state applications.
In December 1997, the United States District Court for the Northern District
of Texas ruled that parts of the Telecom Act were unconstitutional on the
grounds that they improperly discriminate against certain subsidiaries of SBC
by imposing restrictions that prohibit certain of the Telephone Companies by
name from offering interLATA long distance and other services that other
Local Exchange Carriers (LECs) are free to provide. In September 1998, the
United States Court of Appeals for the Fifth Circuit (5th Circuit) reversed
this decision and ruled that the challenged provisions of the Telecom Act
were constitutional. In January 1999, the United States Supreme Court
(Supreme Court) declined to hear an appeal of the 5th Circuit's decision.
Interconnection In August 1996, the FCC issued rules by which competitors
could connect with LECs' networks, including those of the Telephone
Companies. Among other things, the rules addressed unbundling of network
elements, pricing for interconnection and unbundled elements, and resale of
retail telecommunications services. The FCC rules were appealed by numerous
parties, including SBC.
In July 1997, the United States Court of Appeals for the Eighth Circuit (8th
Circuit) held that the FCC did not have the authority to promulgate rules
related to the pricing of local intrastate telecommunications and that its
rules in that regard were invalid. The 8th Circuit also overturned the FCC's
rules which allowed competitors to "pick and choose" among the terms and
conditions of approved interconnection agreements. In October 1997, the 8th
Circuit issued a subsequent decision clarifying that the Telecom Act does not
require the incumbent LECs to deliver network elements to competitors in
anything other than completely unbundled form.
In September 1997, a number of parties, including SBC, filed petitions to
enforce the July 1997 ruling of the 8th Circuit that the right to set local
exchange prices, including the pricing methodology used, is reserved
exclusively to the states. The petitions responded to the FCC's rejection of
Ameritech Corporation's interLATA long distance application in Michigan, in
which the FCC stated it intended to apply its own pricing standards to
Regional Holding Company (RHC) interLATA applications. The petitioners
asserted the FCC was violating state authority. On January 22, 1998, the 8th
Circuit ordered the FCC to abide by the July 1997 ruling and reiterated that
the FCC cannot use interLATA long distance applications made by SBC and other
RHC wireline subsidiaries wishing to provide interLATA long distance to
attempt to reimpose the pricing standards ruled invalid in July 1997 by the
8th Circuit.
In January 1999, the Supreme Court ruled on an appeal of the 8th Circuit's
order. The ruling held that the Telecom Act gives the FCC the authority to
set guidelines for states to follow in setting prices under the Telecom Act,
and reinstated the FCC rules allowing those seeking to interconnect to "pick
and choose" specific provisions from previous interconnection agreements.
Because the 8th Circuit's decision did not address the lawfulness of the
content of the FCC pricing guidelines, the Supreme Court remanded that issue
to the 8th Circuit for further consideration. The ruling also upheld FCC
rules forbidding incumbent LECs from separating already combined network
elements, but remanded back to the FCC its determination of which network
elements must be made available. The Supreme Court also held that, before the
FCC could require telecommunications carriers to make a particular network
element available to requesting carriers, the FCC must first consider as to
proprietary elements, whether access to the elements was necessary and
whether the failure to provide access to a particular element would impair
the requesting carrier's ability to provide the service it seeks to offer.
The effect of this ruling on the telecommunications industry cannot be
determined at this time.
Reciprocal Compensation Reciprocal compensation is billed to SBC's
subsidiaries by Competitive Local Exchange Carriers (CLECs) for the
termination of certain local exchange traffic to CLEC customers. SBC
believes that under the Telecom Act the state commissions have authority to
order reciprocal compensation for intrastate or local traffic, while only the
FCC has authority over interstate and interexchange traffic. SBC believes
most Internet traffic is interexchange and interstate. Several state
commissions, including the CPUC in an October 1998 order, have taken the
position that Internet communications is intrastate or local traffic and
ordered SBC to pay reciprocal compensation to certain CLECs pursuant to then
existing contracts. State commissions in the five-state area other than
Kansas have also issued orders finding that SBC is required to pay reciprocal
compensation to certain CLECs. In June 1998, a U.S. District Court in Texas
affirmed the Texas Public Utility Commission's (TPUC) determination and
upheld payment of reciprocal compensation, holding that an Internet call is
comprised of two portions, and that the TPUC has jurisdiction over the local
portion of the traffic and the FCC over the Internet component. Similar
decisions regarding Internet traffic have been made by other state
commissions. SBC has sought review or reconsideration of these cases.
The question whether Internet communications should be classified as
local/intrastate or interstate traffic for reciprocal compensation purposes
is the subject of a pending FCC proceeding and the FCC is expected to rule on
this issue in the near future. SBC's subsidiaries have been recording
amounts sought by certain CLECs for the termination of Internet traffic to
Internet Service Providers.
Asymmetrical Digital Subscriber Line (ADSL) is a high-speed data service
principally used for Internet access. In June 1998, SBC filed with the FCC a
petition requesting relief for ADSL from pricing, unbundling and resale
regulatory restrictions. The FCC denied the petition and declared that
incumbents, such as the Telephone Companies, must offer such services for
resale at a discount and must offer unbundled access to the equipment used in
ADSL provisioning to the extent possible. SBC has filed with the FCC a
petition for reconsideration of this order. The FCC sought comments on
offering the incumbent LECs the option of providing deregulated advanced
services through an affiliate with appropriate safeguards.
The effects of the FCC decisions on the above topics are dependent on many
factors including, but not limited to, the ultimate resolution of the pending
appeals; the number and nature of competitors requesting interconnection,
unbundling or resale; and the results of the state regulatory commissions'
review and handling of related matters within their jurisdictions.
Accordingly, SBC is not able to assess the impact of the FCC orders and
proposed rulemaking at this time.
State Regulation
The following provides an overview of state regulation in the eight states in
which the Telephone Companies operated at December 31, 1998.
- --------------------------------------------------------------------------------
Number of
Signed
Wireline
Alternative Interconnection Long Distance
State Regulation 1 Dialing Parity 2 Agreements 3 Application Status
- --------------------------------------------------------------------------------
Arkansas Yes, indefinite Presently not 54 Decision expected
required prior in 1999 4
to long distance
authorization
- --------------------------------------------------------------------------------
California Yes, ends Proceeding 66 Decision expected
1/2002 pending in 1999 4
- --------------------------------------------------------------------------------
Connecticut Yes, ends Dialing parity 13 Long distance
2/2001 exists service provided by
the retail entity 5
- --------------------------------------------------------------------------------
Kansas Yes, indefinite Commission 55 Decision expected
ordered in 1999 4
implementation
by 2/1999; state
statute
presently
prohibits
requirement
before long
distance
authorization
- --------------------------------------------------------------------------------
Missouri Yes, indefinite Proceeding 61 Decision expected
pending in 1999 4
- --------------------------------------------------------------------------------
Nevada Yes, ends Presently not 19 No activity
12/2002 required prior
to long distance
approval;
proceeding
pending
- --------------------------------------------------------------------------------
Oklahoma Yes, ends Ordered by 3/1999 52 Decision expected
2/2001 in 1999 4
- --------------------------------------------------------------------------------
Texas Yes, ends TPUC deferred 175 Decision expected
9/2001 its decision in 1999 4
pending FCC
issuance of new
dialing parity
rules; state
statute
presently
prohibits
requirement
before long
distance
authorization
- --------------------------------------------------------------------------------
Other significant notes:
1 Alternative regulation is other than rate of return regulation.
2 In a January 1999 decision, the Supreme Court ruled that the FCC had
the authority to issue rules implementing intrastate and intraLATA dialing
parity. Several interexchange carriers are arguing in pending state
proceedings that the ruling requires immediate implementation of dialing
parity, preempting state requirements. The Telephone Companies take the
position that dialing parity requirements should be consistent with state
laws and that they should not be required to provide intraLATA toll
dialing parity prior to receiving authorization to provide interLATA long
distance services. In states where dialing parity exists, customers are
able to subscribe to an intraLATA toll carrier just as they do for long
distance services.
3 Interconnection agreements are signed with CLECs for the purpose of
allowing the CLECs to exchange local calls with the incumbent telephone
company.
4 Awaiting determination by state commissions on the Telephone Companies'
compliance with the 14-point competitive checklist. FCC approval is
required subsequent to state determination.
5 SNETel is restricted from providing interLATA long distance service in
any of the other Telephone Companies' operating regions.
The following presents highlights of certain regulatory developments.
California In October 1998, the CPUC issued a decision modifying the current
regulatory framework for PacBell effective January 1, 1999. The decision
adopted PacBell's proposal that the current cap on basic residential rates be
continued for three more years, through 2001, with the CPUC retaining the
ability to adjust basic telephone rates. The decision suspended earnings
sharing, rate of return reviews and the use of earnings caps and floors
through 2001. In addition, the decision adopted PacBell's proposal to
eliminate depreciation reviews and granted PacBell the freedom to set its own
depreciation rates and methodology. It also continued the suspension of the
productivity factor adjustment. In addition, the CPUC decision eliminated
most future exogenous cost adjustments, including the recovery of future
costs related to a 1993 accounting change for postretirement benefits other
than pensions. Management currently estimates the items embodied within the
new regulatory framework will have the net effect of reducing annual revenue
by approximately $100 from 1999 through 2004.
In July 1998, the CPUC issued a rate rebalancing decision related to its 1996
order on universal service. The CPUC's decision was implemented
prospectively beginning September 1, 1998 and reduces PacBell's non-basic
local service, network access and long distance service revenues by $305
annually to offset the approximately $305 annually that PacBell expects to
receive from the CHCFB. Beginning in February 1997, PacBell, and all other
California telecommunications carriers, began collecting funds via customer
surcharges consistent with the CPUC's 1996 decision. The CPUC has yet to
decide on the specific mechanism to be employed to ensure the distribution of
funds collected by PacBell and other carriers from February 1997 through
August 1998 is revenue neutral.
Connecticut In January 1997, SNET submitted to the Connecticut Department of
Public Utility Control (DPUC) its proposal on corporate restructure. The
proposal recommended that SNETel functions be split: ownership and
maintenance of switching and transmission network facilities, i.e., all
wholesale functions, would remain in the telephone company, SNETel, and all
retail functions would go to SAI, which was the long distance subsidiary.
Both would be wholly-owned by SNET. In June 1997, the DPUC granted SNET
permission to restructure its telephony operations, with several DPUC-imposed
modifications.
Under the plan, all retail operations (retail marketing and customer service)
have been transferred to SAI, and SAI will be treated by the regulators like
all other CLECs. SNET local service customers will choose their provider via
a balloting process, which has been scheduled for September 1999. All
wholesale services and the network infrastructure will remain with SNETel,
which will be restricted to meeting the needs of CLECs, including SAI and
other wholesale customers. SAI can buy its wholesale service from SNETel or
any other wholesale provider. SAI has been providing interstate and
international long distance service since 1993, and received certification to
provide local service and intrastate toll in Connecticut in 1997.
Missouri Effective September 26, 1997, the Missouri Public Service
Commission (MPSC) determined that SWBell is subject to price cap regulation.
Prices in effect as of December 31, 1996 are the initial maximum allowable
rates for services and cannot be adjusted until January 1, 2000 for basic and
access services and on January 1, 1999 for non-basic services. On an
exchange basis where a competitor began operations, the freeze on maximum
allowable rates for non-basic services was removed. After January 1, 2000,
caps for basic and access services may be adjusted based on one of two
government indices. After January 1, 1999, caps for non-basic services may
be increased up to 8% per year. In an exchange where competition for basic
local service exists for five years, services will be declared competitive
and subject to market pricing unless the MPSC finds effective competition
does not exist. The Office of Public Counsel and MCI WorldCom, Inc. (MCI
WorldCom) sought judicial review of the MPSC determination and in May 1998
the state circuit court affirmed the MPSC decision.
Texas Under the Public Utility Regulatory Act, which became effective in May
1995 (PURA), SWBell elected to move from rate of return regulation to price
regulation with elimination of earnings sharing. Basic local service rates
are capped at existing levels for four years following the election, i.e.,
until September 1999. The TPUC is prohibited from reducing switched access
rates charged by LECs to interexchange carriers while rates are capped.
LECs electing price regulation are committed to network and infrastructure
improvement goals, including expansion of digital switching and advanced
high-speed services to qualifying public institutions, such as schools,
libraries and hospitals, requesting the services. PURA also established an
infrastructure grant fund for use by public institutions in upgrading their
communications and computer technology. The 1997 Texas legislative session
changed the funding for this infrastructure grant fund from annually
collecting $150 for ten years to a fixed percentage (1.25%) applied to all
telecommunications providers' sales taxable revenues. The law also provides
a cap of $1,500 for the life of the fund. SWBell's annual payments were
approximately $36 in 1997 and $56 in 1998. Due to the industry's growth in
revenues, the fund should be completely funded before the original ten years.
PURA establishes local exchange competition by allowing companies that desire
to provide local exchange services to apply for certification by the TPUC,
subject to certain buildout requirements, resale restrictions and minimum
service requirements. PURA provides that SWBell will remain the default
carrier of "1 plus" intraLATA long distance traffic in its territory until
SWBell is allowed to carry interLATA long distance. In 1996, MCI WorldCom
and AT&T Corp. (AT&T) sued the state of Texas, alleging that PURA violates
the Texas state constitution, and claiming that PURA establishes
anticompetitive barriers designed to prevent MCI WorldCom, AT&T and Sprint
Corporation (Sprint) from providing local services within Texas. The FCC,
also in response to petitions filed by AT&T and MCI WorldCom, preempted and
voided portions of PURA that required certain buildout requirements.
Furthermore, the FCC also preempted rules that excluded competitors from
entering markets with fewer than 31,000 access lines and which made resale of
Centrex phone services subject to a limited property restriction. AT&T and
MCI WorldCom have dismissed their suits regarding this matter. In October
1997, SWBell filed with the FCC a petition for reconsideration regarding the
preemption of the property restriction for Centrex services. This issue is
still pending before the FCC.
Competition
Wireline
Competition continues to increase for telecommunications and information
services. Recent changes in legislation and regulation have increased the
opportunities for alternative service providers offering telecommunications
services. Technological advances have expanded the types and uses of
services and products available. As a result, SBC faces increasing
competition as well as new opportunities in significant portions of its
business.
Recent state legislative and regulatory developments allow increased
competition for local exchange services. Companies wishing to provide
competitive local service have filed numerous applications with each of the
state commissions throughout the Telephone Companies' regulated operating
areas, and the commissions of each state have been approving these
applications since late 1995. Under the Telecom Act, companies seeking to
interconnect to the Telephone Companies' networks and exchange local calls
must enter into interconnection agreements with the Telephone Companies.
These agreements are then subject to approval by the appropriate state
commission. SBC has reached approximately 495 interconnection and resale
agreements with competitive local service providers, and most have been
approved by the relevant state commission. AT&T, MCI WorldCom and other
competitors are reselling SBC local exchange services, and as of December 31,
1998, there were approximately 800,000 SBC access lines supporting services
of resale competitors throughout the Telephone Companies' regulated operating
areas, most of them in Texas and California. Many competitors have placed
facilities in service and have begun advertising campaigns and offering
services. SBC also was granted facilities-based and resale operating
authority in certain territories served by other LECs and now offers local
exchange service offerings to these areas.
In California, the CPUC authorized facilities-based local services
competition effective January 1996 and resale competition effective March
1996. While the CPUC has established local competition rules and interim
prices, several issues still remain to be resolved, including final rates for
resale and LEC provisioning and pricing of certain network elements to
competitors. PacBell has incurred substantial costs implementing local
competition and number portability. In November 1998, the CPUC issued a
decision allowing PacBell to begin recovery of local competition
implementation costs.
In Texas, the TPUC set rates in December 1997 that SWBell may charge for
access and interconnection to its telephone network. The TPUC decision sets
pricing for dozens of network components and completes a consolidated
arbitration between SWBell and six of its wholesale customers, including AT&T
and MCI WorldCom.
In Missouri, the MPSC issued orders on a consolidated arbitration hearing
with AT&T and MCI WorldCom and on selected items with Metropolitan Fiber
Systems. Among other terms, the orders established discount rates for resale
of SWBell services and prices for unbundled network elements. SWBell
appealed the interconnection agreement resulting from the first arbitration
proceeding on November 5, 1997; a decision is still pending. A second
arbitration process to address other interconnection issues with AT&T has
concluded, and the MPSC ordered that a conforming interconnection agreement
be filed. SWBell appealed this order in April 1998.
The Telephone Companies expect increased competitive pressure in 1999 and
beyond from multiple providers in various markets, including facilities-based
CLECs, interexchange carriers and resellers. At this time, management is
unable to assess the effect of competition on the industry as a whole, or
financially on SBC, but expects both losses of market share in local service
and gains resulting from new business initiatives, vertical services and new
service areas. Competition also continues to intensify in the Telephone
Companies' intraLATA long distance markets. For example, it is estimated
that providers other than PacBell now serve more than half of the business
intraLATA long distance customers in PacBell's service areas. In addition,
if intraLATA toll dialing parity is required, competition in intraLATA long
distance markets is expected to increase.
In the international arena, Telmex was granted a concession in 1990, which
expired in August 1996, as the sole provider of long distance services in
Mexico. Several large competitors have received licenses to compete with
Telmex and have begun operations. As of December 31, 1998, Telmex has
retained approximately 75% of its long distance customers. Telmex's share of
international long distance traffic is expected to decline significantly when
the proportional return mechanism, which guarantees Telmex the same
percentage of incoming traffic as outgoing traffic, expires at the end of
1999. Aggressive local competition is expected in 1999, primarily in the
business segment.
Wireless
In 1993, the FCC adopted an order allocating radio spectrum and licenses for
PCS. PCS utilizes wireless telecommunications digital technology at a higher
frequency radio spectrum than cellular. Like cellular, it is designed to
permit access to a variety of communications services regardless of
subscriber location. In an FCC auction, which concluded in March 1995, PCS
licenses were awarded in 51 major markets. SBC or affiliates acquired PCS
licenses in the Major Trading Areas of Los Angeles-San Diego, California; San
Francisco-Oakland-San Jose, California; Memphis, Tennessee; Little Rock,
Arkansas; and Tulsa, Oklahoma. The California licenses cover substantially
all of California and Nevada. SBC is currently operational in all of its
major California-Nevada markets and Tulsa, Oklahoma. During 1996, SBC
received several AT&T cellular networks in Arkansas in exchange for SBC's PCS
licenses in Memphis, Tennessee, and Little Rock, Arkansas, and other
consideration.
PCS service was formally launched in all the major California and Nevada
markets at different times throughout 1997, with the buildout to other areas
continuing. The network incorporates the Global System for Mobile
Communications standard, which is widely used in Europe. PBMS is selling PCS
as an off-the-shelf product in retail stores, through exclusive agents and in
company-owned stores across California and Nevada. Significant competition
exists, particularly from the two established cellular companies in each
market.
In an FCC auction that concluded in January 1997, SBC acquired eight
additional PCS licenses for Basic Trading Areas that are within the
five-state area.
SBC also has state-approved interconnection agreements to receive reciprocal
compensation from interexchange carriers and other local service providers
accessing its wireless networks in all states where it provides wireless
services.
Companies that were granted licenses in areas where SBC also provides
wireless service include subsidiaries and affiliates of AT&T, Sprint and
other RHCs. Significant competition from PCS providers exists in SBC's major
markets. Competition has been based upon both price and service packaging,
such as unlimited calling plans, and has contributed to SBC's decline in
average subscriber revenue per wireless customer.
Under the Telecom Act of 1996, SBC may offer interLATA long distance over its
wireless network both inside and outside the regulated operating areas. SBC
has entered the wireless long distance markets, and offers wireless long
distance service in all of its wireless service areas.
Directory
SWBYP, PB Directory and SNET Information Services, Inc. face competition from
over 100 publishers of printed directories in their operating areas. Direct
and indirect competition also exists from other advertising media, including
newspapers, radio, television and direct mail providers, as well as from
directories offered over the Internet.
Other Business Matters
New Accounting Standards In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), which will require all derivatives to be
recorded on the balance sheet at fair value, and will require changes in the
fair value of the derivatives to be recorded in net income or comprehensive
income. FAS 133 must be adopted for years beginning after June 15, 1999,
with earlier adoption permitted. Management is currently evaluating the
impact of the change in accounting required by FAS 133, but is not able to
quantify the effect at this time.
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
the new accounting standard on software costs.
Wireless Acquisition See Note 17 of Notes to Consolidated Financial
Statements for a discussion of the acquisition of Comcast Cellular
Corporation.
Long Distance Agreement On February 8, 1999, SBC announced an agreement with
Williams Communications (Williams), a subsidiary of Williams Cos., Inc.,
under which Williams will serve as SBC's long distance provider. As part of
this agreement, SBC plans to acquire 10% of the common stock of Williams.
This investment will occur simultaneously with an initial public offering of
common stock by Williams, scheduled for the second quarter of 1999.
Merger See Note 3 of Notes to Consolidated Financial Statements for a
discussion of the merger agreement with Ameritech Corporation.
SBC's Year 2000 Project SBC operates numerous date-sensitive computer
applications and systems throughout its businesses. Since 1996, SBC has been
working to upgrade its networks and computer systems to properly recognize
the Year 2000 and continue to process critical operational and financial
information. Companywide teams are in place to address and resolve Year 2000
issues and processes are under way to evaluate and manage the risks and costs
associated with preparing SBC's date-impacted systems and networks for the
new millennium.
SBC is using a four-step methodology to address the issue. The methodology
consists of inventory and assessment, hardware and software fixes, testing
and deployment. SBC measures its progress by tracking the number of
completed hardware and software applications, network components, personal
computers and building facilities that can correctly process Year 2000 dates.
Inventory and assessment is estimated to require 20% of the overall effort
and includes the identification of items (i.e., line-by-line review of
software code, switch generics, vendor products, etc.) that could be impacted
by the Year 2000 and the determination of the work effort required to ensure
compliance. The inventory and assessment phase has been completed. This
process involved reviewing over 340 million lines of software code, 1,200
central office switches, 7,000 company buildings, conducting an inventory and
assessment of 117,000 personal computers, and coordinating with 1,300
suppliers of 14,000 products to obtain adequate assurance they will be Year
2000 compliant or determine and address any appropriate contingency plans or
backup systems.
Making the hardware and software fixes is the second phase of the process and
is estimated to require 25% of the overall effort. This activity involves
modifying program code, upgrading computer software and upgrading or
replacing hardware. As of December 31, 1998, the hardware and software fixes
were substantially complete.
Testing involves ensuring that hardware and software fixes will work properly
in 1999 and beyond and occurs both before and after deployment. Testing is
estimated to comprise 45% of the overall effort. Testing began early in
1998, is more than two-thirds complete, and will continue through 1999 to
allow for thorough testing before the Year 2000. Contingency plans and
backup systems are currently being written.
Deployment involves placing the "fixed" systems into a live environment to
ensure they are working properly. Additional testing is done after
deployment as well. Deployment is estimated to require 10% of the overall
effort. More than half of the deployment phase was completed as of December
31, 1998.
SBC expects to spend approximately $265 on the entire project, with
approximately $140 spent through December 31, 1998. As testing and hardware
and software fixes are estimated to require most of the expenditures, there
is not a strict correlation between expenditures and project completion.
The activities involved in SBC's Year 2000 project necessarily require
estimates and projections, as described above, of activities and resources
that will be required in the future. These estimates and projections could
change as work progresses on the project.
Liquidity and Capital Resources
SBC had $460 of cash and cash equivalents available at December 31, 1998.
Commercial paper borrowings as of December 31, 1998 totaled $1,044. SBC has
entered into agreements with several banks for lines of credit totaling
$1,460, all of which may be used to support commercial paper borrowings (see
Note 10 of Notes to Consolidated Financial Statements). SBC had no
borrowings outstanding under these lines of credit as of December 31, 1998.
Cash from Operating Activities
During 1998, as in 1997 and 1996, SBC's primary source of funds continued to
be cash generated from operations, as shown in the Consolidated Statements of
Cash Flows. Net cash provided by operating activities exceeded SBC's
construction and capital expenditures during 1998, as in 1997 and 1996; this
excess is referred to as free cash flow, a supplemental measure of
liquidity. SBC generated free cash flow of $2,454, $1,366 and $2,046 in
1998, 1997 and 1996.
Cash from Investing Activities
To provide high-quality communications services to its customers, SBC,
particularly its Wireline and Wireless operations, must make significant
investments in property, plant and equipment. The amount of capital
investment is influenced by demand for services and products, continued
growth and regulatory commitments.
SBC's capital expenditures totaled $5,927, $6,230 and $5,855 for 1998, 1997
and 1996. Capital expenditures in the Wireline segment were relatively
unchanged in 1998 compared to 1997. The Wireline segment's capital
expenditures increased 12% in 1997 due primarily to demand-related growth,
network upgrades, customer-contracted requirements, ISDN projects and
SWBell's regulatory commitments. The Wireless segment's capital expenditures
decreased 17% and 23% in 1998 and 1997 due primarily to expenditures for
initial buildout of the PCS network and conversion of SBC's largest cellular
markets to digital during 1997 and 1996.
In 1999, management expects total capital spending to be between $6,400 and
$6,800. Capital expenditures in 1999 will relate primarily to the continued
evolution of the Telephone Companies' networks, including amounts agreed to
under regulation plans at SWBell, and continued buildout of Mobile Systems'
markets and PBMS. SBC expects to fund ongoing capital expenditures with cash
provided by operations.
SWBell has substantially completed the additional network and infrastructure
improvements to be made over periods ranging through 2001 to satisfy
regulatory commitments.
Cash from Financing Activities
Dividends declared by the Board of Directors of SBC were $0.935 per share in
1998, $0.895 per share in 1997, and $0.86 per share in 1996. These per share
amounts do not include dividends declared and paid by PAC and SNET prior to
their respective mergers. The total dividends paid by SBC, PAC and SNET were
$1,836 in 1998, $1,755 in 1997 and $1,795 in 1996. Pursuant to the terms of
the merger agreement, PAC reduced its dividend beginning in the second quarter
of 1996. The lower second and third quarter dividends paid in 1996 improved
1996 cash flow by approximately $195. SBC's dividend policy considers both
the expectations and requirements of shareowners, internal requirements of SBC
and long-term growth opportunities.
In February 1998, SBC called $630 of long-term debt for retirement, including
$175 at PacBell and $425 at SWBell, and issued approximately $200 in
debentures at PacBell due February 2008 and approximately $200 in debentures
at SWBell due March 2048. In September 1998, SBC called $175 of long-term
debt for retirement, all at SWBell. In October 1998, PacBell repurchased
$684 of debentures.
Total debt increased during 1997 due primarily to the issuance of medium-term
notes and debentures at the Telephone Companies and debt redeemable either in
cash or Telmex L shares.
During 1996 PAC issued $1,000 of TOPrS, $500 at 7.56% in January 1996 and
$500 at 8.5% in June 1996 (see Note 11 of Notes to Consolidated Financial
Statements). The proceeds were used to retire outstanding short-term debt,
primarily commercial paper that had increased significantly during 1995.
SBC's total capital consists of debt (long-term debt and debt maturing within
one year), TOPrS and shareowners' equity. Total capital increased $108 in 1998
and $1,056 in 1997. The increase in 1998 was due to 1998 earnings, partially
offset by lower debt levels. The increase in 1997 was primarily due to higher
debt levels and 1997 earnings.
SBC's debt ratio was 48.9%, 57.1% and 56.8% at December 31, 1998, 1997 and
1996. The debt ratio is affected by the same factors that affect total
capital.
Market Risk
SBC's capital costs are directly linked to financial and business risks. SBC
seeks to manage the potential negative effects from market volatility and
market risk. Certain financial instruments used to obtain capital are
subject to market risks from fluctuations in market interest rates. The
majority of SBC's financial instruments are medium- and long-term fixed rate
notes and debentures. Fluctuations in market interest rates can lead to
significant fluctuations in the fair value of these notes and debentures. It
is the policy of SBC to manage its debt structure and foreign exchange
exposure in order to manage capital costs, control financial risks and
maintain financial flexibility over the long term. Where appropriate, SBC
will take actions to limit the negative effect of interest and foreign
exchange rates, liquidity and counterparty risks on shareowner value.
Quantitative Information about Market Risk
- --------------------------------------------------
Foreign Exchange Risk Sensitivity Analysis
- --------------------------------------------------
U.S. Dollar Net Underlying
Value of Net Foreign
Foreign Currency
December 31, Exchange Transaction
1998 Contracts Exposures
- --------------------------------------------------
Swiss Franc $ 24 $ 24
Japanese Yen 142 142
French Franc 37 37
Chilean Peso 32 32
- --------------------------------------------------
Total Exposure $ 235 $ 235
- --------------------------------------------------
Note: There is no net exposed long/short currency position and no foreign
exchange loss from a 10% depreciation of the U.S. dollar.
The preceding table describes the effects of a change in the value of the
Swiss franc, Japanese yen, Chilean peso and French franc given a hypothetical
10% depreciation of the U.S. dollar. Since the identified exposure is fully
covered with forward contracts, changes in the value of the U.S. dollar which
affect the value of the underlying foreign currency commitment are fully
offset by changes in the value of the foreign currency contract. If the
underlying currency transaction exposure changed, the resulting mismatch
would expose the company to currency risk of the foreign exchange contract.
For this reason, all contracts are related to firm commitments and matched by
maturity and currency.
Equity Price Risk Sensitivity Analysis
SBC is exposed to equity price risk related to the change in the price of
AirTouch Communications, Inc. (AirTouch) common stock related to the
settlement of employee stock options. At December 31, 1998, the net
appreciated value of the equity swap contract entered in 1994 was $26, while
the value of the underlying employee stock option exposures for AirTouch
common stock was $25, leaving a net exposed long equity position of $1. If
the value of AirTouch common stock increased by 26%, the net exposed long
equity position would increase by $1 to $2. Since January 1, 1995, the
average yearly share price of AirTouch common stock has increased 26%. The
equity swap contract expires April 1999 and the last option grant expires
January 2003. (See Note 11 of Notes to Consolidated Financial Statements.)
In February 1999, management evaluated the exposure to future appreciation of
AirTouch common stock and the benefit to "unwinding" the swap. As a result,
SBC began exiting the equity swap contract, receiving cash for the
appreciated value of the contract and recognizing a minimal gain. Once
exited, SBC will record in other income (expense) - net future changes in the
value of the underlying employee stock option exposure. If the value of
AirTouch common stock were to increase by an additional 26% from mid-February
1999, SBC would record additional expense of approximately $8.
Interest Rate Sensitivity
The principal amount by expected maturity, average interest rate and fair
value of SBC's liabilities that are exposed to interest rate risk are
described in Notes 10 and 11 of Notes to Consolidated Financial Statements.
Following are SBC's interest rate derivatives subject to interest rate risk
(none of these derivatives mature in 2000 through 2003):
- -----------------------------------------------------------
Maturity
- -----------------------------------------------------------
Fair
After Value
1999 2003 Total 12/31/98
- -----------------------------------------------------------
Interest Rate Derivatives
- -----------------------------------------------------------
Interest Rate Swaps
- -----------------------------------------------------------
Receive Variable/Pay
Fixed Notional Amount 1 $50 - $50 $(1)
Fixed Rate Payable 7.2% -
Weighted Average Variable
Rate Receivable 2 5.1% -
- -----------------------------------------------------------
Receive Variable/Pay
Fixed Notional Amount 3 - $13 $13 $(1)
Fixed Rate Payable 6.7% 6.7%
Weighted Average Variable
Rate Receivable 4 5.0% 5.5%
===========================================================
1 Receive Variable/Pay Fixed amount is offset equally by $50 in Variable
Rate Debt maturing in 1999 with an average interest rate of 4.5% and a
fair value of $50.
2 Weighted Average Variable Rate Receivable based on current and the implied
forward rates in the yield curve at the reporting date for Constant
Maturity Treasury minus 20 basis points.
3 Receive Variable/Pay Fixed amount offsets $13 in lease obligation due
after 2003 with an average interest rate of 5.8% and a fair value of $13.
4 Weighted Average Variable Rate Receivable based on current and the implied
forward rates in the yield curve at the reporting date for One Month LIBOR.
As a result of interest rate fluctuations, if SBC were to terminate the
contracts, it would be required to pay $2 to replace the fixed rate flows or
"unwind" the interest swaps. SBC does not intend to terminate the $50
contract as it is linked to the variable rate debt issued by SBC that also
matures in 1999.
There has been no material change in the updated market risks since December
31, 1997.
Qualitative Information about Market Risk
Foreign Exchange Risk
From time to time SBC makes investments in operations in foreign countries,
is paid dividends, receives proceeds from sales or borrows funds in foreign
currency. Before making an investment, or in anticipation of a foreign
currency receipt, SBC will often enter into forward foreign exchange
contracts. The contracts are used to provide currency at a fixed rate.
SBC's policy is to measure the risk of adverse currency fluctuations by
calculating the potential dollar losses resulting from changes in exchange
rates that have a reasonable probability of occurring. SBC covers the
exposure that results from changes that exceed acceptable amounts. SBC does
not speculate in foreign exchange markets.
Equity Risk
SBC has exposure to risk of market changes related to its recorded liability
for outstanding employee stock options for common stock of AirTouch (spun-off
operations). SBC plans to make open market purchases of the stock of
spun-off operations to satisfy its obligation for options that are
exercised. Off-balance-sheet risk exists to the extent the market price of
AirTouch rises in value. As discussed in "Equity Price Risk Sensitivity
Analysis" above, SBC evaluated the exposure to future appreciation of
AirTouch common stock and is exiting a swap contract related to the options
by April 1999.
Interest Rate Risk
SBC issues debt in fixed and floating rate instruments. Interest rate swaps
are used for the purpose of controlling interest expense by fixing the
interest rate of floating rate debt. When market conditions favor issuing
debt in floating rate instruments, and SBC prefers not to take the risk of
floating rates, SBC will enter interest rate swap contracts to obtain
floating rate payments to service the debt in exchange for paying a fixed
rate. SBC does not seek to make a profit from changes in interest rates.
SBC manages interest rate sensitivity by measuring potential increases in
interest expense that would result from a probable change in interest rates.
When the potential increase in interest expense exceeds an acceptable amount,
SBC reduces risk through the issuance of fixed rate instruments and
purchasing derivatives.
Cautionary Language Concerning Forward-Looking Statements
Information set forth in this report contains forward-looking statements that
are subject to risks and uncertainties. SBC claims the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
The following factors could cause SBC's future results to differ materially
from those expressed in the forward-looking statements: (1) adverse economic
changes in the markets served by SBC or changes in available technology; (2)
the final outcome of various FCC rulemakings and judicial review, if any, of
such rulemakings; (3) the final outcome of various state regulatory
proceedings in SBC's eight-state area, and judicial review, if any, of such
proceedings; and (4) the timing of entry and the extent of competition in the
local and intraLATA toll markets in SBC's eight-state area. Readers are
cautioned that other factors discussed in this report, although not
enumerated here, also could materially impact SBC's future earnings.
<PAGE>
<TABLE>
SBC Communications Inc.
Consolidated Statements of Income
Dollars in millions except per share amounts
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Landline local service $ 11,100 $ 10,334 $ 9,465
Wireless subscriber 3,783 3,372 2,907
Network access 6,512 6,215 6,203
Long distance service 2,355 2,352 2,523
Directory advertising 2,420 2,280 2,156
Other 2,607 2,128 1,948
- --------------------------------------------------------------------------------------------
Total operating revenues 28,777 26,681 25,202
- --------------------------------------------------------------------------------------------
Operating Expenses
Operations and support 16,714 17,802 14,510
Depreciation and amortization 5,177 5,301 4,466
- --------------------------------------------------------------------------------------------
Total operating expenses 21,891 23,103 18,976
- --------------------------------------------------------------------------------------------
Operating Income 6,886 3,578 6,226
- --------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (993) (1,043) (901)
Equity in net income of affiliates 236 201 207
Other income (expense) - net 245 (78) (75)
- --------------------------------------------------------------------------------------------
Total other income (expense) (512) (920) (769)
- --------------------------------------------------------------------------------------------
Income Before Income Taxes, Extraordinary Loss and
Cumulative Effect of Accounting Change 6,374 2,658 5,457
- --------------------------------------------------------------------------------------------
Income taxes 2,306 984 2,070
- --------------------------------------------------------------------------------------------
Income Before Extraordinary Loss and Cumulative
Effect of Accounting Change 4,068 1,674 3,387
Extraordinary Loss from Early Extinguishment of Debt,
net of tax (60) - -
Cumulative Effect of Accounting Change, net of tax 15 - 90
- --------------------------------------------------------------------------------------------
Net Income $ 4,023 $ 1,674 $ 3,477
============================================================================================
Earnings Per Common Share:
Income Before Extraordinary Loss and Cumulative
Effect of Accounting Change $ 2.08 $ 0.86 $ 1.73
Net Income $ 2.06 $ 0.86 $ 1.78
- --------------------------------------------------------------------------------------------
Earnings Per Common Share-Assuming Dilution:
Income Before Extraordinary Loss and Cumulative
Effect of Accounting Change $ 2.05 $ 0.85 $ 1.72
Net Income $ 2.03 $ 0.85 $ 1.77
============================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SBC Communications Inc.
Consolidated Balance Sheets
Dollars in millions except per share amounts
- -----------------------------------------------------------------------------------------
December 31,
---------------------------
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 460 $ 410
Short-term cash investments 6 320
Accounts receivable - net of allowances for uncollectibles of
$472 and $430 5,790 5,344
Prepaid expenses 414 357
Deferred income taxes 489 660
Other current assets 379 426
- -----------------------------------------------------------------------------------------
Total current assets 7,538 7,517
- -----------------------------------------------------------------------------------------
Property, Plant and Equipment - Net 29,920 29,068
- -----------------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated Amortization of
$741 and $1,047 3,087 3,663
- -----------------------------------------------------------------------------------------
Investments in Equity Affiliates 2,514 2,740
- -----------------------------------------------------------------------------------------
Other Assets 2,007 1,848
- -----------------------------------------------------------------------------------------
Total Assets $ 45,066 $ 44,836
=========================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 1,551 $ 2,139
Accounts payable and accrued liabilities 7,980 8,330
Dividends payable 458 441
- -----------------------------------------------------------------------------------------
Total current liabilities 9,989 10,910
- -----------------------------------------------------------------------------------------
Long-Term Debt 11,612 13,176
- -----------------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,990 1,569
Postemployment benefit obligation 5,220 5,200
Unamortized investment tax credits 359 431
Other noncurrent liabilities 2,116 2,030
- -----------------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 9,685 9,230
- -----------------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable preferred
securities of subsidiary trusts# 1,000 1,000
- -----------------------------------------------------------------------------------------
Shareowners' Equity
Preferred shares ($1 par value, 10,000,000 authorized:
none issued) - -
Common shares ($1 par value, 7,000,000,000 authorized:
issued 1,987,532,349 at December 31, 1998 and
1,984,141,868 at December 31, 1997) 1,988 992
Capital in excess of par value 9,139 9,966
Retained earnings 3,396 1,204
Guaranteed obligations of employee stock ownership
plans (ESOP) (147) (219)
Deferred compensation - leveraged ESOP (LESOP) (82) (119)
Treasury shares (28,217,018 at December 31, 1998 and
29,741,356 at December 31, 1997, at cost) (882) (730)
Accumulated other comprehensive income (632) (574)
- -----------------------------------------------------------------------------------------
Total shareowners' equity 12,780 10,520
- -----------------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 45,066 $ 44,836
=========================================================================================
<FN>
# The trusts contain assets of $1,030 in principal amount of the Subordinated
Debentures of Pacific Telesis Group.
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SBC Communications Inc.
Consolidated Statements of Cash Flows
Dollars in millions, increase (decrease) in cash and cash equivalents
- -------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 4,023 $ 1,674 $ 3,477
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,177 5,301 4,466
Undistributed earnings from investments in
equity affiliates (56) (100) (138)
Provision for uncollectible accounts 513 566 438
Amortization of investment tax credits (72) (82) (82)
Deferred income tax expense 533 239 485
Extraordinary loss, net of tax 60 - -
Cumulative effect of accounting change, net of tax (15) - (90)
Changes in operating assets and liabilities:
Accounts receivable (959) (902) (1,097)
Other current assets (8) (56) 301
Accounts payable and accrued liabilities (187) 1,431 591
Other - net (628) (475) (450)
- -------------------------------------------------------------------------------------------
Total adjustments 4,358 5,922 4,424
- -------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 8,381 7,596 7,901
- -------------------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (5,927) (6,230) (5,855)
Investments in affiliates (85) (26) (74)
Purchase of short-term investments (42) (916) (1,005)
Proceeds from short-term investments 355 1,029 816
Dispositions 1,140 578 96
Acquisitions - (1,118) (442)
Other 11 13 19
- -------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (4,548) (6,670) (6,445)
- -------------------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (367) (563) (974)
Issuance of other short-term borrowings 2 1,079 209
Repayment of other short-term borrowings (8) (805) (134)
Issuance of long-term debt 413 1,597 988
Repayment of long-term debt (1,121) (602) (443)
Early extinguishment of debt and related call premiums (765) (6) -
Issuance of trust originated preferred securities - - 1,000
Purchase of fractional shares - (15) -
Issuance of common shares 64 - 111
Purchase of treasury shares (498) (87) (650)
Issuance of treasury shares 308 293 52
Dividends paid (1,811) (1,724) (1,765)
Other - (7) (103)
- -------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (3,783) (840) (1,709)
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 50 86 (253)
- -------------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 410 324 577
- -------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Year $ 460 $ 410 $ 324
===========================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SBC Communications Inc.
Consolidated Statements of Shareowners' Equity
Dollars and shares in millions except per share amounts
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated Treasury
Shares Capital in Retained Guaranteed Deferred Other Shares Total
------------- Excess of Earnings Obligations Compensation Comprehensive ------------- Comprehensive
Shares Amount Par Value (Deficit) of ESOP LESOP Income Shares Amount Income
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 991 $ 991 $ 10,002 $ (546) $ (331) $ (242) $ (578) (11) $ (481) $ -
Net income for the year
($1.78 per share) - - - 3,477 - - - - - 3,477
Other comprehensive income,
net of tax:
Foreign currency
translation adjustment,
net of income tax
benefit of $28 - - - - - - (59) - - (59)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 3,418
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends to shareowners
($0.86 per share) - - (115) (1,680) - - - - - -
Reduction of debt
associated with ESOP - - - - 55 - - - - -
Cost of LESOP trust shares
allocated to employee accounts - - - - - 81 - - - -
Issuance of common shares - - 20 - - - - - - -
Purchase of treasury shares - - - - - - - (13) (650) -
Issuance of treasury shares - - 21 - - - - 4 146 -
Other - - 3 14 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 991 991 9,931 1,265 (276) (161) (637) (20) (985) 3,418
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year
($0.86 per share) - - - 1,674 - - - - - 1,674
Other comprehensive income,
net of tax:
Foreign currency
translation adjustment,
net of income tax
expense of $38 - - - - - - 63 - - 63
- ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 1,737
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends to shareowners
($0.895 per share) - - - (1,755) - - - - - -
Reduction of debt
associated with ESOP - - - - 57 - - - - -
Cost of LESOP trust shares
allocated to employee accounts - - - - - 42 - - - -
Issuance of common shares 1 1 39 - - - - - - -
Purchase of treasury shares - - - - - - - (2) (87) -
Issuance of treasury shares - - (38) - - - - 7 335 -
Other - - 34 20 - - - - 7 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 992 992 9,966 1,204 (219) (119) (574) (15) (730) 1,737
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year
($2.06 per share) - - - 4,023 - - - - - 4,023
Other comprehensive income,
net of tax:
Foreign currency
translation adjustment,
net of income tax
benefit of $37 - - - - - - (58) - - (58)
Unrealized gain on
available-for-sale
securities - - - - - - 60 - - 60
Less: reclassification
adjustment for gains
included in net income - - - - - - (60) - - (60)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 3,965
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends to shareowners
($0.935 per share) - - - (1,836) - - - - - -
Two-for-one stock split 993 993 (993) - - - - (15) - -
Reduction of debt
associated with ESOP - - - - 72 - - - - -
Cost of LESOP trust shares
allocated to employee accounts - - - - - 37 - - - -
Issuance of common shares 3 3 74 - - - - - - -
Purchase of treasury shares - - - - - - - (12) (498) -
Issuance of treasury shares - - (33) - - - - 14 346 -
Other - - 125 5 - - - - - -
====================================================================================================================================
Balance, December 31, 1998 1,988 $1,988 $ 9,139 $ 3,396 $ (147) $ (82) $ (632) (28)$ (882) $ 3,965
====================================================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Note 1. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include the
accounts of SBC Communications Inc. and its majority-owned subsidiaries
(SBC). The statements reflect SBC's mergers with Pacific Telesis Group (PAC)
and Southern New England Telecommunications Corporation (SNET) as pooling of
interests (see Note 2). SBC's subsidiaries and affiliates operate
predominantly in the communications services industry, providing landline and
wireless telecommunications services and equipment and directory advertising
both domestically and worldwide.
SBC's principal wireline subsidiaries are Southwestern Bell Telephone Company
(SWBell), providing telecommunications services in Texas, Missouri, Oklahoma,
Kansas and Arkansas, Pacific Bell (PacBell, which also includes Pacific Bell
Information Services), The Southern New England Telephone Company and Nevada
Bell (collectively referred to as the Telephone Companies). SBC's principal
wireless subsidiaries are Southwestern Bell Mobile Systems, Inc., Pacific
Bell Mobile Services and SNET Cellular, Inc. SBC's principal directory
subsidiaries are Southwestern Bell Yellow Pages, Inc. (SWBYP), Pacific Bell
Directory (PB Directory) and SNET Information Services, Inc.
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 certain foreign investments accounted for under the
equity method are included for periods ended within three months of SBC's
year end.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. Certain amounts in
prior period financial statements have been reclassified to conform to the
current year's presentation.
Income Taxes - Deferred income taxes are provided for temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.
Investment tax credits earned prior to their repeal by the Tax Reform Act of
1986 are amortized as reductions in income tax expense over the lives of the
assets which gave rise to the credits.
Cash Equivalents - Cash equivalents include all highly liquid investments
with original maturities of three months or less.
Deferred Charges - Directory advertising costs are deferred until the
directory is published and advertising revenues related to these costs are
recognized.
Revenue Recognition/Cumulative Effect of Accounting Change - SBC recognizes
revenues as earned. Amounts billed in advance of the period in which service
is rendered are recorded as a liability.
SNET Information Services, Inc. prior to January 1, 1998, and PB
Directory, prior to January 1, 1996, recognized revenues and expenses
related to publishing directories using the "amortization" method, under
which revenues and expenses were recognized over the lives of the
directories, generally one year. Effective January 1, 1998, for SNET
Information Services, Inc. and January 1, 1996, for PB Directory, the
accounting was changed to the "issue basis" method of accounting, which
recognizes the revenues and expenses at the time the related directory is
published. The change in methodology was made because the issue basis
method is generally followed in the publishing industry, including SWBYP,
and better reflects the operating activity of the business.
The cumulative after-tax effect of applying the changes in method to prior
years was recognized as of January 1, 1998 and 1996 as one-time, non-cash
gains of $15, or $0.01 per share and $90, or $0.05 per share. The gains
are net of deferred taxes of $11 and $53. Had the current method been
applied during prior periods, income before extraordinary loss and
cumulative effect of accounting change would not have been materially
affected.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost. The cost of additions and substantial betterments of property,
plant and equipment is capitalized. The cost of maintenance and repairs
of property, plant and equipment is charged to operating expenses.
Property, plant and equipment is depreciated using straight-line methods
over their estimated economic lives, generally ranging from 3 to 50
years. In accordance with composite group depreciation methodology, when
a portion of the Telephone Companies' depreciable property, plant and
equipment is retired in the ordinary course of business, the gross book
value is charged to accumulated depreciation; no gain or loss is
recognized on the disposition of this plant.
Intangible Assets - Intangible assets consist primarily of wireless
cellular and Personal Communications Services (PCS) licenses, customer
lists and the excess of consideration paid over net assets acquired in
business combinations. These assets are being amortized using the
straight-line method, over periods generally ranging from 5 to 40 years.
At December 31, 1998 and 1997, amounts included in net intangible assets
for licenses were $2,141 and $2,261. Management periodically reviews the
carrying value and lives of all intangible assets based on expected future
cash flows.
Software Costs - The costs of computer software purchased or developed for
internal use are expensed as incurred. However, initial operating system
software costs are capitalized and amortized over the estimated economic
lives of the associated hardware. The American Institute of Certified
Public Accountants has issued a Statement of Position (SOP) that requires
capitalization of certain computer software expenditures beginning in 1999.
Management continues to evaluate the impact of the change in accounting
required by the SOP and anticipates that it will increase net income by
less than $200 in 1999. With comparable levels of software expenditures,
the SOP would tend to increase net income in comparison with SBC's current
method of accounting for software costs. However, the increases would be
largest in the year of adoption with diminishing levels of increases
compared with current accounting throughout the amortization period.
Consequently, given otherwise comparable income levels excluding software,
and otherwise comparable software expenditures, the effect of the SOP
would be to increase income in the first year and decrease income in each
subsequent year until the number of years affected by the SOP equals the
amortization period.
Advertising Costs - Costs for advertising products and services or
corporate image are expensed as incurred (see Note 18).
Foreign Currency Translation - Local currencies are generally considered
the functional currency for SBC's share of foreign operations, except in
countries considered highly inflationary. SBC translates its share of
foreign assets and liabilities at current exchange rates. Revenues and
expenses are translated using average rates during the year. The ensuing
foreign currency translation adjustments are recorded as a separate
component of shareowners' equity. Other transaction gains and losses
resulting from exchange rate changes on transactions denominated in a
currency other than the local currency are included in earnings as
incurred.
Derivative Financial Instruments - SBC does not invest in any derivatives
for trading purposes. From time to time as part of its risk management
strategy, SBC uses immaterial amounts of derivative financial instruments
including interest rate swaps to hedge exposures to interest rate risk on
debt obligations, and foreign currency forward exchange contracts to hedge
exposures to changes in foreign currency rates for transactions related to
its foreign investments. Derivative contracts are entered into for
hedging of firm commitments only. SBC currently does not recognize the
fair values of these derivative financial investments or their changes in
fair value in its financial statements. Interest rate swap settlements
are recognized as adjustments to interest expense in the consolidated
statements of income when paid or received. Foreign currency forward
exchange contracts are set up to coincide with firm commitments. Gains
and losses are deferred until the underlying transaction being hedged
occurs, and then are recognized as part of that transaction. PAC entered
into an equity swap contract to hedge exposure to risk associated with its
recorded liability for certain outstanding employee stock options relating
to stock of AirTouch Communications Inc. (AirTouch) (see Note 15). The
equity swap contract and its liability are recorded at fair value in the
balance sheet as other assets or liabilities. Equity swap settlements are
recorded in interest expense in the consolidated statements of income when
paid or received.
Note 2. Mergers with SNET and PAC
On April 1, 1997, SBC and PAC completed the merger of an SBC subsidiary
with PAC, in a transaction in which each outstanding share of PAC common
stock was exchanged for 1.4629 shares of SBC common stock (equivalent to
approximately 626 million shares). With the merger, PAC became a
wholly-owned subsidiary of SBC. The transaction has been accounted for as
a pooling of interests and a tax-free reorganization.
Transaction costs and one-time charges relating to the closing of the
merger were $359 ($215 net of tax) including, 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 total, $287 ($180 net of tax) is included in
expenses in 1997, and $72 ($35 net of tax) in 1996. The amounts due to
ratepayers are being paid out over five years, from 1998 to 2002.
On October 26, 1998, SBC and SNET completed the merger of an SBC
subsidiary with SNET, in a transaction in which each share of SNET common
stock was exchanged for 1.7568 shares of SBC common stock (equivalent to
approximately 120 million shares). SNET became a wholly-owned subsidiary
of SBC effective with the merger and the transaction has been accounted
for as a pooling of interests and a tax-free reorganization. Financial
statements for prior periods have been restated to include the accounts of
SNET. Transaction costs related to the merger were $40 ($26 net of tax).
Operating revenues, income before extraordinary loss and cumulative effect
of accounting change and net income of the separate companies for the
pre-merger periods of the last three periods were as follows:
-----------------------------------------------------------------------------
Nine
Months
Ended
September 30, Year Ended December 31,
----------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Operating revenues:
SBC $ 19,495 $ 24,659 $ 23,260
SNET 1,606 2,022 1,942
=============================================================================
Combined $ 21,101 $ 26,681 $ 25,202
=============================================================================
Income before extraordinary loss and
cumulative effect of accounting
change:
SBC $ 3,085 $ 1,474 $ 3,189
SNET 164 198 193
Adjustments 3 2 5
=============================================================================
Combined $ 3,252 $ 1,674 $ 3,387
=============================================================================
Net income:
SBC $ 3,085 $ 1,474 $ 3,279
SNET 179 194 193
Adjustments 3 6 5
=============================================================================
Combined $ 3,267 $ 1,674 $ 3,477
=============================================================================
The combined results include the effect of changes applied retroactively
to conform the accounting methodologies between SNET and SBC for pension
and postemployment benefits. SBC believes the new method is more
prevalent and better reflects the operations of the business.
Post-merger initiatives
During the second quarter of 1997, SBC announced after-tax charges of $1.6
billion related to several strategic decisions resulting from the merger
integration process that began with the April 1, 1997 closing of its
merger with PAC, which included $165 ($101 after tax) of charges related
to several regulatory rulings during the second quarter of 1997 and $281
($176 after tax) for merger approval costs. The decisions resulted from
an extensive review of operations throughout the merged company and
include significant integration of operations and consolidation of some
administrative and support functions.
During the fourth quarter of 1998, SBC again performed a complete review
of all operations affected by the merger with SNET to determine the impact
on ongoing merger integration processes. Review teams examined
operational functions and evaluated all strategic initiatives. As a result
of this review, SBC announced net after-tax charges of $268 related to
strategic decisions arising from the review and expensing of
merger-related costs incurred by SNET.
One-time charges related to the strategic decisions reached by the review
teams totaled $403 ($249 after tax) in the fourth quarter of 1998 and $2
billion ($1.3 billion after tax) in the second quarter of 1997. At
December 31, 1998 and 1997, remaining accruals for anticipated cash
expenditures related to these decisions were approximately $323 and $432.
Reorganization SBC is centralizing several key functions that will
support the operations of the Telephone Companies, including network
planning, strategic marketing and procurement. It is also consolidating a
number of corporate-wide support activities, including research and
development, information technology, financial transaction processing and
real estate management. The Telephone Companies will continue as separate
legal entities. These initiatives continue to result in the creation of
some jobs and the elimination and realignment of others, with many of the
affected employees changing job responsibilities and in some cases
assuming positions in other locations.
SBC recognized charges of approximately $82 ($50 net of tax) during the
fourth quarter of 1998 and $338 ($213 net of tax) during the second
quarter of 1997 in connection with these initiatives. The charges were
comprised mainly of postemployment benefits, primarily related to
severance, and costs associated with closing down duplicate operations,
primarily contract cancellations. Other charges arising out of the
mergers related to relocation, retraining and other effects of
consolidating certain operations are being recognized in the periods those
charges are incurred. The initial integration process subsequent to the
PAC merger resulted in SBC incurring expenses for these merger-related
items in advance of any substantial synergistic benefits. During the
second half of 1997, these merger-related charges totaled $501 ($304 net
of tax).
Impairments/asset valuation As a result of SBC's merger integration
plans, strategic review of domestic operations and organizational
alignments, SBC reviewed the carrying values of related long-lived assets
in the fourth quarter of 1998 and the second quarter of 1997. The reviews
were conducted company-wide, although the fourth quarter 1998 review
focused primarily on SNET. These reviews included estimating remaining
useful lives and cash flows and identifying assets to be abandoned. Where
this review indicated impairment, discounted cash flows related to those
assets were analyzed to determine the amount of the impairment. As a
result of these reviews, SBC wrote off some assets and recognized
impairments to the value of other assets, recording a combined charge of
$321 ($199 after tax) in the fourth quarter of 1998 and $965 ($667 after
tax) in the second quarter of 1997.
The 1998 impairments and writeoffs primarily related to recognition of an
impairment of the assets supporting SNET's video and telephony operations,
and also included charges for required changes in wireless equipment,
inventory and sites. The 1997 impairments and writeoffs related primarily
to the wireless digital TV operations in southern California, certain
analog switching equipment in California, certain rural and other
telecommunications equipment in Nevada, selected wireless equipment,
duplicate or obsolete equipment, cable within commercial buildings in
California, certain nonoperating plant and other assets.
Pacific and Southwestern video curtailment/purchase commitments SBC also
announced in 1997 that it was scaling back its limited direct investment
in video services in the areas also served by PacBell and SWBell. As a
result of this curtailment, SBC halted construction on the Advanced
Communications Network (ACN) in California. As part of an agreement with
the ACN vendor, SBC paid the liabilities of the ACN trust that owned and
financed ACN construction, incurred costs to shut down all construction
previously conducted under the trust and received certain consideration
from the vendor. In the second quarter of 1997, SBC recognized net
expense of $553 ($346 after tax) associated with these activities. During
the third quarter of 1997, SBC recorded the corresponding short-term debt
of $610 previously incurred by the ACN trust on its balance sheet.
Additionally, SBC curtailed certain other video-related activities
including discontinuing its broadband network video trials in Richardson,
Texas, and San Jose, California, substantially scaling back its
involvement in the Tele-TV joint venture and withdrawing its operations in
territory served by SWBell from the Americast venture. Americast partners
are disputing the withdrawal in arbitration and litigation, the outcome of
which cannot be predicted, but is not expected to have a material impact
on SBC's financial condition or results of operations. The collective
impact of these decisions and actions by SBC resulted in a charge of $145
($92 after tax) in the second quarter of 1997.
Note 3. Merger Agreement with Ameritech Corporation
On May 11, 1998, SBC announced a definitive agreement to merge an SBC
subsidiary with Ameritech Corporation (Ameritech) in a transaction in
which each share of Ameritech common stock will be converted into and
exchanged for 1.316 shares of SBC common stock (equivalent to
approximately 1,450 million shares). After the merger, Ameritech will be
a wholly-owned subsidiary of SBC. The transaction, which has been
approved by the board of directors and shareowners of each company, is
intended to be accounted for as a pooling of interests and to be a
tax-free reorganization. The merger is subject to certain regulatory
approvals, including the Federal Communications Commission (FCC) and state
commissions in Ohio and Illinois. If approvals are granted, the
transaction is expected to close in 1999.
SBC and Ameritech own competing cellular licenses in several markets,
including, but not limited to, Chicago, Illinois, and St. Louis, Missouri
(Overlapping Cellular Licenses). In an effort to comply with the FCC's
rules and regulations and certain provisions of the Merger Agreement, SBC
and Ameritech expect to be required by the FCC to divest one of the
Overlapping Cellular Licenses in each market and are attempting to
determine the manner in which an Overlapping Cellular License in each
market should be divested.
The pro forma effect on SBC's consolidated statements of income had the
merger occurred on January 1, 1996 is as follows:
-----------------------------------------------------------------
Pro Forma (unaudited): 1998 1997 1996
-----------------------------------------------------------------
Operating revenues $ 45,931 $ 42,679 $ 40,119
Income before extraordinary loss
and cumulative effect of
accounting change $ 7,674 $ 3,970 $ 5,521
Net income $ 7,629 $ 3,970 $ 5,611
-----------------------------------------------------------------
Basic earnings per share:
Income before extraordinary loss
and cumulative effect of
accounting change $ 2.25 $ 1.17 $ 1.62
Net income $ 2.24 $ 1.17 $ 1.65
-----------------------------------------------------------------
Diluted earnings per share:
Income before extraordinary loss
and cumulative effect of
accounting change $ 2.23 $ 1.16 $ 1.61
Net income $ 2.21 $ 1.16 $ 1.64
=================================================================
This pro forma information does not include the effect of changes, which
will be applied retroactively, to conform accounting methodologies between
SBC and Ameritech. Based on information currently available, management
estimates the conforming changes will not materially affect the pro forma
operating revenues or income before extraordinary loss and cumulative
effect of accounting change. Additionally, the pro forma information also
does not include any potential cost savings which may result from the
integration of SBC's and Ameritech's operations or future transaction
costs relating to the merger (which are estimated to be less than $90),
nor does it consider any reorganization costs or costs associated with the
disposition of the Overlapping Cellular Licenses that may be required.
Management is unable to quantify the potential cost savings that may
result from the integration of SBC and Ameritech. The financial impact of
the reorganization costs or costs associated with the disposition of the
Overlapping Cellular Licenses cannot be determined pending the resolution
of the disposal.
Note 4. Pacific Telesis Group Financial Information
The following table presents summarized financial information for PAC at
December 31, or for the year then ended:
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
Balance Sheets
Current assets $ 3,037 $ 2,835 $ 2,474
Noncurrent assets 15,428 14,150 14,134
Current liabilities 5,278 4,513 3,527
Noncurrent liabilities 10,482 10,413 10,308
============================================================================
Income Statements
Operating revenues $ 11,302 $ 10,101 $ 9,588
Operating income (loss) 2,612 (166) 2,198
Income (loss) before extraordinary loss
and cumulative effect of accounting changes 1,240 (546) 1,057
Net income (loss) 1,180 (224) 1,142
============================================================================
SBC has not provided separate financial statements and other disclosures
for PAC as management has determined that such information is not material
to the holders of the Trust Originated Preferred Securities (TOPrS) (see
Note 11), which have been guaranteed by SBC. This information is provided
as a supplement only.
Note 5. Earnings Per Share
A reconciliation of the numerators and denominators of basic earnings per
share and diluted earnings per share for income before extraordinary loss
and cumulative effect of accounting change for the years ended
December 31, 1998, 1997 and 1996 are shown in the table below.
--------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
--------------------------------------------------------------------------
Numerators
Numerator for basic earnings per share:
Income before extraordinary loss and
cumulative effect of accounting change $4,068 $1,674 $3,387
--------------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 4 3 2
--------------------------------------------------------------------------
Numerator for diluted
earnings per share $4,072 $1,677 $3,389
==========================================================================
Denominators
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding (000) 1,956,610 1,944,617 1,956,200
--------------------------------------------------------------------------
Dilutive potential common shares (000):
Stock options 21,701 12,926 7,385
Other stock-based compensation 5,542 4,388 3,410
--------------------------------------------------------------------------
Denominator for diluted
earnings per share 1,983,853 1,961,931 1,966,995
==========================================================================
Basic earnings per share:
Income before extraordinary loss and
cumulative effect of accounting change $ 2.08 $ 0.86 $ 1.73
Extraordinary loss (0.03) - -
Cumulative effect of accounting change 0.01 - 0.05
--------------------------------------------------------------------------
Net income $ 2.06 $ 0.86 $ 1.78
==========================================================================
Diluted earnings per share:
Income before extraordinary loss and
cumulative effect of accounting change $ 2.05 $ 0.85 $ 1.72
Extraordinary loss (0.03) - -
Cumulative effect of accounting change 0.01 - 0.05
--------------------------------------------------------------------------
Net income $ 2.03 $ 0.85 $ 1.77
==========================================================================
Note 6. Property, Plant and Equipment
Property, plant and equipment is summarized as follows at December 31:
------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------
Land $ 442 $ 434
Buildings 6,842 6,502
Central office equipment 28,019 25,864
Cable, wiring and conduit 30,916 29,943
Other equipment 5,897 5,926
Under construction 1,350 1,546
------------------------------------------------------------------------
73,466 70,215
Accumulated depreciation and amortization 43,546 41,147
------------------------------------------------------------------------
Property, plant and equipment-net $ 29,920 $ 29,068
========================================================================
SBC's depreciation expense as a percentage of average depreciable plant
was 7.2%, 7.4% and 6.9% for 1998, 1997 and 1996.
Certain facilities and equipment used in operations are under operating or
capital leases. Rental expenses under operating leases for 1998, 1997 and
1996 were $440, $386 and $346. At December 31, 1998, the future minimum
rental payments under noncancelable operating leases for the years 1999
through 2003 were $1,817, $2,652, $2,519, $2,553 and $2,508 and $7,096
thereafter. Capital leases are not significant.
Note 7. Investment in Telewest Communications plc
During 1998, SBC owned up to 15% of Telewest Communications plc
(Telewest), the largest cable television operator in the United Kingdom.
Due to restrictions existing on the sale of SBC's interest in Telewest,
SBC accounted for its investment using the cost method of accounting.
During the third quarter of 1998, as a result of Telewest's merger with
General Cable, Telewest entered into a new agreement with its key
shareholders, including SBC, which lifted those restrictions. SBC was
then required to account for its investment in Telewest as
available-for-sale securities pursuant to Financial Accounting Standards
Board Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). Under FAS 115, available-for-sale
securities are measured at fair value in the statement of financial
position, and unrealized holding gains and losses are excluded from
earnings and reported as a net amount in a separate component of
shareowners' equity until realized. During 1998, SBC sold approximately
90% of its Telewest investment for $425 and made a charitable contribution
of the remainder. The net effect from Telewest transactions for the year
ended December 31, 1998 was to increase net income by $60.
Note 8. Equity Investments
Investments in affiliates accounted for under the equity method include
SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's
national telecommunications company. SBC is a member of a consortium that
holds all of the AA shares of Telmex stock, representing voting control of
the company. Another member of the consortium, Carso Global Telecom, S.A.
de C.V., has the right to appoint a majority of the directors of Telmex.
SBC also owns L shares which have limited voting rights. Throughout 1998,
SBC sold portions of its L shares in response to open market share
repurchases by Telmex, so that its total equity investment remained below
10% of Telmex's total equity capitalization.
Other major equity investments held by SBC include a 1997 investment of
approximately $760 in Telkom SA Limited (Telkom), the state-owned
telecommunications company of South Africa (see Note 17), an indirect 15%
ownership in Cegetel, a joint venture providing a broad range of
telecommunications offerings in France, investments in Chilean
telecommunications operations and minority ownership of several domestic
wireless properties.
The following table is a reconciliation of SBC's investments in equity
affiliates:
-----------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------
Beginning of year $ 2,740 $ 1,964 $ 1,616
Additional investments 55 1,076 337
Equity in net income 236 201 207
Dividends received (167) (90) (70)
Currency translation adjustments (110) (135) (94)
Reclassifications and other
adjustments (240) (276) (32)
=======================================================================
End of year $ 2,514 $ 2,740 $ 1,964
=======================================================================
The currency translation adjustment for 1998 primarily reflects the effect
of exchange rate fluctuations on SBC's investment in South Africa. Other
adjustments for 1998 reflect a write-down of an international investment
and the sale of portions of SBC's Telmex L shares.
Currency translation adjustments for 1997 primarily reflect the effect of
the exchange rate fluctuations on SBC's investments in South African and
French telecommunications companies. Other adjustments for 1997 reflect
the sale of portions of SBC's Telmex L shares and the change to the cost
method of accounting in 1997 for SBC's 1995 investment in South African
wireless operations which were sold during the third quarter of 1998 (see
Note 17).
Undistributed earnings from equity affiliates were $918 and $862 at
December 31, 1998 and 1997.
Note 9. Segment Information
SBC has four reportable segments: Wireline, Wireless, Directory and
Other. The Wireline segment provides landline telecommunications
services, including local, network access and long distance services,
messaging and Internet services and sells customer premise and private
business exchange equipment. The Wireless segment provides wireless
telecommunications services, including local and long distance services,
and sells wireless equipment. The Directory segment sells advertising for
and publication of yellow pages and white pages directories and electronic
publishing. The Other segment includes SBC's international investments
and other domestic operating subsidiaries.
These segments are strategic business units that offer different products
and services and are managed accordingly. SBC evaluates performance based
on income before income taxes, adjusted for normalizing items. For 1998,
normalizing items included gains on sales of certain non-core businesses,
principally the required disposition of SBC's interest in Mobile Telephone
Networks (MTN), a South African national cellular company, due to SBC's
investment in Telkom, and charges related to strategic initiatives
resulting from the merger integration process with SNET. For 1997,
normalizing items included the costs related to strategic initiatives
resulting from the merger integration process with PAC, the impact of
several second quarter 1997 regulatory rulings and charges for ongoing
merger integration costs (see Note 2), as well as the gain on the sale of
the Telephone Companies' interest in Bell Communications Research, Inc.
(Bellcore) and the first quarter 1997 settlement gain at PAC associated
with lump-sum pension payments that exceeded the projected service and
interest costs for 1996 retirements. The effect of any normalizing
adjustments is shown separately in the table below. The accounting
policies of the segments are the same as those described in Note 1.
Transactions between segments are reported at fair value.
Corporate, adjustments and eliminations include corporate activities, the
elimination of intersegment transactions, and other adjustments. Included
in other adjustments are differences in accounting between subsidiary and
consolidated financial statements for postretirement benefits at PacBell
and the treatment of conforming accounting adjustments arising out of the
pooling of interests with SNET and PAC that were required to be treated as
changes in accounting principles by the subsidiaries.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
Corporate,
At December 31, 1998 or for the Adjustments & Normalizing
year ended Wireline Wireless Directory Other Eliminations Adjustments Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 22,097 $ 4,184 $ 2,320 $ 82 $ 102 $ (8) $ 28,777
Intersegment revenues 113 1 73 3 (190) - -
Depreciation and amortization 4,265 583 31 - 77 221 5,177
Equity in net income of affiliates - 25 - 211 - - 236
Interest expense 861 179 11 37 (98) 3 993
Income before income taxes 4,364 490 1,131 269 195 (75) 6,374
Segment assets 33,427 7,161 1,385 2,854 239 - 45,066
Investment in equity method
investees 34 232 - 2,274 (26) - 2,514
Expenditures for additions to
long-lived assets 5,178 644 30 11 64 - 5,927
=================================================================================================================================
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
Corporate,
At December 31, 1997 or for the Adjustments & Normalizing
year ended Wireline Wireless Directory Other Eliminations Adjustments Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 20,718 $ 3,696 $ 2,197 $ 57 $ 201 $ (188)$ 26,681
Intersegment revenues 208 1 89 - (298) - -
Depreciation and amortization 4,095 491 28 - 83 604 5,301
Equity in net income of affiliates (5) 9 - 206 (9) - 201
Interest expense 837 152 4 25 (2) 27 1,043
Income before income taxes 3,736 355 1,043 192 75 (2,743) 2,658
Segment assets 32,018 7,071 1,227 3,398 1,122 - 44,836
Investment in equity method
investees 34 229 - 2,503 (26) - 2,740
Expenditures for additions to
long-lived assets 5,275 776 38 - 141 - 6,230
=================================================================================================================================
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
Corporate,
At December 31, 1996 or for the Adjustments & Normalizing
year ended Wireline Wireless Directory Other Eliminations Adjustments Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 19,751 $ 3,137 $ 2,077 $ 34 $ 203 $ - $ 25,202
Intersegment revenues 168 - 68 9 (245) - -
Depreciation and amortization 3,954 397 28 1 86 - 4,466
Equity in net income of affiliates (5) 22 - 226 (36) - 207
Interest expense 766 107 5 34 (11) - 901
Income before income taxes 3,789 567 970 178 (47) - 5,457
Expenditures for additions to
long-lived assets 4,712 1,006 32 5 100 - 5,855
=================================================================================================================================
</TABLE>
Geographic Information
SBC's investments outside of the United States are primarily accounted for
under the equity method of accounting and do not record in operating
revenues and expenses the revenues and expenses of the individual
companies in which SBC invests. Long-lived assets consist primarily of
the book value of these investments.
------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
------------------------------------------------------------
Revenues:
United States $ 28,692 $ 26,624 $ 25,168
Mexico 15 21 25
South Africa 48 22 3
France 4 5 3
Chile 1 2 2
Other foreign 17 7 1
------------------------------------------------------------
Total $ 28,777 $ 26,681 $ 25,202
============================================================
------------------------------------------------
December 31, 1998 1997
------------------------------------------------
Long-Lived Assets:
United States $ 31,135 $ 30,229
Mexico 836 733
South Africa 694 837
France 557 543
United Kingdom - 339
Chile 59 295
Other foreign 214 234
------------------------------------------------
Total $ 33,495 $ 33,210
================================================
Note 10. Debt
Long-term debt, including interest rates and maturities, is summarized as
follows at December 31:
-----------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
SWBell
Debentures
5.38%-5.88% 2003-2006 $ 500 $ 500
6.13%-6.88% 2000-2048 1,750 1,550
7.00%-7.75% 2009-2027 1,150 1,750
---------------------------------------------------------------------------
3,400 3,800
Unamortized discount-net of premium (38) (36)
---------------------------------------------------------------------------
Total debentures 3,362 3,764
---------------------------------------------------------------------------
Notes
5.04%-7.67% 1998-2010 1,063 1,236
Unamortized discount (5) (6)
---------------------------------------------------------------------------
Total notes 1,058 1,230
---------------------------------------------------------------------------
PacBell
Debentures
4.62%-5.88% 1999-2006 475 475
6.00%-6.88% 2002-2034 1,194 1,194
7.12%-7.75% 2008-2043 1,587 2,250
8.50% 2031 29 225
---------------------------------------------------------------------------
3,285 4,144
Unamortized discount-net of premium (65) (89)
---------------------------------------------------------------------------
Total debentures 3,220 4,055
---------------------------------------------------------------------------
Notes
6.12%-8.70% 2001-2009 1,500 1,300
Unamortized discount (18) (18)
---------------------------------------------------------------------------
Total notes 1,482 1,282
---------------------------------------------------------------------------
Other notes and debentures
4.37%-6.98% 1998-2007 501 633
7.00%-10.50% 1998-2033 2,048 2,033
---------------------------------------------------------------------------
2,549 2,666
Unamortized premium-net of discount 61 65
---------------------------------------------------------------------------
Total other notes and debentures 2,610 2,731
---------------------------------------------------------------------------
Guaranteed obligations of ESOP 1
8.41%-9.40% 2000 127 198
---------------------------------------------------------------------------
Capitalized leases 260 294
---------------------------------------------------------------------------
Total long-term debt,
including current maturities 12,119 13,554
Current maturities (507) (378)
---------------------------------------------------------------------------
Total long-term debt $ 11,612 13,176
===========================================================================
1 See Note 14.
In February and September 1998, SBC called $805 of long-term debt for
retirement. SBC recognized after-tax charges of $11 associated with the
calling of this debt.
In October 1998, PacBell repurchased $684 of long-term debt. The
repurchases resulted in a $60 after-tax extraordinary loss, net of taxes
of $42.
At December 31, 1998, the aggregate principal amounts of long-term debt
and average interest rate scheduled for repayment for the years 1999
through 2003 were $507 (6.6%), $574 (6.4%), $1,034 (7.5%), $980 (6.7%),
$749 (6.3%) with $8,406 (6.9%) due thereafter. As of December 31, 1998,
SBC was in compliance with all covenants and conditions of instruments
governing its debt.
Debt maturing within one year consists of the following at December 31:
------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------
Commercial paper $ 1,044 $ 1,412
Current maturities of long-term debt 507 378
Other short-term debt - 349
------------------------------------------------------------------------
Total $ 1,551 $ 2,139
========================================================================
The weighted average interest rate on commercial paper debt at
December 31, 1998 and 1997 was 5.49% and 6.02%. SBC has entered into
agreements with several banks for compensated lines of credit totaling
$655 and uncompensated lines of credit totaling $805, thus total lines of
credit available are $1,460, all of which may be used to support
commercial paper borrowings. SBC had no borrowings outstanding under
these lines of credit as of December 31, 1998 or 1997.
Note 11. Financial Instruments
The carrying amounts and estimated fair values of SBC's long-term debt,
including current maturities and other financial instruments, are
summarized as follows at December 31:
-------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------
SWBell debentures $3,362 $3,531 $3,764 $3,828
SWBell notes 1,058 1,129 1,230 1,271
PacBell debentures 3,220 3,463 4,055 4,337
PacBell notes 1,482 1,590 1,282 1,342
Other notes and debentures 2,610 2,725 2,731 2,947
TOPrS 1,000 1,029 1,000 1,034
Guaranteed obligations of ESOP 1 127 132 198 207
========================================================================
1 See Note 14.
The fair values of SBC's long-term debt were estimated based on quoted
market prices, where available, or on the net present value method of
expected future cash flows using current interest rates. The fair value of
the TOPrS was estimated based on quoted market prices. The carrying
amounts of commercial paper debt approximate fair values.
SBC does not hold or issue any financial instruments for trading
purposes. SBC's cash equivalents and short-term investments are recorded
at amortized cost. The carrying amounts of cash and cash equivalents and
short-term investments and customer deposits approximate fair values.
Pacific Telesis Financing I and II (the Trusts) were formed for the
exclusive purpose of issuing preferred and common securities representing
undivided beneficial interests in the Trusts and investing the proceeds
from the sales of TOPrS in unsecured subordinated debt securities of PAC.
Under certain circumstances, dividends on TOPrS could be deferred for up to
a period of five years. PAC sold $1 billion of TOPrS, $500 at 7.56% in
January 1996 through Pacific Telesis Financing I and $500 at 8.5% in
June 1996 through Pacific Telesis Financing II. As of December 31, 1998,
the Trusts held subordinated debt securities of PAC in principal amounts of
$516 and $514 with interest rates of 7.56% and 8.5%. Both issues of TOPrS
were priced at $25 per share, have an original 30-year maturity that may be
extended up to 49 years, are callable five years after date of sale at par
and are included on the balance sheet as corporation-obligated mandatorily
redeemable preferred securities of subsidiary trusts. The proceeds were
used to retire short-term indebtedness, primarily commercial paper. SBC
has guaranteed payment of the obligations of the TOPrS.
Derivatives
SBC entered into an equity swap contract to hedge exposure to risk of
market changes related to its recorded liability for outstanding employee
stock options for common stock of AirTouch (spun-off operations) and
associated stock appreciation rights (SARs) (see Note 15). In February
1999, SBC began exiting the equity swap contract, receiving cash for the
appreciated value of the contract and recognizing a minimal gain. Once
exited, SBC will record in other income (expense) - net future changes in
the value of the underlying employee stock option exposure. SBC plans to
make open-market purchases of the stock of spun-off operations to satisfy
its obligation for options that are exercised. Off-balance-sheet risk
exists to the extent the market price of the stock of spun-off operations
rises above the market price reflected in the liability's current carrying
value. The equity swap hedged this exposure and minimized the impact of
market fluctuations. The contract entitled SBC to receive settlement
payments to the extent the price of the common stock of spun-off operations
rose above the notional value of $23.74 per share, but imposed an
obligation to make payments to the extent the price declined below this
level. The swap also obligated SBC to make a monthly payment of a fee
based on LIBOR. The total notional amount of the contract, $13 and $19 as
of December 31, 1998 and 1997, covered the approximate number of the
outstanding options and SARs of spun-off operations on that date. SBC
periodically adjusted downward the outstanding notional amount as the
options and SARs were exercised.
Both the equity swap and SBC's liability for the stock options and SARs of
spun-off operations are carried in the balance sheet at their market
values, which were immaterial as of December 31, 1998 and 1997. Gains and
losses from quarterly market adjustments of the carrying amounts were
substantially offsetting. As of December 31, 1998 and 1997, the
accounting loss that would have been incurred from nonperformance by the
counterparty to the equity swap was $26 and $14.
Note 12. Income Taxes
Significant components of SBC's deferred tax liabilities and assets are as
follows at December 31:
-------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------
Depreciation and amortization $ 3,959 $ 3,679
Equity in foreign subsidiaries 357 253
Other 355 2,052
-------------------------------------------------------------------
Deferred tax liabilities 4,671 5,984
-------------------------------------------------------------------
Employee benefits 1,707 2,528
Unamortized investment tax credits 91 174
Currency translation adjustments 333 303
Other 1,244 2,140
-------------------------------------------------------------------
Deferred tax assets 3,375 5,145
-------------------------------------------------------------------
Deferred tax assets valuation allowance 36 70
-------------------------------------------------------------------
Net deferred tax liabilities $ 1,332 $ 909
===================================================================
The decrease in the valuation allowance is the result of an evaluation of
the uncertainty associated with the realization of certain deferred tax
assets. The valuation allowance is maintained in deferred tax assets for
certain unused federal and state loss carryforwards.
The components of income tax expense are as follows:
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
Federal:
Current $ 1,583 $ 786 $ 1,443
Deferred-net 437 76 364
Amortization of investment tax credits (72) (82) (82)
----------------------------------------------------------------------------
1,948 780 1,725
----------------------------------------------------------------------------
State and local:
Current 262 41 224
Deferred-net 96 163 121
----------------------------------------------------------------------------
358 204 345
----------------------------------------------------------------------------
Total $ 2,306 $ 984 $ 2,070
============================================================================
A reconciliation of income tax expense and the amount computed by applying
the statutory federal income tax rate (35%) to income before income taxes,
extraordinary loss and cumulative effect of accounting change is as
follows:
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Taxes computed at federal statutory rate $ 2,231 $ 930 $ 1,910
Increases (decreases) in income taxes
resulting from:
Amortization of investment tax credits
over the life of the plant that gave
rise to the credits (47) (53) (53)
State and local income taxes-net of
federal income tax benefit 233 133 224
Other-net (111) (26) (11)
-----------------------------------------------------------------------------
Total $ 2,306 $ 984 $ 2,070
=============================================================================
Note 13. Employee Benefits
Pensions - Substantially all employees of SBC are covered by one of
various noncontributory pension and death benefit plans. The pension
benefit formula used in the determination of pension cost for
nonmanagement employees is based on a flat dollar amount per year of
service according to job classification. For PAC managers, benefits
accrue in separate account balances based on a fixed percentage of each
employee's monthly salary with interest. For all other managers, benefits
accrue in separate account balances based on a fixed percentage of each
employee's monthly salary plus interest or are determined based upon a
stated percentage of adjusted career income. Both the bargaining-unit and
management employees of SNET have a cash balance pension plan.
Accordingly, pension benefits are determined as a single account balance
and grow each year with pay and interest credits.
SBC's objective in funding the plans, in combination with the standards of
the Employee Retirement Income Security Act of 1974 (as amended), is to
accumulate funds sufficient to meet its benefit obligations to employees
upon their retirement. Contributions to the plans are made to a trust for
the benefit of plan participants. Plan assets consist primarily of
stocks, U.S. government and domestic corporate bonds, index funds and real
estate.
The following table presents the change in the pension plan benefit
obligation for the years ended December 31:
------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------
Benefit obligation at beginning of the year $ 18,116 $ 16,330
Service cost - benefits earned during the period 339 300
Interest cost on projected benefit obligation 1,265 1,237
Amendments 254 402
Actuarial gain 566 1,398
Special termination benefits 53 -
Benefits paid (1,723) (1,551)
------------------------------------------------------------------------
Benefit obligation at end of year $ 18,870 $ 18,116
========================================================================
The following table presents the change in pension plan assets for the
years ended December 31 and the pension plans' funded status at December 31:
------------------------------------------------------------------
1998 1997
------------------------------------------------------------------
Fair value of plan assets at beginning
of the year $ 24,998 $ 22,428
Actual return on plan assets 3,753 4,111
Benefits paid (1,720) (1,541)
------------------------------------------------------------------
Fair value of plan assets at end of year $ 27,031 $ 24,998
==================================================================
Funded status $ 8,161 $ 6,882
Unrecognized prior service cost 1,312 1,221
Unrecognized net gain (8,327) (7,081)
Unamortized transition asset (759) (895)
------------------------------------------------------------------
Prepaid pension cost $ 387 $ 127
==================================================================
The following table presents amounts recognized in SBC's Consolidated
Balance Sheets at December 31:
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
Prepaid pension cost $ 819 $ 545
Accrued pension liability (432) (418)
----------------------------------------------------------------
Net amount recognized $ 387 $ 127
================================================================
Net pension cost is composed of the following:
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Service cost - benefits earned during
the period $ 339 $ 300 $ 317
Interest cost on projected benefit
obligation 1,265 1,237 1,226
Expected return on plan assets (1,771) (1,640) (1,664)
Amortization of prior service cost 27 15 (19)
Recognized actuarial gain (99) (115) (92)
---------------------------------------------------------------------------
Net pension benefit $ (239) $ (203) $ (232)
===========================================================================
Significant weighted average assumptions used in developing pension
information include:
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Discount rate for determining projected
benefit obligation 7.0% 7.25% 7.5%
Long-term rate of return on plan assets 8.5% 8.5% 8.5%
Composite rate of compensation increase 4.3% 4.3% 4.3%
=============================================================================
The projected benefit obligation is the actuarial present value of all
benefits attributed by the pension benefit formula to previously rendered
employee service. It is measured based on assumptions concerning future
interest rates and employee compensation levels. Should actual experience
differ from the actuarial assumptions, the benefit obligation will be
affected.
In April 1997, management amended the pension plan for non-PAC managers to
a cash balance pension plan effective June 1, 1997. Under the new plan,
participants accrue benefits based on a percentage of pay plus interest.
In addition, a transition benefit is phased in over five years. The new
plan also requires computation of a grandfathered benefit using the old
formula for five years. Participants receive the greater of the cash
balance benefit or the grandfathered benefit. The new cash balance plan
allows lump sum benefit payments in addition to annuities. This change
did not have a significant impact on SBC's net income for 1997.
In March 1996, management amended the pension plan for PAC managers from a
final pay plan to a cash balance plan effective July 1, 1996. An enhanced
transition benefit, based on frozen pay and service as of
June 30, 1996, was established to preserve benefits already accrued by
salaried employees under the final pay plan and resulted in an increase in
earned benefits for most employees. SBC also updated the actuarial
assumptions used in valuing the PAC plans to reflect changes in market
interest rates and recent experience, including a change in its assumption
concerning future ad hoc increases in pension benefits. Taken together,
these changes increased net income by approximately $125 during 1996.
Approximately 4,200 employees left PacBell during 1996 under retirement or
voluntary and involuntary severance programs and received special pension
benefits and cash incentives in connection with the PacBell restructuring
and related force reduction programs. Annual pension cost excludes $64 of
additional pension benefits charged to PacBell's restructuring reserve in
1996.
During 1997, a significant amount of lump sum pension payments resulted in
a partial settlement of PAC's pension plans. Therefore, net settlement
gains in the amount of $299 were recognized in 1997. Of this amount, $152
was recognized in the first quarter of 1997 and related primarily to
managers who terminated employment in 1996. These gains are not included
in the net pension cost shown in the preceding table.
In connection with a voluntary early-out offer that provided enhanced
pension benefits, approximately 1,135 employees left SNET during 1996.
Annual pension cost excludes $65 of net settlement gains charged to SNET's
restructuring reserve in 1996.
Supplemental Retirement Plans - SBC also provides senior and middle
management employees with nonqualified, unfunded supplemental retirement
and savings plans. These plans include supplemental defined pension
benefits as well as compensation deferral plans, some of which include a
corresponding match by SBC based on a percentage of the compensation
deferral. Expenses related to these plans were $105, $90 and $90 in 1998,
1997 and 1996. Liabilities of $1,008 and $897 related to these plans have
been included in other noncurrent liabilities in SBC's Consolidated
Balance Sheets at December 31, 1998 and 1997.
Postretirement Benefits - SBC provides certain medical, dental and life
insurance benefits to substantially all retired employees under various
plans and accrues actuarially determined postretirement benefit costs as
active employees earn these benefits. Employees retiring after certain
dates will pay a share of the costs of medical coverage that exceed a
defined dollar medical cap. Such future cost-sharing provisions have been
reflected in determining SBC's postretirement benefit costs. SBC
maintains Voluntary Employee Beneficiary Association trusts to fund
postretirement benefits. Assets consist principally of stocks and U.S.
government and corporate bonds.
The following table sets forth the change in the benefit obligation for
the years ended December 31:
-----------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------
Benefit obligation at beginning of the year $ 7,701 $ 7,112
Service cost - benefits earned during the period 109 106
Interest cost on projected benefit obligation 537 516
Amendments 363 (48)
Actuarial gain (220) 397
Benefits paid (410) (382)
-----------------------------------------------------------------------
Benefit obligation at end of year $ 8,080 $ 7,701
=======================================================================
The following table sets forth the change in plan assets for the years
ended December 31 and the plans' funded status at December 31:
-------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------
Fair value of plan assets at beginning
of the year $ 3,826 $ 2,926
Actual return on plan assets 847 677
Employer contribution 354 462
Benefits paid (248) (239)
-------------------------------------------------------------------
Fair value of plan assets at end of year $ 4,779 $ 3,826
===================================================================
Funded status $ (3,301) $ (3,875)
Unrecognized prior service cost 286 (13)
Unrecognized net gain (1,912) (1,175)
-------------------------------------------------------------------
Accrued postretirement benefit obligation $ (4,927) $ (5,063)
===================================================================
Postretirement benefit cost is composed of the following:
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Service cost-benefits earned during
the period $ 109 $ 106 $ 105
Interest cost on accumulated postretirement
benefit obligation (APBO) 537 516 512
Expected return on assets (272) (220) (181)
Other - net 6 (14) 5
---------------------------------------------------------------------------
Postretirement benefit cost $ 380 $ 388 $ 441
===========================================================================
The fair value of plan assets restricted to the payment of life insurance
benefits was $844 and $987 at December 31, 1998 and 1997. At December 31,
1998 and 1997, the accrued life insurance benefits included in the APBO
benefit obligation were $367 and $93.
The assumed medical cost trend rate in 1999 is 7.0%, decreasing linearly
to 5.5% in 2002, prior to adjustment for cost-sharing provisions of the
medical and dental plans for active and certain recently retired
employees. The assumed dental cost trend rate in 1999 is 5.75%, reducing
to 5.0% in 2002. Raising the annual medical and dental cost trend rates
by one percentage point increases the APBO as of December 31, 1998 by $488
and increases the aggregate service and interest cost components of the
net periodic postretirement benefit cost for 1998 by approximately $34.
Decreasing the annual medical and dental cost trend rates by one
percentage point decreases the APBO as of December 31, 1998 by $408 and
decreases the aggregate service and interest cost components of the net
periodic postretirement benefit cost for 1998 by approximately $27.
Significant assumptions for the discount rate, long-term rate of return on
plan assets and composite rate of compensation increase used in developing
the APBO and related postretirement benefit costs were the same as those
used in developing the pension information.
Note 14. Other Employee Benefits
Employee Stock Ownership Plans - SBC maintains contributory savings plans
which cover substantially all employees. Under the savings plans, SBC
matches a stated percentage of eligible employee contributions, subject to
a specified ceiling.
SBC has four leveraged ESOPs as part of the existing savings plans. Two
of the ESOPs were funded with notes issued by the savings plans to various
lenders, the proceeds of which were used to purchase shares of SBC's
common stock in the open market. These notes are unconditionally
guaranteed by SBC and therefore presented as a reduction to shareowners'
equity and an increase in long-term debt. They will be repaid with SBC
contributions to the savings plans, dividends paid on SBC shares and
interest earned on funds held by the ESOPs.
The third ESOP purchased PAC treasury shares in exchange for a promissory
note from the plan to PAC. Since PAC is the lender, this note is not
reflected as a liability and the remaining cost of unallocated trust
shares is carried as a reduction of shareowners' equity. Principal and
interest on the note are paid from employer contributions and dividends
received by the trust. All PAC shares were exchanged for SBC shares
effective with the merger April 1, 1997. The provisions of the ESOP were
unaffected by this exchange.
The fourth ESOP acquired SNET shares with the proceeds of notes issued by
the savings plans, which SNET guaranteed, through a third party. The SNET
common stock was acquired through open market purchases, in exchange for a
promissory note from the plan to SNET. SNET periodically makes cash
payments to the ESOP that, together with dividends received on shares held
by the ESOP, are used to make interest and principal payments on both
loans. All SNET shares were exchanged for SBC shares effective with the
merger October 26, 1998. The provisions of the ESOP were unaffected by
this exchange.
SBC's match of employee contributions to the savings plans is fulfilled
with shares of stock allocated from the ESOPs and with purchases of SBC's
stock in the open market. Shares held by the ESOPs are released for
allocation to the accounts of employees as employer matching contributions
are earned. Benefit cost is based on a combination of the contributions
to the savings plans and the cost of shares allocated to participating
employees' accounts. Both benefit cost and interest expense on the notes
are reduced by dividends on SBC's shares held by the ESOPs and interest
earned on the ESOPs' funds.
Information related to the ESOPs and the savings plans is summarized below:
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Benefit expense-net of dividends and
interest income $ 55 $ 59 $ 76
Interest expense-net of dividends and
interest income 16 21 30
-----------------------------------------------------------------------------
Total expense $ 71 $ 80 $ 106
=============================================================================
Company contributions for ESOPs $ 110 $ 112 $ 121
=============================================================================
Dividends and interest income for debt service $ 58 $ 63 $ 67
=============================================================================
SBC shares held by the ESOPs are summarized as follows at December 31:
------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------
Unallocated 11,505,123 17,210,803
Committed to be allocated 1,245,335 282,388
Allocated to participants 47,425,671 45,966,307
------------------------------------------------------------------------
Total 60,176,129 63,459,498
========================================================================
Note 15. Stock-Based Compensation
Under various SBC plans, senior and other management employees and
non-employee directors have received stock options, SARs, performance
shares and nonvested stock units to purchase shares of SBC common stock.
Options issued through December 31, 1998 carry exercise prices equal to
the market price of the stock at the date of grant and have maximum terms
ranging from five to ten years. Depending upon the grant, vesting of
options may occur up to four years from the date of grant. Performance
shares are granted to key employees in the form of common stock and/or in
cash based upon the price of common stock at date of grant and are awarded
at the end of a two- or three-year period, subject to the achievement of
certain performance goals. Nonvested stock units also are valued at
market price of the stock at date of grant and vest over a three-year
period. Up to 206 million shares may be issued under these plans.
In 1996, SBC elected to continue measuring compensation cost for these
plans using the intrinsic value-based method of accounting prescribed in
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). Accordingly, no compensation cost
for SBC's stock option plans has been recognized. The compensation cost
that has been charged against income for SBC's other stock-based
compensation plans, primarily SARs and nonvested stock units, totaled $45,
$43 and $22 for 1998, 1997 and 1996. Had compensation cost for stock
option plans been recognized using the fair value based method of
accounting at the date of grant for awards in 1998, 1997 and 1996 as
defined by FAS 123, SBC's net income would have been $3,921, $1,597 and
$3,445, and basic net income per share would have been $2.00, $0.82 and
$1.76.
Options and SARs held by the continuing employees of PAC at the time of
the AirTouch spin-off were supplemented with an equal number of options
and SARs for common shares of spun-off operations. The exercise prices
for outstanding options and SARs held by continuing employees of PAC were
adjusted downward to reflect the value of the supplemental spun-off
operations' options and SARs. The balance sheet reflects a related
liability equal to the difference between the current market price of
spun-off operations stock and the exercise prices of the supplemental
options outstanding (see Note 11). As of December 31, 1998, 459,916
supplemental spun-off operations options and SARs were outstanding with
expiration dates ranging from 1999 to 2003. Outstanding options and SARs
that were held by employees of the wireless operations at the spin-off
date were replaced by options and SARs for common shares of spun-off
operations. The spun-off operations assumed liability for these
replacement options and SARs.
For purposes of these pro forma disclosures, the estimated fair value of
the options granted after 1994 is amortized to expense over the options'
vesting period. Because most employee options vest over a two- to
four-year period, these disclosures will not be indicative of future pro
forma amounts until the FAS 123 rules are applied to all outstanding
non-vested awards. The fair value for these options was estimated at the
date of grant, using a Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1998, 1997 and
1996: risk-free interest rate of 5.72%, 6.56% and 6.25%; dividend yield of
2.21%, 3.07% and 4.91%; expected volatility factor of 15%, 15% and 18%;
and expected option life of 5.3, 5.8 and 4.7 years.
Information related to options and SARs is summarized below:
-----------------------------------------------------------------------------
Weighted
Average
Number Exercise
Price
-----------------------------------------------------------------------------
Outstanding at January 1, 1996 60,648,949 $20.89
Granted 25,035,921 23.00
Exercised (3,979,290) 18.73
Forfeited/Expired (2,159,301) 21.59
-----------------------------------------------------------------------------
Outstanding at December 31, 1996
(35,522,826 exercisable at weighted
average price of $20.13) 79,546,279 21.64
Granted 33,560,019 27.28
Exercised (17,548,592) 20.51
Forfeited/Expired (4,817,751) 25.16
-----------------------------------------------------------------------------
Outstanding at December 31, 1997
(40,802,392 exercisable at weighted
average price of $21.02) 90,739,955 23.76
Granted 21,756,535 42.51
Exercised (16,853,425) 22.13
Forfeited/Expired (4,591,616) 31.08
-----------------------------------------------------------------------------
Outstanding at December 31, 1998
(47,493,729 exercisable at weighted
average price of $22.31) 91,051,449 $28.17
=============================================================================
Information related to options and SARs outstanding at December 31, 1998:
-----------------------------------------------------------------------------
$13.50- $17.50- $26.00- $34.00-
Exercise Price Range $17.49 $25.99 $33.99 $43.00
-----------------------------------------------------------------------------
Number of options and SARs:
Outstanding 3,492,843 41,277,620 25,901,002 20,379,984
Exercisable 3,492,843 41,277,620 2,639,149 84,117
Weighted average exercise price:
Outstanding $16.51 $22.39 $27.60 $42.59
Exercisable $16.51 $22.39 $28.21 $42.00
Weighted average remaining
contractual life 3.43 years 6.38 years 8.31 years 5.97 years
=============================================================================
The weighted-average, grant-date fair value of each option granted during
1998, 1997 and 1996 was $8.62, $5.57 and $3.47.
Note 16. Shareowners' Equity
Common Stock Split - On January 30, 1998, the Board of Directors of SBC
declared a two-for-one stock split, effected in the form of a stock
dividend, on the shares of SBC's common stock. Each shareholder of record
on February 20, 1998 received an additional share of common stock for each
share of common stock then held. The stock was issued March 19, 1998.
SBC retained the current par value of $1.00 per share for all shares of
common stock.
Note 17. Acquisitions and Dispositions
During the third quarter of 1998, SBC sold its interest in MTN to the
remaining shareholders of MTN for $337. The sale fulfilled SBC's
obligation to divest MTN as a requirement of the acquisition of Telkom.
The effect on other income (expense) - net and net income from the sale of
MTN was $250 and $162. See Note 7 for the disposition of SBC's interest
in Telewest.
In May 1997, a consortium made up of SBC and Telekom Malaysia Berhad, 60%
owned by SBC, completed the purchase of 30% of Telkom. SBC invested
approximately $760, approximately $600 of which will remain in Telkom.
During 1996, SBC received several AT&T Corp. cellular networks in Arkansas
in exchange for SBC's PCS licenses in Memphis and Little Rock and other
consideration.
These acquisitions were primarily accounted for under the purchase method
of accounting. The purchase prices in excess of the underlying fair value
of identifiable net assets acquired are being amortized over periods not
to exceed 40 years. Results of operations of the properties acquired have
been included in the consolidated financial statements from their
respective dates of acquisition.
The above developments did not have a significant impact on consolidated
results of operations for 1998, 1997 or 1996, nor would they had they
occurred on January 1 of the respective periods.
On January 20, 1999, SBC announced it has agreed to acquire Comcast
Cellular Corporation (Comcast Cellular), the wireless subsidiary of
Comcast Corporation, in a transaction valued at $1,674. Under the terms
of the agreement, SBC will pay $400 in cash and assume Comcast Cellular's
current debt of $1,274. The transaction will be accounted for through the
purchase accounting method. Comcast Cellular offers analog and digital
wireless services to more than 800,000 subscribers in Pennsylvania,
Delaware, New Jersey and Illinois. The largest market in which Comcast
Cellular operates is Philadelphia, Pennsylvania. SBC for several years
has been operating the Illinois properties it is purchasing under a
previous agreement between the two companies. The transaction, which is
subject to regulatory approvals, is expected to be completed by the end of
1999.
Note 18. Additional Financial Information
-----------------------------------------------------------------------------
December 31,
-----------------------
Balance Sheets 1998 1997
-----------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accounts payable $ 2,865 $ 3,115
Accrued taxes 1,206 1,118
Advance billing and customer deposits 855 764
Compensated future absences 568 558
Accrued interest 249 326
Accrued payroll 338 315
Other 1,899 2,134
-----------------------------------------------------------------------------
Total $ 7,980 $ 8,330
=============================================================================
Statements of Income 1998 1997 1996
-----------------------------------------------------------------------------
Advertising expense $ 594 $ 558 $ 400
=============================================================================
Interest expense incurred $ 1,052 $ 1,168 $ 1,043
Capitalized interest (59) (125) (142)
-----------------------------------------------------------------------------
Total interest expense $ 993 $ 1,043 $ 901
=============================================================================
-----------------------------------------------------------------------------
Statements of Cash Flows 1998 1997 1996
-----------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 1,070 $ 1,014 $ 888
Income taxes, net of refunds $ 1,721 $ 489 $ 1,367
=============================================================================
No customer accounted for more than 10% of consolidated revenues in 1998,
1997 or 1996.
Several subsidiaries of SBC have negotiated contracts with the
Communications Workers of America (CWA), none of which is subject to
renegotiation in 1999. Approximately two-thirds of SBC's employees are
represented by the CWA.
Note 19. Quarterly Financial Information (Unaudited)
<TABLE>
-----------------------------------------------------------------------------------
Basic
Earnings
Total Operating (Loss) Stock Price
Calendar Operating Income Net Income Per Common -----------------------------
Quarter Revenues (Loss) (Loss) Share High Low Close
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
First 1 $ 6,855 $ 1,775 $ 985 $ 0.50 $ 46.563 $ 35.375 $ 43.375
Second 7,030 1,817 1,020 0.52 44.938 37.125 40.000
Third 2 7,216 1,903 1,262 0.65 44.875 35.000 44.375
Fourth 1,2 7,676 1,391 756 0.39 54.875 41.125 53.625
--------------------------------------------
Annual 1,2 $ 28,777 $ 6,886 $ 4,023 $ 2.06
===================================================================================
1997 3
First $ 6,405 $ 1,685 $ 901 $ 0.46 $ 29.125 $ 24.813 $ 26.250
Second 6,372 (831) (736) (0.38) 30.938 24.625 30.938
Third 6,790 1,573 867 0.45 31.125 26.781 30.719
Fourth 7,114 1,151 642 0.33 38.063 30.000 36.625
--------------------------------------------
Annual $ 26,681 $ 3,578 $ 1,674 $ 0.86
===================================================================================
<FN>
1 Net Income and Earnings per Common Share reflect a cumulative effect of
accounting change of $15, or $0.01 per share in the first quarter from a
change in accounting for directory operations and an extraordinary loss on
retirement of debt of $60, or $0.03 per share in the fourth quarter.
2 Net income in the third quarter includes after-tax gains of $219 for
gains on sales of certain non-core businesses, principally the required
disposition of MTN, due to SBC's investment in Telkom. Net income in the
fourth quarter also includes $268 of charges related to strategic
initiatives resulting from the merger integration process with SNET.
3 Net income (loss) includes $90 in first quarter pension settlement gain
for 1996 retirements (see Note 13), $1.6 billion in second quarter
charges related to post-merger initiatives (see Note 2), $10 and $294 in
third and fourth quarter merger integration costs and $33 in fourth
quarter gain on sale of SBC's interests in Bellcore.
</FN>
</TABLE>
Report of Independent Auditors
The Board of Directors and Shareowners
SBC Communications Inc.
We have audited the accompanying consolidated balance sheets of SBC
Communications Inc. (the Company) as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareowners' equity, and cash
flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
1996 financial statements of Pacific Telesis Group, a wholly-owned
subsidiary, which statements reflect total operating revenues constituting
approximately 38% of the Company's related consolidated financial statement
total for the year ended December 31, 1996. Those statements were audited by
other auditors whose report, which has been furnished to us, included an
explanatory paragraph that describes the change in its method of recognizing
directory publishing revenues and related expenses. Our opinion, insofar as
it relates to the 1996 data included for Pacific Telesis Group, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1996, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SBC
Communications Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
February 12, 1999
Report of Management
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. The integrity and objectivity of
the data in these financial statements, including estimates and judgments
relating to matters not concluded by year end, are the responsibility of
management, as is all other information included in the Annual Report, unless
otherwise indicated.
The financial statements of SBC Communications Inc. (SBC) have been audited
by Ernst & Young LLP, independent auditors. Management has made available to
Ernst & Young LLP all of SBC's financial records and related data, as well as
the minutes of shareowners' and directors' meetings. Furthermore, management
believes that all representations made to Ernst & Young LLP during its audit
were valid and appropriate.
Management has established and maintains a system of internal accounting
controls that provides reasonable assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition and the prevention and detection of
fraudulent financial reporting. The concept of reasonable assurance
recognizes that the costs of an internal accounting controls system should
not exceed, in management's judgment, the benefits to be derived.
Management also seeks to ensure the objectivity and integrity of its
financial data by the careful selection of its managers, by organizational
arrangements that provide an appropriate division of responsibility and by
communication programs aimed at ensuring that its policies, standards and
managerial authorities are understood throughout the organization.
Management continually monitors the system of internal accounting controls
for compliance. SBC maintains an internal auditing program that
independently assesses the effectiveness of the internal accounting controls
and recommends improvements thereto.
The Audit Committee of the Board of Directors, which consists of eight
directors who are not employees, meets periodically with management, the
internal auditors and the independent auditors to review the manner in which
they are performing their responsibilities and to discuss auditing, internal
accounting controls and financial reporting matters. Both the internal
auditors and the independent auditors periodically meet alone with the Audit
Committee and have access to the Audit Committee at any time.
/s/ Edward E. Whitacre Jr.
Edward E. Whitacre Jr.
Chairman of the Board and
Chief Executive Officer
/s/ Donald E. Kiernan
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
Stock Trading Information
SBC is listed on the New York, Chicago and Pacific stock exchanges and
The Swisss Exchange. SBC is traded on the London Stock Exchange through
the SEAQ International Markets facility.
Ticker symbol (NYSE): SBC
Newspaper stock listing: SBC or SBC Comm
EXHIBIT 21
PRINCIPAL SUBSIDIARIES OF SBC COMMUNICATIONS INC.
AS OF DECEMBER 31, 1998
State of Conducts
Name Incorporation Business Under
Southwestern Bell Missouri Same
Telephone Company
Southwestern Bell Dually incorporated in Same
Mobile Systems, Inc. Delaware and Virginia
SBC International, Inc. Delaware Same
Southwestern Bell Missouri Same
Yellow Pages, Inc.
Pacific Telesis Group Nevada Same
Southern New England Connecticut Same
Telecommunications
Corporation
EXHIBIT 23-a
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of SBC Communications Inc. (SBC) of our report dated February 12,
1999, included in the 1998 Annual Report to Shareowners of SBC.
Our audits also included the financial statement schedules of SBC listed in
Item 14(a). These schedules are the responsibility of SBC's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8) pertaining to the SBC Savings Plan and the SBC
Savings and Security Plan and certain other plans (Nos. 333-24295 and
333-66105), the Stock Savings Plan (Nos. 33-37451 and 33-54291), the SBC
Communications Inc. 1992 Stock Option Plan (No. 33-49855), the SBC
Communications Inc. 1995 Management Stock Option Plan (Nos. 33-61715 and
333-49343), the SBC Communications Inc. 1996 Stock and Incentive Plan (No.
333-30669), and in the Registration Statements (Form S-3) pertaining to
the SBC Communications Inc. Direct Stock Purchase and Reinvestment Plan
(Nos. 333-08979, 333-44553, and 333-02587 (originally filed on Form S-4)),
and SBC Communications Capital Corporation and SBC Communications Inc.
(Nos. 33-45490 and 33-56909), and in the Registration Statement (Form S-4)
pertaining to SBC Communications Inc. (No. 333-45837), and in the related
Prospectuses, of our report dated February 12, 1999, with respect to the
consolidated financial statements incorporated herein by reference, and
our report included in the preceding paragraph with respect to the
financial statement schedules included in this Annual Report (Form 10-K)
for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Antonio, Texas
March 8, 1999
EXHIBIT 23-b
Consent of Independent Accountants
We consent to the inclusion in the Annual Report for the year ended December
31, 1998 on Form 10-K and the accompanying Proxy Statement dated on or about
March 12, 1998 of SBC Communications Inc., of our report dated February 27,
1997 (Exhibit 99-a), on our audit of the consolidated financial statements and
financial statement schedule of Pacific Telesis Group and Subsidiaries as of
December 31, 1996, and for the year then ended, as included in Pacific Telesis
Group's annual report on Form 10-K for the year ended December 31, 1996.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8) pertaining to the SBC Savings Plan and the SBC Savings
and Security Plan and certain other plans (Nos. 333-24295 and 333-66105), the
Stock Savings Plan (Nos. 33-37451 and 33-54291), the SBC Communications Inc.
1992 Stock Option Plan (No. 33-49855), the SBC Communications Inc. 1995
Management Stock Option Plan (No. 33-61715 and 333-49343), the SBC
Communications Inc. 1996 Stock and Incentive Plan (No. 333-30669), and in
the Registration Statements (Form S-3) pertaining to the SBC Communications
Inc. Direct Stock Purchase and Reinvestment Plan (Nos. 333-08979, 333-44553,
and 333-02587, originally filed on Form S-4), and SBC Communications Capital
Corporation and SBC Communications Inc. (Nos. 33-45490 and 33-56909), and in
the Registration Statement (Form S-4) pertaining to SBC Communications Inc.
(No. 333-45837), and in the related Prospectuses, of our report dated
February 27, 1997 (Exhibit 99-a), on our audit of the consolidated financial
statements and financial statement schedule of Pacific Telesis Group and
Subsidiaries as of December 31, 1996 and for the year then ended, as included
in Pacific Telesis Group's annual report on Form 10-K for the year ended
December 31, 1996.
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Francisco, California
March 8, 1999
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is an officer and a director of the
Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints James
D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any
one of them, all having addresses in the City of San Antonio and State of
Texas, his attorney, for him and in his name, place and stead, and in his
office and capacity in the Corporation as an officer and a director, to
execute and file such annual report, and thereafter to execute and file any
amendment or amendments thereto, hereby giving and granting to said attorneys
full power and authority to do and perform each and every act and thing
whatsoever requisite or necessary to be done in and concerning the premises,
as fully to all intents and purposes as he might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Edward E. Whitacre, Jr.
__________________________________
Edward E. Whitacre, Jr.
Director and Chairman of the Board
and Chief Executive Officer
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is an officer and a director of the
Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Alfred G. Richter, Jr., Judith M. Sahm, or
any one of them, all having addresses in the City of San Antonio and State of
Texas, his attorney, for him and in his name, place and stead, and in his
office and capacity in the Corporation as an officer, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Royce S. Caldwell
________________________________
Royce S. Caldwell
President-SBC Operations and
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is an officer of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Alfred G. Richter, Jr., Judith M. Sahm, or
any one of them, all having addresses in the City of San Antonio and State of
Texas, his attorney, for him and in his name, place and stead, and in his
office and capacity in the Corporation as an officer, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as he might or could do if personally present at the
doing thereof, hereby ratifying and confirming all that said attorneys may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ D. E. Kiernan
________________________________
D. E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Clarence C. Barksdale
__________________________________
Clarence C. Barksdale
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ James E. Barnes
__________________________________
James E. Barnes
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ August A. Busch III
__________________________________
August A. Busch III
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Ruben R. Cardenas
__________________________________
Ruben R. Cardenas
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ William P. Clark
__________________________________
William P. Clark
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Martin K. Eby, Jr.
__________________________________
Martin K. Eby, Jr.
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Herman E. Gallegos
__________________________________
Herman E. Gallegos
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Jess T. Hay
__________________________________
Jess T. Hay
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Bobby R. Inman
__________________________________
Bobby R. Inman
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Charles F. Knight
__________________________________
Charles F. Knight
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Mary S. Metz
__________________________________
Mary S. Metz
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Haskell M. Monroe, Jr.
__________________________________
Haskell M. Monroe, Jr.
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Toni Rembe
__________________________________
Toni Rembe
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ S. Donley Ritchey
__________________________________
S. Donley Ritchey
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Joyce M. Roche
__________________________________
Joyce M. Roche
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Richard M. Rosenberg
__________________________________
Richard M. Rosenberg
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Carlos Slim Helu
__________________________________
Carlos Slim Helu
Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation,
hereinafter referred to as the "Corporation," proposes to file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, an annual report on Form 10-K, and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward
E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr.,
Judith M. Sahm, or any one of them, all having addresses in the City of San
Antonio and State of Texas, the undersigned's attorney, for the undersigned
and in the undersigned's name, place and stead, and in the undersigned's
office and capacity in the Corporation as a director, to execute and file
such annual report, and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said attorneys full power
and authority to do and perform each and every act and thing whatsoever
requisite or necessary to be done in and concerning the premises, as fully to
all intents and purposes as the undersigned might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the
29th day of January 1999.
/s/ Patricia P. Upton
__________________________________
Patricia P. Upton
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC
COMMUNICATIONS INC.'S DECEMBER 31, 1998 CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 460
<SECURITIES> 6
<RECEIVABLES> 6,262
<ALLOWANCES> 472
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 7,538
<PP&E> 73,466
<DEPRECIATION> 43,546
<TOTAL-ASSETS> 45,066
<CURRENT-LIABILITIES> 9,989
<BONDS> 11,612
0
0
<COMMON> 1,988
<OTHER-SE> 10,792
<TOTAL-LIABILITY-AND-EQUITY> 45,066
<SALES> 0<F2>
<TOTAL-REVENUES> 28,777
<CGS> 0<F3>
<TOTAL-COSTS> 16,714
<OTHER-EXPENSES> 5,177
<LOSS-PROVISION> 513
<INTEREST-EXPENSE> 993
<INCOME-PRETAX> 6,374
<INCOME-TAX> 2,306
<INCOME-CONTINUING> 4,068
<DISCONTINUED> 0
<EXTRAORDINARY> (60)
<CHANGES> 15
<NET-INCOME> 4,023
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.03
<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 OPERATIONS AND SUPPORT
IN THE FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
Exhibit 99-a
Report of Independent Accountants
To the Board of Directors and Shareowner of Pacific Telesis Group:
We have audited the consolidated statement of income, shareowner's equity and
cash flows of Pacific Telesis Group (a wholly-owned subsidiary of SBC
Communications Inc. effective April 1, 1997) and subsidiaries (the
"Company") for the year ended December 31, 1996, and the related financial
statement schedule as of and for the year ended December 31, 1996, as
included in the Company's annual report on Form 10-K for the year ended
December 31, 1996. These consolidated financial statements and the financial
statement schedule are the responsibility of management. Our responsibility
is to express an opinion on the consolidated financial statements and the
financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations of Pacific Telesis Group and Subsidiaries and of their cash flows
for the year ended December 31, 1996 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, schedule presents fairly, in all
material respects, the information required to be included therein as of and
for the year ended December 31, 1996.
As discussed in Note A to the consolidated financial statements, Pacific
Bell, a subsidiary of Pacific Telesis Group, changed its method of
recognizing directory publishing revenues and related expenses effective
January 1, 1996.
PricewaterhouseCoopers LLP
San Francisco, California
March 8, 1999
