FORM 10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8610
SBC COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At July 30, 1999, 1,967,302,612 common shares were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SBC COMMUNICATIONS INC.
- -----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
<CAPTION>
- -----------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-----------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Landline local service $ 2,897 $ 2,777 $ 5,727 $ 5,459
Wireless subscriber 1,107 955 2,092 1,822
Network access 1,718 1,644 3,403 3,247
Long distance service 552 593 1,109 1,183
Directory advertising 419 436 991 986
Other 702 625 1,390 1,188
- -----------------------------------------------------------------------------------------
Total operating revenues 7,395 7,030 14,712 13,885
- -----------------------------------------------------------------------------------------
Operating Expenses
Operations and support 4,175 3,978 8,252 7,857
Depreciation and amortization 1,273 1,235 2,520 2,436
- -----------------------------------------------------------------------------------------
Total operating expenses 5,448 5,213 10,772 10,293
- -----------------------------------------------------------------------------------------
Operating Income 1,947 1,817 3,940 3,592
- -----------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (213) (260) (436) (516)
Equity in net income of affiliates 92 73 154 126
Other income (expense) - net 3 (39) (80) (78)
- -----------------------------------------------------------------------------------------
Total other income (expense) (118) (226) (362) (468)
- -----------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Accounting Change 1,829 1,591 3,578 3,124
- -----------------------------------------------------------------------------------------
Income Taxes 653 571 1,287 1,134
- -----------------------------------------------------------------------------------------
Income Before Cumulative Effect
of Accounting Change 1,176 1,020 2,291 1,990
- -----------------------------------------------------------------------------------------
Cumulative Effect of Accounting
Change, net of tax - - - 15
- -----------------------------------------------------------------------------------------
Net Income $ 1,176 $ 1,020 $ 2,291 $ 2,005
=========================================================================================
Earnings Per Common Share:
Income Before Cumulative Effect
of Accounting Change $ 0.60 $ 0.52 $ 1.17 $ 1.01
Net Income $ 0.60 $ 0.52 $ 1.17 $ 1.02
- -----------------------------------------------------------------------------------------
Earnings Per Common Share - Assuming Dilution:
Income Before Cumulative Effect
of Accounting Change $ 0.59 $ 0.51 $ 1.15 $ 1.00
Net Income $ 0.59 $ 0.51 $ 1.15 $ 1.01
- -----------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding (in millions) 1,964 1,958 1,963 1,957
- -----------------------------------------------------------------------------------------
Dividends Declared Per Common Share $ 0.24375 $ 0.23375 $ 0.4875 $ 0.4675
=========================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
<CAPTION>
- --------------------------------------------------------------------------------
June 30, December 31,
-------------- -------------
1999 1998
- --------------------------------------------------------------------------------
Assets (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 848 $ 460
Accounts receivable - net of allowances for
uncollectibles of $461 and $472 5,342 5,790
Prepaid expenses 678 414
Deferred income taxes 666 489
Other current assets 339 385
- --------------------------------------------------------------------------------
Total current assets 7,873 7,538
- --------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 75,441 73,466
Less: Accumulated depreciation and amortization 45,083 43,546
- --------------------------------------------------------------------------------
Property, Plant and Equipment - Net 30,358 29,920
- --------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated
Amortization of $802 and $741 3,202 3,087
- --------------------------------------------------------------------------------
Investments in Equity Affiliates 2,430 2,514
- --------------------------------------------------------------------------------
Other Assets 2,197 2,007
- --------------------------------------------------------------------------------
Total Assets $ 46,060 $ 45,066
================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 1,011 $ 1,551
Accounts payable and accrued liabilities 6,095 6,774
Accrued taxes 1,790 1,206
Dividends payable 480 458
- --------------------------------------------------------------------------------
Total current liabilities 9,376 9,989
- --------------------------------------------------------------------------------
Long-Term Debt 11,350 11,612
- --------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 2,339 1,990
Postemployment benefit obligation 5,099 5,220
Unamortized investment tax credits 327 359
Other noncurrent liabilities 2,165 2,116
- --------------------------------------------------------------------------------
Total deferred credits and other
noncurrent liabilities 9,930 9,685
- --------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable
preferred securities of subsidiary trusts* 1,000 1,000
- --------------------------------------------------------------------------------
Shareowners' Equity
Common shares issued ($1 par value) 1,988 1,988
Capital in excess of par value 9,205 9,139
Retained earnings 4,731 3,396
Guaranteed obligations of employee stock
ownership plans (109) (147)
Deferred compensation - LESOP (78) (82)
Treasury shares (at cost) (721) (882)
Accumulated other comprehensive income (loss) (612) (632)
- --------------------------------------------------------------------------------
Total shareowners' equity 14,404 12,780
- --------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 46,060 $ 45,066
================================================================================
* The trusts contain $1,030 in principal amount of the Subordinated Debentures
of Pacific Telesis Group.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
<CAPTION>
- --------------------------------------------------------------------------
Six months ended
June 30,
-------------------
1999 1998
- -------------------------------------------------------------------------
Operating Activities
<S> <C> <C>
Net income $ 2,291 $ 2,005
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,520 2,436
Undistributed earnings from investments
in equity affiliates (111) (4)
Provision for uncollectible accounts 226 251
Amortization of investment tax credits (32) (36)
Deferred income tax expense 298 105
Cumulative effect of accounting change, net of tax - (15)
Other - net (417) (991)
- -------------------------------------------------------------------------
Total adjustments 2,484 1,746
- -------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,775 3,751
- -------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (3,001) (2,731)
Investments in affiliates (33) (21)
Purchase of short-term investments - (41)
Proceeds from short-term investments 5 269
Dispositions 455 109
Other 1 3
- --------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,573) (2,412)
- --------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (700) 231
Issuance of other short-term borrowings - 2
Repayment of other short-term borrowings - (8)
Issuance of long-term debt 6 393
Repayment of long-term debt (328) (822)
Issuance of common shares - 46
Purchase of treasury shares - (168)
Issuance of treasury shares 145 99
Dividends paid (937) (895)
- -------------------------------------------------------------------------
Net Cash Used in Financing Activities (1,814) (1,122)
- -------------------------------------------------------------------------
Net increase in cash and cash equivalents 388 217
- -------------------------------------------------------------------------
Cash and cash equivalents beginning of year 460 410
- -------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 848 $ 627
=========================================================================
Cash paid during the six months ended June 30 for:
Interest $ 439 $ 570
Income taxes, net of refunds $ 368 $ 579
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SBC COMMUNICATIONS INC.
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Guaranteed
Capital Obligations Accumulated
in of Employee Other
Excess Stock Deferred Comprehensive
Common of Par Retained Ownership Compensation Treasury Income
Shares Value Earnings Plans - LESOP Shares (Loss)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 1,988 $ 9,139 $ 3,396 $ (147) $ (82) $ (882) $ (632)
Net income - - 2,291 - - - -
Other comprehensive income - - - - - - 20
Dividends to shareowners - - (958) - - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 38 - - -
Cost of LESOP trust shares allocated
to employee accounts - - - - 4 - -
Issuance of treasury shares - (12) - - - 161 -
Other - 78 2 - - - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ 1,988 $ 9,205 $ 4,731 $ (109) $ (78) $ (721) $ (612)
=======================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
At June 30, or for the six months then ended: 1999 1998
----------------------------
<S> <C> <C>
Debt ratio................................................. 44.52% 54.42%
Network access lines in service (000)...................... 37,838 36,548
Resold lines (000)......................................... 930 677
Access minutes of use (000,000)............................ 76,550 72,806
Wireless customers (000)................................... 7,455 6,305
Number of employees........................................ 131,270 129,800
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
1. BASIS OF PRESENTATION The consolidated financial statements have been
prepared by SBC Communications Inc. (SBC) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the
opinion of management, include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the results for the interim
periods shown. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to
such SEC rules and regulations. The results for the interim periods are not
necessarily indicative of results for the full year. The consolidated
financial statements contained herein should be read in conjunction with the
consolidated financial statements and notes thereto included in SBC's 1998
Annual Report to Shareowners.
2. CONSOLIDATION The consolidated financial statements include the accounts of
SBC and its majority-owned subsidiaries. SBC's principal Wireline
subsidiaries are Southwestern Bell Telephone Company, Pacific Bell (which
also includes Pacific Bell Information Services), The Southern New England
Telephone Company and Nevada Bell. 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., Pacific Bell Directory and SNET Information Services,
Inc. (see Note 9 for further discussion regarding segments). All significant
intercompany transactions are eliminated in the consolidation process.
Investments in partnerships, joint ventures and less than majority-owned
subsidiaries are principally accounted for under the equity method. Earnings
from foreign investments accounted for under the equity method are included
for periods ended within three months of the date of SBC's Consolidated
Statements of Income.
3. CUMULATIVE EFFECT OF CHANGE IN DIRECTORY ACCOUNTING Prior to January 1, 1998,
SNET Information Services, Inc. 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, 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 Southwestern Bell Yellow Pages, Inc. and Pacific Bell
Directory, and better reflects the operating activity of the business.
The cumulative after-tax effect of applying the change in method to prior
years 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.
4. COMPREHENSIVE INCOME The components of SBC's comprehensive income for the
second quarter and six months ended June 30, 1999 and 1998 include net income
and the adjustment to shareowners' equity for the foreign currency
translation adjustment.
Following is SBC's comprehensive income:
------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
--------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------------
Net income $ 1,176 $ 1,020 $ 2,291 $ 2,005
Foreign currency translation
adjustment 39 (68) 20 (76)
------------------------------------------------------------------------
Total comprehensive income $ 1,215 $ 952 $ 2,311 $ 1,929
========================================================================
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
5. 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 transaction is subject to certain regulatory
approvals, including the Federal Communications Commission (FCC), United
States Department of Justice (DOJ) and state commissions in Ohio and
Illinois. The DOJ and the Public Utility Commission of Ohio have approved the
merger. In July 1999, the Illinois Commerce Commission began a second round
of hearings on the merger and is expected to issue a final ruling in the
third quarter of 1999.
In June 1999, staff members of the FCC recommended that the FCC approve the
transaction, subject to certain conditions, including accelerated entry into
new markets, so that SBC will offer wireline services in 30 new markets
within 30 months after the merger closes. In addition, SBC will establish a
separate subsidiary to provide advanced services such as Asymmetrical
Digital Subscriber Line (ADSL) and will not charge residential customers
minimum monthly long distance fees for at least three years after entering
the long distance market. The FCC conditions require specific performance
and reporting provisions and contain enforcement provisions that could
potentially trigger more than $2 billion in payments if certain goals are not
met. For example, failure to achieve entrance into 30 new markets within 30
months will result in a fine of $40 for each violation. The FCC is expected
to issue a final order in the third quarter of 1999.
In May 1999, the Indiana Utility Regulatory Commission (IURC) issued an order
finding that the transaction was subject to their approval and held hearings
concluding in July 1999. However, in July 1999, the Indiana Supreme Court
vacated the IURC May order and ruled the IURC lacks jurisdiction, effectively
nullifying IURC jurisdictional proceedings.
In July 1999, the Public Utilities Commission of Nevada (PUCN) ordered SBC to
show cause why it should not be required to file an application for approval
of the Ameritech transaction. In August 1999, SBC and the staff of the PUCN
agreed, subject to PUCN approval, to a schedule for a review of the
transaction with a final decision due by September 10, 1999. The agreement
also gives SBC the right to continue to pursue its right to contest PUCN
jurisdiction over the transaction.
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 order to comply with the FCC's rules and
regulations and certain provisions of the merger agreement, Ameritech, in
April 1999, agreed to sell 20 Midwestern cellular properties, including
properties with the Overlapping Cellular Licenses. The proposed sale also
addresses DOJ conditions for approval of the merger.
Subject to obtaining timely regulatory approvals, the transaction is expected
to close in the third quarter of 1999.
6. COMPLETION OF MERGERS 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.
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
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
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.
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. Remaining
accruals for anticipated cash expenditures related to these decisions were
approximately $229 at June 30, 1999 and $323 at December 31, 1998.
It is expected that SBC and Ameritech will form review teams subsequent to
the completion of the merger to perform comprehensive reviews of the combined
companies' operations and strategic initiatives. During this review, the
strategic initiatives from the PAC and SNET mergers will be incorporated. The
results of any such reviews cannot be determined at this time, material
accounting charges could occur.
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
7. PACIFIC TELESIS GROUP FINANCIAL INFORMATION The following tables present
summarized financial information for PAC:
--------------------------------------------------------------------
June 30, December 31,
1999 1998
--------------------------------------------------------------------
Balance Sheets
Current assets $ 3,403 $ 3,037
Noncurrent assets $ 15,726 $ 15,428
Current liabilities $ 5,321 $ 5,278
Noncurrent liabilities $ 10,563 $ 10,482
====================================================================
--------------------------------------------------------------------
Six months ended June 30, 1999 1998
--------------------------------------------------------------------
Income Statements
Operating revenues $ 5,922 $ 5,520
Operating income $ 1,520 $ 1,306
Net income $ 811 $ 628
====================================================================
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, which have been
guaranteed by SBC.
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
8. EARNINGS PER SHARE A reconciliation of the numerators and denominators of
basic earnings per share and diluted earnings per share for income before
cumulative effect of accounting change for the second quarter and six months
ended June 30, 1999 and 1998 are shown in the table below.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-----------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerators
Numerator for basic earnings per share:
Income before cumulative effect of
accounting change $ 1,176 $ 1,020 $ 2,291 $ 1,990
-------------------------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 1 1 2 2
-------------------------------------------------------------------------------------
Numerator for diluted
earnings per share $ 1,177 $ 1,021 $ 2,293 $ 1,992
=====================================================================================
Denominators
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding (000) 1,964,383 1,958,208 1,963,042 1,957,455
-------------------------------------------------------------------------------------
Dilutive potential common shares (000):
Stock options 25,140 21,143 25,161 21,182
Other stock-based compensation 6,205 5,577 6,119 5,405
-------------------------------------------------------------------------------------
Denominator for diluted
earnings per share 1,995,728 1,984,928 1,994,322 1,984,042
=====================================================================================
Basic earnings per share:
Income before cumulative effect of
accounting change $ 0.60 $ 0.52 $ 1.17 $ 1.01
Cumulative effect of accounting change - - - 0.01
-------------------------------------------------------------------------------------
Net income $ 0.60 $ 0.52 $ 1.17 $ 1.02
=====================================================================================
Diluted earnings per share:
Income before cumulative effect of
accounting change $ 0.59 $ 0.51 $ 1.15 $ 1.00
Cumulative effect of accounting change - - - 0.01
-------------------------------------------------------------------------------------
Net income $ 0.59 $ 0.51 $ 1.15 $ 1.01
=====================================================================================
</TABLE>
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.
SBC evaluates performance of these segments based on income before income
taxes, adjusted for normalizing items. There were no normalizing items for
the quarters and first six months ended June 30, 1999 and 1998.
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following tables present segment information for SBC.
--------------------------------------------------------------
Revenues Income
from before
For the three months external Intersegment income
ended June 30, 1999 customers revenues taxes
--------------------------------------------------------------
Wireline $ 5,728 $ 37 $ 1,300
Wireless 1,232 - 232
Directory 404 23 156
Other 22 - 174
Corporate, Adjustments &
Eliminations 9 (60) (33)
--------------------------------------------------------------
Total $ 7,395 $ - $ 1,829
==============================================================
--------------------------------------------------------------
Revenues Income
from before
For the three months external Intersegment income
ended June 30, 1998 customers revenues taxes
--------------------------------------------------------------
Wireline $ 5,444 $ 79 $ 1,197
Wireless 1,045 1 148
Directory 420 21 166
Other 21 - 54
Corporate, Adjustments &
Eliminations 100 (101) 26
--------------------------------------------------------------
Total $ 7,030 $ - $ 1,591
==============================================================
-----------------------------------------------------------------------
Revenues Income
from before
At June 30, 1999 or for external Intersegment income Segment
the six months ended customers revenues taxes assets
-----------------------------------------------------------------------
Wireline $ 11,363 $ 69 $ 2,598 $ 34,220
Wireless 2,325 - 365 7,220
Directory 961 50 426 1,115
Other 45 - 236 2,836
Corporate, Adjustments &
Eliminations 18 (119) (47) 669
-----------------------------------------------------------------------
Total $ 14,712 $ - $ 3,578 $ 46,060
=======================================================================
-----------------------------------------------------------------------
Revenues Income
from before
At June 30, 1998 or for external Intersegment income Segment
the six months ended customers revenues taxes assets
-----------------------------------------------------------------------
Wireline $ 10,758 $ 135 $ 2,290 $ 32,955
Wireless 1,991 2 243 7,038
Directory 948 47 413 1,105
Other 39 - 196 3,188
Corporate, Adjustments &
Eliminations 149 (184) (18) 1,138
-----------------------------------------------------------------------
Total $ 13,885 $ - $ 3,124 $ 45,424
=======================================================================
10.SOFTWARE COSTS The American Institute of Certified Public Accountants issued
a Statement of Position (SOP) that requires capitalization of certain
computer software expenditures beginning in 1999. The SOP, which has been
adopted prospectively as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining internal
use software. Prior to the adoption of the SOP, the costs of computer
software purchased or developed for internal use were expensed as incurred.
However, initial operating system software costs were, and continue to be,
capitalized.
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
With comparable levels of software expenditures, the SOP would tend to
increase net income in comparison with SBC's former 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. The effect of
adopting the SOP was to increase net income by approximately $58, or $0.03
per share assuming dilution, for the second quarter of 1999, and by $86, or
$0.04 per share assuming dilution, for the first six months of 1999.
11.WIRELESS ACQUISITION On July 8, 1999, SBC completed the acquisition of
Comcast Cellular Corporation (Comcast), the wireless subsidiary of Comcast
Corporation, in a transaction valued at $1.8 billion including assumption of
$1.4 billion in debt. The transaction will be accounted for under the
purchase method of accounting. Results of operations will be included in the
consolidated financial statements from the date of the acquisition. With the
acquisition, SBC will add more than 850,000 subscribers in Pennsylvania,
Delaware, New Jersey and Illinois.
In July 1999, subsequent to the completion of the acquisition, SBC retired
virtually all of Comcast's outstanding Senior Notes.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
Overview Financial results for SBC Communications Inc. (SBC) for the second
quarter and first six months of 1999 and 1998 are summarized as follows:
<TABLE>
- -----------------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
--------------------------- --------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 7,395 $ 7,030 5.2% $ 14,712 $ 13,885 6.0%
Operating expenses $ 5,448 $ 5,213 4.5% $ 10,772 $ 10,293 4.7%
Operating income $ 1,947 $ 1,817 7.2% $ 3,940 $ 3,592 9.7%
Income before income taxes and
cumulative effect of
accounting change $ 1,829 $ 1,591 15.0% $ 3,578 $ 3,124 14.5%
Income before cumulative effect
of accounting change $ 1,176 $ 1,020 15.3% $ 2,291 $ 1,990 15.1%
Cumulative effect of accounting
change - - - - $ 15 -
Net income $ 1,176 $ 1,020 15.3% $ 2,291 $ 2,005 14.3%
=========================================================================================
</TABLE>
SBC reported net income for the second quarter of 1999 of $1,176, or $0.59 per
share assuming dilution, and for the six months ended of $2,291, or $1.15 per
share assuming dilution, compared to $1,020, or $0.51 per share assuming
dilution, in the second quarter of 1998 and $2,005, or $1.01 per share assuming
dilution, for the first six months of 1998. In the first quarter of 1998, SBC
reflected a cumulative effect of accounting change related to accounting for
directory revenues and expenses (see Note 3 of Notes to Consolidated Financial
Statements). The primary factors contributing to this increase were growth in
demand for services and products in SBC's wireline telephone, cellular and
Personal Communication Services (PCS) operations and a reduction in operating
expenses due to merger related initiatives and benefits.
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.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
SBC evaluates performance of these segments based on income before income taxes,
adjusted for normalizing items (see Note 9 of Notes to Consolidated Financial
Statements). Income before income taxes includes operating income, interest
expense, equity in net income of affiliates and other income (expense) - net.
Operating income includes operating revenues, operations and support and
depreciation and amortization expense. There were no normalizing items for the
quarters and first six months ended June 30, 1999 or 1998. Components of income
before income taxes by segment for the second quarter and first six months of
1999 and 1998 are as follows:
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
------------------------------ ----------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline $ 1,300 $ 1,197 8.6% $ 2,598 $ 2,290 13.4%
Wireless 232 148 56.8 365 243 50.2
Directory 156 166 (6.0) 426 413 3.1
Other 174 54 - 236 196 20.4
Corporate, adjustments
& eliminations (33) 26 - (47) (18) -
- ------------------------------------------------ -------------------
Total Income Before
Income Taxes $ 1,829 $ 1,591 15.0% $ 3,578 $ 3,124 14.5%
=======================================================================================
</TABLE>
Changes in income before income taxes in the Wireline, Wireless and Directory
segments primarily reflect increases in operating income discussed below.
Changes in income before income taxes for the operations included in the Other
segment result primarily from the changes in equity in net income of affiliates
and other income (expense) - net discussed below; changes in this line also
impacted the Wireline segment.
Operating Income Components of operating income by segment for the second
quarter and first six months of 1999 and 1998 are as follows:
<TABLE>
- ---------------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
------------------------------ ----------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline $ 1,501 $ 1,411 6.4% $ 2,982 $ 2,726 9.4%
Wireless 304 224 35.7 509 398 27.9
Directory 159 169 (5.9) 431 416 3.6
Other (11) (6) 83.3 (22) (12) 83.3
Corporate, adjustments
& eliminations (6) 19 - 40 64 (37.5)
- ------------------------------------------------ -------------------
Total Operating Income $ 1,947 $ 1,817 7.2% $ 3,940 $ 3,592 9.7%
=======================================================================================
</TABLE>
Components of segment operating revenues and expenses and discussion of the
segment results for the second quarter and first six months of 1999 and 1998
follow.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Operating Revenues SBC's operating revenues increased $365, or 5.2%, in the
second quarter of 1999 and $827, or 6.0%, for the first six months of 1999.
Components of operating revenues by segment for the second quarter and first six
months of 1999 and 1998 are as follows:
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
----------------------------- ----------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline $ 5,765 $ 5,523 4.4% $ 11,432 $ 10,893 4.9%
Wireless 1,232 1,046 17.8 2,325 1,993 16.7
Directory 427 441 (3.2) 1,011 995 1.6
Other 22 21 4.8 45 39 15.4
Corporate, adjustments
& eliminations (51) (1) - (101) (35) -
- -------------------------------------------- -------------------
Total Operating Revenues $ 7,395 $ 7,030 5.2% $ 14,712 $ 13,885 6.0%
===================================================================================
</TABLE>
Wireline
Wireline operating revenues increased $242, or 4.4%, in the second quarter of
1999 and $539, or 4.9%, for the first six months of 1999. Components of Wireline
operating revenues for the second quarter and first six months of 1999 and 1998
are as follows:
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
----------------------------- ----------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Local service $ 2,913 $ 2,801 4.0% $ 5,758 $ 5,508 4.5%
Network access:
Interstate 1,258 1,162 8.3 2,487 2,299 8.2
Intrastate 464 482 (3.7) 923 948 (2.6)
Long distance service 554 592 (6.4) 1,111 1,181 (5.9)
Other 576 486 18.5 1,153 957 20.5
- -------------------------------------------- -------------------
Total Wireline $ 5,765 $ 5,523 4.4% $ 11,432 $ 10,893 4.9%
===================================================================================
</TABLE>
Local service revenues increased $112, or 4.0%, in the second quarter and
$250, or 4.5%, in the first six months of 1999 due primarily to increases
in demand which totaled approximately $158 for the second quarter and $327
for the first six months of 1999, including increases in access lines,
vertical services and data-related services revenues. The number of access
lines increased by 3.5% since June 30, 1998. Approximately 39% of access
line growth was due to sales of additional access lines to existing
residential customers. Approximately 45% of the access line growth was in
California and 30% was in Texas. Access lines in Texas and California
account for approximately 75% of SBC's access lines. Vertical services
revenues, which include custom calling services, such as Caller ID, Call
Waiting, voice mail and other enhanced services, increased by
approximately 16% and totaled more than $1.0 billion for the first six
months of 1999. This increase in demand was partially offset by a decline
in the public telephone business totaling nearly $50 for the second
quarter and approximately $95 for the first six months of 1999.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Local service revenues also increased as a result of regulatory actions
that decreased one or more other types of operating revenues. In 1999, the
introduction of extended area service plans and the introduction of the
California High Cost Fund (CHCFB) collectively increased local service
revenues by approximately $37 for the second quarter and $71 for the first
six months and decreased long distance revenues by approximately $27 for
the second quarter and $57 for the first six months and intrastate network
access revenues by approximately $12 for the second quarter and $25 for
the first six months. The net effect on Wireline operating revenues was a
reduction of approximately $2 for the second quarter and $11 for the first
six months of 1999. 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 Pacific Bell (PacBell) to set
competitive rates for other services. The increases in local services
revenues were partially offset by decreases due to rate reductions under
CPUC price cap orders of approximately $35 for the second quarter and $59
for the first six months of 1999.
Network access Interstate network access revenues increased $96, or 8.3%,
in the second quarter and $188, or 8.2%, in the first six months of 1999
due largely to increases in demand for access services by interexchange
carriers, special access, and growth in revenues from end-user charges
attributable to an increasing access line base, which collectively
resulted in an increase of approximately $125 for the second quarter and
$234 for the first six months of 1999. In addition, customer number
portability cost recovery, net of a Federal Communications Commission
(FCC) retroactive rate decrease in the second quarter of 1999, effective
February 1999, contributed approximately $21 for the second quarter and
$50 to the increase for the first six months of 1999. Partially offsetting
these increases were the effects of rate reductions related to the FCC's
productivity factor adjustment, access reform and other changes totaling
approximately $53 for the second quarter and $101 for the first six months
of 1999.
Intrastate network access revenues decreased $18, or 3.7%, in the second
quarter and $25, or 2.6%, in the first six months of 1999. Increases in
demand at Southwestern Bell Telephone Company (SWBell), PacBell, The
Southern New England Telephone Company (SNET) and Nevada Bell
(collectively referred to as the Telephone Companies) totaled
approximately $25 for the second quarter and $53 for the first six months
of 1999, including usage by alternative intraLATA toll carriers. These
increases were offset by state regulatory rate reductions totaling
approximately $22 for the second quarter and $42 for the first six months
of 1999 and the effects of the CHCFB described above in local service
totaling approximately $12 for the second quarter and $25 for the first
six months of 1999.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Long distance service revenues decreased $38, or 6.4%, in the second
quarter and $70, or 5.9%, in the first six months of 1999. Long distance
service revenues decreased due to the effects of regulatory shifts of
approximately $28 in the second quarter and $57 for the first six months
of 1999, discussed above in local service, related to CHCFB and the
introduction of extended area service; price competition from alternative
intraLATA toll carriers of approximately $12 in the second quarter and $26
in the first six months of 1999. Also contributing to the decrease were
regulatory rate orders of approximately $11 in the second quarter and $12
in the first six months of 1999. Partially offsetting these decreases were
increased revenues related to the net effect of local exchange carrier
billing settlements of approximately $12 in the second quarter and $20 in
the first six months of 1999 and increased demand at PacBell and increased
customer migration to SNET All Distance totaling approximately $7 in the
second quarter and $16 in the first six months of 1999.
Other operating revenues increased $90, or 18.5%, in the second quarter
and $196, or 20.5%, in the first six months of 1999 due to increased
equipment sales, primarily consumer equipment, at the Telephone Companies
of approximately $30 in the second quarter and $71 in the first six months
of 1999, increased sales from other nonregulated products and services at
the Telephone Companies of approximately $18 in the second quarter and $66
in the first six months of 1999, revenues from new business initiatives,
primarily Internet services, of approximately $24 in the second quarter
and $45 for the six months of 1999 and the deregulation of 911 revenues
shifted to other revenues from local service of approximately $11 in the
second quarter and $23 in the first six months of 1999.
Wireless
Wireless operating revenues increased $186, or 17.8%, in the second quarter of
1999 and $332, or 16.7%, for the first six months of 1999. Components of
Wireless operating revenues for the second quarter and first six months of 1999
and 1998 are as follows:
<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
------------------------------ ----------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Subscriber $ 1,107 $ 956 15.8% $ 2,092 $ 1,823 14.8%
Other 125 90 38.9 233 170 37.1
- ---------------------------------------------- --------------------
Total Wireless $ 1,232 $ 1,046 17.8% $ 2,325 $ 1,993 16.7%
======================================================================================
</TABLE>
Subscriber revenues consist of local service and wireless long distance.
Wireless subscriber revenues increased $151, or 15.8%, in the second
quarter and $269, or 14.8%, for the first six months of 1999 due primarily
to growth in the number of customers of 18.2% and an increase in long
distance roaming charges. These increases were partially offset by
declines in average revenue per customer. At June 30, 1999, SBC had
6,275,000 traditional cellular customers, including resale customers and
1,180,000 PCS customers.
Other wireless revenues relate primarily to equipment sales and increased
$35, or 38.9%, in the second quarter and $63, or 37.1%, for the first six
months of 1999. The increase was attributable to growth in the number of
customers and conversion to digital equipment.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Directory
Directory operating revenues decreased $14, or 3.2%, in the second quarter and
increased $16, or 1.6%, for the first six months of 1999. Directory operating
revenues for the second quarter and first six months of 1999 and 1998 are as
follows:
<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
------------------------------ ----------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Directory $ 427 $ 441 (3.2)% $ 1,011 $ 995 1.6%
======================================================================================
</TABLE>
Directory operating revenues decreased in the second quarter of 1999 due
mainly to a net change in directories published of approximately $41, as
compared to the second quarter of 1998. Because of the change in the
timing of the publication of directories, revenues in the third quarter of
1999 are expected to be higher than the third quarter of 1998. Partially
offsetting the decrease was increased demand, including benefits from
sales initiatives developed in the merger integration process. Directory
operating revenues increased in the first six months of 1999 due primarily
to increased demand, partially offset by approximately $49 related to a
net change in directories published, as compared to the first six months
of 1998.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Operating Expenses SBC's operating expenses increased $235, or 4.5%, in the
second quarter and $479, or 4.7%, for the first six months of 1999. Components
of operating expenses by segment for the second quarter and first six months of
1999 and 1998 are as follows:
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
----------------------------------------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline $ 4,264 $ 4,112 3.7% $ 8,450 $ 8,167 3.5%
Wireless 928 822 12.9 1,816 1,595 13.9
Directory 268 272 (1.5) 580 579 0.2
Other 33 27 22.2 67 51 31.4
Corporate, adjustments
& eliminations (45) (20) - (141) (99) 42.4
- -------------------------------------------- -------------------
Total Operating Expenses $ 5,448 $ 5,213 4.5% $ 10,772 $ 10,293 4.7%
===================================================================================
</TABLE>
Operations and support SBC's operations and support increased $197 or
5.0%, in the second quarter and $395, or 5.0%, for the first six months of
1999. Components of operations and support expenses by segment for the
second quarter and first six months of 1999 and 1998 are as follows:
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
----------------------------- ---------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline $ 3,161 $ 3,057 3.4% $ 6,270 $ 6,083 3.1%
Wireless 774 676 14.5 1,510 1,310 15.3
Directory 261 264 (1.1) 565 562 0.5
Other 33 27 22.2 67 51 31.4
Corporate, adjustments
& eliminations (54) (46) 17.4 (160) (149) 7.4
---------------------------------------- ------------------
Total operations and
support $ 4,175 $ 3,978 5.0% $ 8,252 $ 7,857 5.0%
===============================================================================
</TABLE>
Wireline operations and support increased $104, or 3.4%, in the second
quarter and $187, or 3.1%, in the first six months of 1999. The increase
includes costs of approximately $90 in the second quarter and $145 in the
first six months of 1999 associated with business initiatives and other
products, primarily Asymmetrical Digital Subscriber Lines (ADSL), Internet
and voice mail. Additionally, operations and support increased
approximately $59 in the second quarter and $137 in the first six months
of 1999 as a result of increased wages and salaries and materials.
Operations and support also increased approximately $45 in the second
quarter and $77 in first six months of 1999 as a result of costs
associated with reciprocal compensation for the termination of Internet
traffic at the Telephone Companies. In addition, the increase in
operations and support includes costs of approximately $5 in the second
quarter and $48 in the first six months of 1999 related to centralizing
support functions and other merger initiatives at SWBell and PacBell.
Partially offsetting these increased costs were reductions of
approximately $41 in the second quarter and $72 in first six months of
1999 primarily the result of lower contract labor costs, costs associated
with customer number portability and benefit costs. These reductions
primarily resulted from the realization of merger initiative benefits,
partially offset by normal growth in operations and
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
support expenses. Also partially offsetting the increases in operations
and support was the change in accounting for software costs (see Note 10
of Notes to the Consolidated Financial Statements) which resulted in
approximately $63 in the second quarter and $89 in the first six months
of 1999 being capitalized rather than expensed and lower costs of
approximately $14 in the second quarter and $33 in the first six
months of 1999 for interconnection and regulatory mandated network
enhancements.
Wireless expenses increased $98, or 14.5%, in the second quarter and $200,
or 15.3%, for the first six months of 1999 due primarily to growth in the
number of customers. These increases were partially offset by decreased
customer acquisition costs of 5% and 8% in the second quarter and first
six months of 1999 and lower uncollectible expense.
Directory expenses decreased $3, or 1.1%, in the second quarter and
increased $3, or 0.5%, for the first six months of 1999. The second
quarter decrease is primarily due to a net change in directories published
as discussed in directory operating revenues above and decreased
product-related costs due to benefits from merger initiatives, partially
offset by additional expenses associated with increased demand. Directory
expenses increased in the first six months of 1999 as employee-related
costs increased due to increased demand, partially offset by a net change
in directories published and decreased product-related costs due to
benefits from merger initiatives.
Depreciation and amortization SBC's depreciation and amortization expense
increased $38, or 3.1%, in the second quarter and $84, or 3.4%, for the
first six months of 1999. Components of depreciation and amortization
expense by segment for the second quarter and first six months of 1999 and
1998 are as follows:
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
Second Quarter Six-Month Period
---------------------------- --------------------------
Percent Percent
1999 1998 Change 1999 1998 Change
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireline $ 1,103 $ 1,055 4.5% $ 2,180 $ 2,084 4.6%
Wireless 154 146 5.5 306 285 7.4
Directory 7 8 (12.5) 15 17 (11.8)
Other - - - - - -
Corporate, adjustments
& eliminations 9 26 (65.4) 19 50 (62.0)
------------------------------------------- -------------------
Total depreciation and
amortization $ 1,273 $ 1,235 3.1% $ 2,520 $ 2,436 3.4%
===============================================================================
</TABLE>
Depreciation and amortization expense is primarily in the Wireline and
Wireless segments. Depreciation and amortization increased due primarily
to increased depreciation expense of approximately $56 in the second
quarter and $106 in the first six months in the Wireline segment and
approximately $10 in the second quarter and $22 in the first six months in
the Wireless segment. These increases resulted from overall higher plant
levels. The increases were partially offset by reduced depreciation
expense of approximately $7 at SNET in the second quarter and $15 in the
first six months related to lower levels of analog switching equipment. In
addition, the third quarter 1998 sale of SBC Media Ventures reduced
depreciation expense by approximately $14 in the second quarter and $28 in
the first six months of 1999.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Interest expense decreased $47, or 18.1%, for the second quarter of 1999 and
$80, or 15.5%, for the first six months of 1999. This decrease was due primarily
to reductions in interest expense resulting from lower debt levels.
Equity in net income of affiliates increased $19, or 26.0%, in the second
quarter of 1999 due primarily to increases from SBC's investment in Telefonos de
Mexico, S.A. de C.V. (Telmex) and SBC's investments in French telecommunications
totaling approximately $22. These increases were partially offset by reduced
equity in net income from SBC's investment in Telkom SA Limited (Telkom) in
South Africa. Equity in net income of affiliates increased $28, or 22.2%, in the
first six months of 1999 due primarily to increased equity in net income of
approximately $40 from SBC's investment in Telmex and in France, as well as
SBC's certain domestic wireless operations. These increases were partially
offset by a lower contribution from SBC's investment in Telkom, resulting from
the impact of the decline in the value of the rand and higher maintenance
expenses, including weather-related expenses. Also offsetting the increase were
higher expenditures on wireless activities in Switzerland.
Other income (expense) - net for the second quarter of 1999 and 1998 was income
of $3 and net expense of $39 and net expense of $80 and $78 for the first six
months of 1999 and 1998. In the second quarter and first six months of 1999 SBC
recognized a gain from the sale of a portion of one of SBC's international
investments, Amdocs Limited (Amdocs) by approximately $92 in a secondary
offering as well as gains of $52 representing market adjustments on Amdocs
shares used for contributions to the SBC Foundation and deferred compensation.
Results for the second quarter and first six months of 1999 also included a gain
of approximately $59 recognized from the sale of SBC's investment in an
international investment. The first six months of 1999 also included a gain of
approximately $24 recognized from the sale of certain discontinued plant related
to Advanced Communications Network.
Offsetting these gains were increased expenses related to higher appreciation in
the market value of Telmex L shares underlying certain SBC debt redeemable
either in cash or Telmex L shares than in the comparable periods of 1998, net of
gains recognized from the sale of certain Telmex L shares, of approximately $156
for the second quarter and $212 for the first six months of 1999. Also affecting
comparisons in the first six months of 1998 was receipt of a special dividend of
approximately $158 from Amdocs, approximately $133 of other expense related to
the impairment of an international investment and investments in certain
wireless technologies, primarily wireless video and approximately $14 in expense
for the write off of call premiums and unamortized discounts on early retirement
of debt at SWBell.
Income Taxes increased $82, or 14.4%, in the second quarter and $153, or 13.5%,
in the first six months of 1999 due primarily to higher income before income
taxes.
COMPETITIVE AND REGULATORY ENVIRONMENT
Texas Legislation In May 1999, the Texas legislature adopted Senate Bill 560, as
amended. The bill, which will become law on September 1, 1999, extends incentive
regulation indefinitely, provides more pricing flexibility on certain products
offered by SWBell, such as Caller ID, operator service and directory assistance,
and allows SWBell to package some services in ways attractive to customers. The
bill also requires SWBell to reduce the intrastate switched access rate it
charges to long distance carriers by 1 cent on September 1, 1999 and by 2
additional cents on the earlier of SWBell's entry into the long distance market
or July 1, 2000. The 1 cent reduction in intrastate access rates taking effect
on September 1, 1999 is expected to result in a reduction of intrastate network
access revenues of approximately $25 for the remainder of 1999.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
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 Telecommunications Act of 1996
(Telecom Act) the state commissions have authority to order reciprocal
compensation only for intrastate or local traffic, while the FCC has authority
over interstate and interexchange traffic. SBC believes most Internet traffic is
interexchange and interstate. Several state commissions have taken the position
that Internet communications is intrastate or local traffic and ordered SBC to
pay reciprocal compensation to certain CLECs pursuant to existing contracts. In
February 1999, the FCC declared that Internet traffic is not intrastate or local
traffic but instead is primarily interstate, subject to interstate jurisdiction.
However, the FCC added that state commissions, interpreting existing contracts
and consistent with federal law, might nevertheless order payment of reciprocal
compensation for Internet traffic in certain circumstances. In March 1999, MCI
WorldCom filed an appeal of the FCC ruling and certain local exchange carriers
also appealed; the outcome of these appeals is pending.
In June 1999, the California Public Utilities Commission (CPUC) in arbitration
between PacBell and a CLEC customer voted to treat Internet traffic as local
pending a further CPUC proceeding to examine the issue. The CPUC also approved a
reduction in the reciprocal compensation rate between PacBell and the CLEC
customer beginning June 29, 1999. In July 1999, the CPUC issued a draft decision
in another arbitration between PacBell and a CLEC customer upholding reciprocal
compensation fees. The final decision is expected to result in a reduction of
the reciprocal compensation rate paid by PacBell to the CLEC customer beginning
in the fourth quarter of 1999. In July 1999, the CPUC also affirmed an order
that had concluded that Internet traffic is local. SBC is currently evaluating
the impact of this order.
SBC has been recording expense for amounts sought by certain CLECs for the
termination of Internet traffic to Internet Service Providers.
Customer Local Number Portability Long-term customer local number portability
(LNP) allows customers to change local exchange carriers while maintaining their
existing telephone numbers. In December 1998, the FCC issued an order on
recovery of costs incurred for LNP by local exchange carriers. This order
provides for the levying of federally tariffed LNP monthly end-user charges for
a five-year period, beginning in February 1999. SBC began recovering LNP costs
at the rates of 48 cents to 50 cents per access line per month. In July 1999,
the FCC issued an order on SBC's rates, revising the rates to 33 cents and 34
cents, with a refund obligation for the period of February through July 1999.
SBC recorded $23 in the second quarter of 1999 related to the rate reduction.
Federal Access Rates In May 1999, the United States Court of Appeals for the
District of Columbia Circuit (Court of Appeals) ruled that the FCC failed to
adequately explain certain changes to part of the formula used to calculate the
access rates local carriers, such as SBC's subsidiaries, charge long distance
carriers. Specifically, the Court of Appeals disagreed with the FCC's rationale
for making certain changes to the "X factor" adjustment, the purpose of which is
to ensure that access rates decrease as local phone company productivity
increases, and ordered the FCC to reevaluate the formula. The Court of Appeals
did not state whether the FCC should have made specific adjustments that would
have resulted in either higher or lower access rates. In a subsequent order, the
Court of Appeals stayed the mandate of this decision until April 1, 2000. The
effect of the Court of Appeal's decision on SBC's results of operations and
financial position cannot be determined at this time.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
Shared Transport In June 1999, the United States Supreme Court (Supreme Court)
set aside an August 1998 United States Court of Appeals for the Eighth Circuit
(8th Circuit) ruling that major carriers, such as SBC's subsidiaries, could be
forced to lease, at a discount, shared transport service for carrying phone
calls among telephone company central switching offices. The 8th Circuit had
held that such shared transport was subject to mandatory leasing under the
Telecom Act. The Supreme Court previously ruled that the FCC ignored some limits
in the Telecom Act when it drew up rules for mandatory leasing and in light of
that prior ruling, ordered the 8th Circuit to reconsider the shared transport
ruling. The effect of this ruling on SBC cannot be determined at this time.
California Rate Ruling In June 1999, the CPUC issued a ruling recategorizing
certain of PacBell's services, including the maintenance of inside wiring,
collect, calling card and person to person calls and the provisioning of
directory assistance to interexchange carriers, as competitive products. In its
ruling, the CPUC approved an increase in the ceiling price for both inside wire
repair services and interexchange directory assistance. Although the effect of
this ruling on SBC's results of operations and financial position cannot be
determined at this time, it is expected to be favorable.
OTHER BUSINESS MATTERS
Cumulative Effect of Change in Accounting See Note 3 of Notes to Consolidated
Financial Statements for a discussion of the change in directory accounting at
SNET Information Services, Inc. in the first quarter of 1998.
Pending Merger See Note 5 of Notes to Consolidated Financial Statements for a
discussion of the merger agreement with Ameritech Corporation.
New Accounting Standards In June 1998, the Financial Accounting Standards Board
(FASB) 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 changes in the fair value of the
derivatives to be recorded in net income or comprehensive income. In June 1999,
the FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of the FASB Statement No. 133"
(FAS 137) that among other items, defers the date that FAS 133 must be adopted
to years beginning after June 15, 2000. Earlier adoption is permitted. SBC is
currently evaluating the impact of the change in accounting required by FAS 133
and FAS 137, but is not able to quantify the effect at this time.
See Note 10 of Notes to Consolidated Financial Statements for a discussion of
the new accounting standard on software costs.
Acquisition On May 3, 1999, SBC and Telmex announced they have agreed to acquire
Cellular Communications of Puerto Rico Inc. (Cellular Communications) in a
transaction valued at $814. Under the terms of the agreement, SBC and Telmex
will pay approximately $464 in cash and assume Cellular Communications'
long-term debt of $350. The transaction will be accounted for through the
purchase accounting method. SBC is expected to eventually own a direct 50%
interest in Cellular Communications. Cellular Communications offers wireless
services under the Cellular One brand name to more than 330,000 subscribers in
Puerto Rico and the U.S. Virgin Islands. The company also offers paging and long
distance service in Puerto Rico and will offer wireline phone service in San
Juan. The transaction was approved by shareholders in July 1999 and approval by
regulators is pending. The acquisition is expected to be approved in the third
quarter of 1999.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
OTHER BUSINESS MATTERS - Continued
Wireless Acquisition See Note 11 of Notes to Consolidated Financial Statements
for a discussion of the acquisition of Comcast Cellular Corporation (Comcast).
Marketing Agreement In July 1999, SBC entered into a strategic marketing and
distribution agreement with DIRECTV, Inc., that will make high-quality digital
satellite television service available to SBC's residential customers. SBC,
through DIRECTV, Inc. will offer customers a digital video entertainment
service.
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. Company-wide 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
century.
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.
The inventory and assessment phase was estimated to require 20% of the overall
effort and included the identification and prioritization of items that could be
impacted by the Year 2000 and the determination of the work effort required to
ensure compliance. The inventory and assessment phase was completed in 1998.
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 124,000 personal computers and coordinating with 1,500 suppliers.
SBC must obtain adequate assurance that the 15,000 products they provide will be
Year 2000 compliant or determine and address any appropriate contingency plans
or backup systems.
Making the hardware and software fixes was the second phase of the process and
was estimated to require 25% of the overall effort. This activity involved
modifying program code, upgrading computer software and upgrading or replacing
hardware. The hardware and software fixes were completed as of June 30, 1999.
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 and
is substantially complete. Contingency plans have been written and will be
finalized by August 31, 1999.
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. Ninety eight
percent of the deployment phase was completed as of June 30, 1999.
SBC has budgeted $265 on the entire project, with approximately $197 spent
through June 30, 1999.
The activities involved in SBC's Year 2000 project 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.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
LIQUIDITY AND CAPITAL RESOURCES
SBC had $848 in cash and cash equivalents available at June 30, 1999. During the
first six months of 1999, as in 1998, SBC's primary source of funds continued to
be cash provided by operating activities. SBC has agreements in place with
several banks for lines of credit totaling $1,460, all of which may be used to
support commercial paper borrowings. SBC had no borrowings outstanding under
these lines of credit at June 30, 1999. Commercial paper borrowings as of June
30, 1999 totaled $345.
SBC's investing activities are primarily related to construction and capital
expenditures. During the first six months of 1999, SBC invested $3,001 for
construction and capital expenditures, primarily in the Wireline and Wireless
segments. Investing activities during the first six months of 1999 also included
asset dispositions of $455, primarily related to foreign operations. Capital
expenditures for 1999 are estimated to be approximately $6,400 to $6,800.
In February 1998, SBC retired $630 of long-term debt, 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.
Cash paid for dividends in the first six months of 1999 was $937, or $4.7%
higher than in the first six months of 1998 due to an increase in dividends paid
per share to $0.4875 from $0.4675.
In July 1999, subsequent to the completion of the acquisition, SBC retired
virtually all of Comcast's outstanding Senior Notes.
<PAGE>
SBC COMMUNICATIONS INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
In May 1999, SBC entered agreements to participate in several interest rate
swaps (Swaps) with notional values totaling $795. The Swaps have terms to pay
variable rates of interest based upon Three Month LIBOR plus or minus a spread,
and to receive fixed rates of interest designed to match certain low-coupon debt
liabilities on SBC's balance sheet. The Swaps mature 2002 through 2006. SBC will
record interest rate settlements as adjustments to interest expense in the
consolidated statements of income when paid or received. SBC currently does not
recognize the fair value of these derivative financial instruments or their
changes in its financial statements. Any gains or losses on the Swaps are
deferred until each instrument is terminated. At June 30, 1999, the Swaps fair
values totaled ($13).
Effective June 30, 1999, as a result of Vodafone Group PLC merging with AirTouch
Communications, Inc. (AirTouch), forming Vodafone AirTouch PLC (Vodafone
AirTouch), the outstanding AirTouch stock options held by SBC employees were
converted to Vodafone AirTouch options. For each option for a share of AirTouch
common stock, the option holders received an option in 0.5 ADR's of Vodafone
AirTouch and the grant price of the options were reduced for the value of cash
received by AirTouch shareowners. The last option grant expires January 2003,
and as of June 30, 1999 approximately 99,000 options were still outstanding.
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; (4)
the timing of entry and the extent of competition in the local and intraLATA
toll markets in SBC's eight-state area; and (5) the impact of the Ameritech
transaction, including regulatory requirements and merger integration efforts.
Readers are cautioned that other factors discussed in this form, although not
enumerated here, also could materially impact SBC's future earnings.
<PAGE>
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the second quarter of 1999, the Company sold shares of common stock to
non-employee directors pursuant to the Company's Non-Employee Director Stock and
Deferral Plan. Under the plan, a director may make an annual election to receive
all or part of his annual retainer or fees in the form of SBC shares or deferred
stock units (DSUs) that are convertible into SBC shares. During this period, an
aggregate of 10,242 SBC shares and DSUs were purchased by non-employee directors
at prices ranging from $49.75 to $55.75, in each case the fair market value of
the shares on the date of purchase. The issuances of shares and DSUs were exempt
from registration pursuant to Section 4(2) of the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareowners
(a) The annual meeting of the shareowners of SBC Communications Inc. (SBC) was
held on April 30, 1999, in San Antonio, Texas. Shareowners representing
1,526,347,075 shares of common stock as of the March 2, 1999 record date
were present in person or were represented at the meeting by proxy.
(b) At the meeting, holders of common shares voted as indicated below to elect
the following persons to the Board of Directors for a three-year term:
SHARES SHARES
DIRECTOR FOR WITHHELD*
James E. Barnes 1,503,417,735 22,929,340
August A. Busch III 1,504,106,879 22,240,196
William P. Clark 1,503,955,402 22,391,673
Mary S. Metz 1,504,242,297 22,104,778
Patricia P. Upton 1,504,232,417 22,114,658
Edward E. Whitacre, Jr. 1,504,375,910 21,971,165
*Includes shares represented at the meeting by proxy where the shareowner
withheld authority to vote for the indicated director or directors, as
well as shares present at the meeting which were not voted for such
director or directors.
(a) Shareowners ratified the appointment of Ernst & Young LLP as independent
auditors of SBC for the year ended December 31, 1999. The vote was
1,508,688,584 FOR and 7,973,976 AGAINST, with 9,684,515 shares ABSTAINING.
(d) Shareowners voted not to adopt a shareowner proposal to limit certain
existing pension benefits for outside directors. The vote was 406,936,269
FOR and 872,532,305 AGAINST, with 46,774,271 shares ABSTAINING.
<PAGE>
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION - Continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On June 17, 1999, SBC filed a Form 8-K, reporting on Item 5. Other Events
and Item 7. Financial Statements and Exhibits. In the report, SBC
disclosed a press release announcing that it had commenced an offer to
purchase and consent solicitation for all of the outstanding 9.5% Senior
Notes due May 1, 2007 issued by Comcast Cellular Corporation (Comcast
Cellular), in connection with the closing of SBC's purchase of all stock
of Comcast Cellular.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBC Communications Inc.
August 6, 1999 /s/ Donald E. Kiernan
------------------------
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<TABLE>
SBC COMMUNICATIONS INC. EXHIBIT 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- --------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Accounting Changes* $ 3,467 $ 3,120 $ 6,318 $ 2,558 $ 5,283 $ 4,670 $ 4,403
Add: Interest Expense 436 516 993 1,043 901 1,043 1,010
Dividends on Preferred
Securities 40 40 80 80 60 - -
1/3 Rental Expense 75 70 147 129 115 85 93
---------- --------- -------- --------- --------- -------- ---------
Adjusted Earnings $ 4,018 $ 3,746 $ 7,538 $ 3,810 $ 6,359 $ 5,798 $ 5,506
========== ========= ======== ========= ========= ======== =========
Total Interest Charges $ 467 $ 549 $ 1,052 $ 1,168 $ 1,043 $ 1,048 $ 1,010
Dividends on Preferred
Securities 40 40 80 80 60 - -
1/3 Rental Expense 75 70 147 129 115 85 93
---------- --------- -------- --------- --------- -------- ---------
Adjusted Fixed Charges $ 582 $ 659 $ 1,279 $ 1,377 $ 1,218 $ 1,133 $ 1,103
========== ========= ======== ========= ========= ======== =========
Ratio of Earnings to Fixed Charges 6.90 5.68 5.89 2.77 5.22 5.12 4.99
*Undistributed earnings on investments accounted for under the equity method
have been excluded
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC
COMMUNICATIONS INC.'S JUNE 30, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 848
<SECURITIES> 1
<RECEIVABLES> 5,803
<ALLOWANCES> 461
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 7,873
<PP&E> 75,441
<DEPRECIATION> 45,083
<TOTAL-ASSETS> 46,060
<CURRENT-LIABILITIES> 9,376
<BONDS> 11,350
0
0
<COMMON> 1,988
<OTHER-SE> 12,416
<TOTAL-LIABILITY-AND-EQUITY> 46,060
<SALES> 0<F2>
<TOTAL-REVENUES> 14,712
<CGS> 0<F3>
<TOTAL-COSTS> 8,252
<OTHER-EXPENSES> 2,520
<LOSS-PROVISION> 226
<INTEREST-EXPENSE> 436
<INCOME-PRETAX> 3,578
<INCOME-TAX> 1,287
<INCOME-CONTINUING> 2,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,291
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.15
<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>
