-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V6s5ZdczjZV0D+ZyAJtSNQxo9C2ivjGTO3bamvCNfP/Br5MloRFYz6qZqLIaXGPU Nv8+E6sNUNW2tNySL5uSlQ== 0000732717-99-000013.txt : 19990512 0000732717-99-000013.hdr.sgml : 19990512 ACCESSION NUMBER: 0000732717-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SBC COMMUNICATIONS INC CENTRAL INDEX KEY: 0000732717 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 431301883 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08610 FILM NUMBER: 99616713 BUSINESS ADDRESS: STREET 1: 175 E HOUSTON STREET 2: ROOM 9-4 CITY: SAN ANTONIO STATE: TX ZIP: 78205 BUSINESS PHONE: 2108214105 MAIL ADDRESS: STREET 1: 175 E HOUSTON STREET 2: ROOM 9-4 CITY: SAN ANTONIO STATE: TX ZIP: 78205 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHWESTERN BELL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 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 March 31, 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 April 30, 1999, 1,963,839,781 common shares were outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements SBC COMMUNICATIONS INC. - ----------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME Dollars in millions except per share amounts (Unaudited) - ----------------------------------------------------------------------------- Three months ended March 31, ----------------------- 1999 1998 - ----------------------------------------------------------------------------- Operating Revenues Landline local service $ 2,830 $ 2,682 Wireless subscriber 985 867 Network access 1,685 1,603 Long distance service 557 590 Directory advertising 572 550 Other 688 563 - ----------------------------------------------------------------------------- Total operating revenues 7,317 6,855 - ----------------------------------------------------------------------------- Operating Expenses Operations and support 4,077 3,879 Depreciation and amortization 1,247 1,201 - ----------------------------------------------------------------------------- Total operating expenses 5,324 5,080 - ----------------------------------------------------------------------------- Operating Income 1,993 1,775 - ----------------------------------------------------------------------------- Other Income (Expense) Interest expense (223) (256) Equity in net income of affiliates 62 53 Other income (expense) - net (83) (39) - ----------------------------------------------------------------------------- Total other income (expense) (244) (242) - ----------------------------------------------------------------------------- Income Before Income Taxes and Cumulative Effect of Accounting Change 1,749 1,533 - ----------------------------------------------------------------------------- Income Taxes 634 563 - ----------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change 1,115 970 - ----------------------------------------------------------------------------- Cumulative Effect of Accounting Change, net of tax - 15 - ----------------------------------------------------------------------------- Net Income $ 1,115 $ 985 ============================================================================= Earnings Per Common Share: Income Before Cumulative Effect of Accounting Change $ 0.57 $ 0.49 Net Income $ 0.57 $ 0.50 - ----------------------------------------------------------------------------- Earnings Per Common Share - Assuming Dilution: Income Before Cumulative Effect of Accounting Change $ 0.56 $ 0.49 Net Income $ 0.56 $ 0.50 - ----------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding (in millions) 1,962 1,957 - ----------------------------------------------------------------------------- Dividends Declared Per Common Share $ 0.24375 $ 0.23375 - ----------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
SBC COMMUNICATIONS INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS Dollars in millions except per share amounts - -------------------------------------------------------------------------------- March 31, December 31, -------------- ------------- 1999 1998 - -------------------------------------------------------------------------------- Assets (Unaudited) Current Assets Cash and cash equivalents $ 547 $ 460 Accounts receivable - net of allowances for uncollectibles of $470 and $472 5,376 5,790 Prepaid expenses 700 414 Deferred income taxes 678 489 Other current assets 362 385 - -------------------------------------------------------------------------------- Total current assets 7,663 7,538 - -------------------------------------------------------------------------------- Property, Plant and Equipment - at cost 74,350 73,466 Less: Accumulated depreciation and amortization 44,306 43,546 - -------------------------------------------------------------------------------- Property, Plant and Equipment - Net 30,044 29,920 - -------------------------------------------------------------------------------- Intangible Assets - Net of Accumulated Amortization of $768 and $741 3,124 3,087 - -------------------------------------------------------------------------------- Investments in Equity Affiliates 2,430 2,514 - -------------------------------------------------------------------------------- Other Assets 2,135 2,007 - -------------------------------------------------------------------------------- Total Assets $ 45,396 $ 45,066 ================================================================================ Liabilities and Shareowners' Equity Current Liabilities Debt maturing within one year $ 1,840 $ 1,551 Accounts payable and accrued liabilities 5,959 6,774 Accrued taxes 1,514 1,206 Dividends payable 482 458 - -------------------------------------------------------------------------------- Total current liabilities 9,795 9,989 - -------------------------------------------------------------------------------- Long-Term Debt 11,404 11,612 - -------------------------------------------------------------------------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 2,146 1,990 Postemployment benefit obligation 5,084 5,220 Unamortized investment tax credits 343 359 Other noncurrent liabilities 2,091 2,116 - -------------------------------------------------------------------------------- Total deferred credits and other noncurrent liabilities 9,664 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 9,170 9,139 Retained earnings 4,034 3,396 Guaranteed obligations of employee stock ownership plans (127) (147) Deferred compensation - LESOP (78) (82) Treasury shares (at cost) (803) (882) Accumulated other comprehensive income (loss) (651) (632) - -------------------------------------------------------------------------------- Total shareowners' equity 13,533 12,780 - -------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $ 45,396 $ 45,066 ================================================================================ * The trusts contain $1,030 in principal amount of the Subordinated Debentures of Pacific Telesis Group. See Notes to Consolidated Financial Statements.
SBC COMMUNICATIONS INC. - -------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in millions, increase (decrease) in cash and cash equivalents (Unaudited) - -------------------------------------------------------------------------- Three months ended March 31, ------------------- 1999 1998 - ------------------------------------------------------------------------- Operating Activities Net income $ 1,115 $ 985 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,247 1,201 Undistributed earnings from investments in equity affiliates (44) (8) Provision for uncollectible accounts 106 127 Amortization of investment tax credits (16) (18) Deferred income tax expense 19 149 Cumulative effect of accounting change, net of tax - (15) Other - net (670) (1,208) - ------------------------------------------------------------------------- Total adjustments 642 228 - ------------------------------------------------------------------------- Net Cash Provided by Operating Activities 1,757 1,213 - ------------------------------------------------------------------------- Investing Activities Construction and capital expenditures (1,399) (1,175) Investments in affiliates (23) - Purchase of short-term investments - (40) Proceeds from short-term investments 5 184 Dispositions 111 94 Other 2 2 - -------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,304) (935) - -------------------------------------------------------------------------- Financing Activities Net change in short-term borrowings with original maturities of three months or less 68 799 Issuance of other short-term borrowings - 3 Repayment of other short-term borrowings - (5) Issuance of long-term debt 4 392 Repayment of long-term debt (49) (785) Issuance of common shares - 35 Purchase of treasury shares - (71) Issuance of treasury shares 66 69 Dividends paid (455) (437) - ------------------------------------------------------------------------- Net Cash Used in Financing Activities (366) - - ------------------------------------------------------------------------- Net increase in cash and cash equivalents 87 278 - ------------------------------------------------------------------------- Cash and cash equivalents beginning of year 460 410 - ------------------------------------------------------------------------- Cash and Cash Equivalents End of Period $ 547 $ 688 ========================================================================= Cash paid during the three months ended March 31 for: Interest $ 247 $ 341 Income taxes, net of refunds $ 237 $ 522 See Notes to Consolidated Financial Statements.
SBC COMMUNICATIONS INC. - ----------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY Dollars in millions (Unaudited) - ----------------------------------------------------------------------------------------------------------------------- Guaranteed Accumulated Capital Obligations Deferred Other Common in Retained of Employee Compensation Treasury Comprehensive Shares Excess Earnings Stock - LESOP Shares Income of Par Ownership (Loss) Value Plans - ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $1,988 $9,139 $3,396 $(147) $(82) $(882) $(632) Net income - - 1,115 - - - - Other comprehensive income (loss) - - - - - - (19) Dividends to shareowners - - (478) - - - - Reduction of debt associated with Employee Stock Ownership Plans - - - 20 - - - Cost of LESOP trust shares allocated to employee accounts - - - - 4 - - Issuance of treasury shares - (9) - - - 79 - Other - 40 1 - - - - - ----------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 $1,988 $9,170 $4,034 $(127) $ (78) $(803) $(651) ======================================================================================================================= See Notes to Consolidated Financial Statements.
SELECTED FINANCIAL AND OPERATING DATA At March 31, or for the three months then ended: 1999 1998 ------------------------- Debt ratio.......................................... 47.68% 56.41% Network access lines in service (000)............... 37,690 36,253 Resold lines (000).................................. 896 632 Access minutes of use (000,000)..................... 37,746 35,671 Wireless customers (000)............................ 7,150 6,070 Number of employees.................................131,070 129,000 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. 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 three months ended March 31, 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 March 31, 1999 1998 ---------------------------------------------------------------- Net income $ 1,115 $ 985 Foreign currency translation adjustment (19) (8) ---------------------------------------------------------------- Total comprehensive income $ 1,096 $ 977 ================================================================ 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 merger 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. In April 1999, the Public Utility Commission of Ohio approved the merger, subject to motions for rehearing. Also in April 1999, SBC and Ameritech accepted FCC Chairman William Kennard's invitation to discuss whether the FCC will craft conditions on the companies' merger to address the FCC's public interest concerns. If remaining 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 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. In May 1999, the Indiana Utility Regulatory Commission (IURC) issued an order finding that the merger is subject to their approval. The order does not specifically address how the approval process would take place and a prehearing conference is scheduled for May 27, 1999. SBC believes that the IURC does not have jurisdiction in this matter. 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 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 SBC COMMUNICATIONS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued Dollars in millions except per share amounts 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 March 31, 1999 and December 31, 1998, remaining accruals for anticipated cash expenditures related to these decisions were approximately $306 and $323. 7. PACIFIC TELESIS GROUP FINANCIAL INFORMATION The following tables present summarized financial information for PAC: -------------------------------------------------------------------- March 31, December 31, 1999 1998 -------------------------------------------------------------------- Balance Sheets Current assets $ 3,407 $ 3,037 Noncurrent assets $ 15,539 $ 15,428 Current liabilities $ 5,290 $ 5,278 Noncurrent liabilities $ 10,564 $ 10,482 ==================================================================== -------------------------------------------------------------------- Three months ended March 31, 1999 1998 -------------------------------------------------------------------- Income Statements Operating revenues $ 2,974 $ 2,772 Operating income $ 779 $ 610 Net income $ 437 $ 290 ==================================================================== 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. 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 three months ended March 31, 1999 and 1998 are shown in the table below. ------------------------------------------------------------------- Three months ended March 31, ---------------------- 1999 1998 ------------------------------------------------------------------- Numerators Numerator for basic earnings per share: Income before cumulative effect of accounting change $ 1,115 $ 970 ------------------------------------------------------------------- Dilutive potential common shares: Other stock-based compensation 1 1 ------------------------------------------------------------------- Numerator for diluted earnings per share $ 1,116 $ 971 =================================================================== Denominators Denominator for basic earnings per share: Weighted average number of common shares outstanding (000) 1,961,685 1,956,695 ------------------------------------------------------------------- Dilutive potential common shares (000): Stock options 25,183 21,220 Other stock-based compensation 6,033 5,234 ------------------------------------------------------------------- Denominator for diluted earnings per share 1,992,901 1,983,149 =================================================================== Basic earnings per share: Income before cumulative effect of accounting change $ 0.57 $ 0.49 Cumulative effect of accounting change - 0.01 ------------------------------------------------------------------- Net income $ 0.57 $ 0.50 =================================================================== Diluted earnings per share: Income before cumulative effect of accounting change $ 0.56 $ 0.49 Cumulative effect of accounting change - 0.01 ------------------------------------------------------------------- Net income $ 0.56 $ 0.50 =================================================================== 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 ended March 31, 1999 or 1998. 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 At March 31, 1999 or for external Intersegment income Segment the three months ended customers revenues taxes assets ----------------------------------------------------------------------- Wireline $ 5,635 $ 32 $ 1,298 $ 33,851 Wireless 1,093 - 133 7,106 Directory 557 27 270 1,281 Other 23 - 62 2,786 Corporate, Adjustments & Eliminations 9 (59) (14) 372 ----------------------------------------------------------------------- Total $ 7,317 $ - $ 1,749 $ 45,396 ======================================================================= ----------------------------------------------------------------------- Revenues Income from before At March 31, 1998 or for external Intersegment income Segment the three months ended customers revenues taxes assets ----------------------------------------------------------------------- Wireline $ 5,314 $ 56 $ 1,093 $ 32,191 Wireless 946 1 95 6,995 Directory 528 26 247 1,216 Other 18 - 142 3,249 Corporate, Adjustments & Eliminations 49 (83) (44) 1,268 ----------------------------------------------------------------------- Total $ 6,855 $ - $ 1,533 $ 44,919 ======================================================================= 10.SOFTWARE COSTS 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. 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. 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 for the quarter ended March 31, 1999 by approximately $28 or $0.01 per share. 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 first quarter of 1999 and 1998 are summarized as follows: - ------------------------------------------------------------------------------- Three-Month Period ------------------------------ Percent 1999 1998 Change - ------------------------------------------------------------------------------- Operating revenues $ 7,317 $ 6,855 6.7% Operating expenses $ 5,324 $ 5,080 4.8% Operating income $ 1,993 $ 1,775 12.3% Income before income taxes and cumulative effect of accounting change $ 1,749 $ 1,533 14.1% Income before cumulative effect of accounting change $ 1,115 $ 970 14.9% Cumulative effect of accounting change - $ 15 - Net income $ 1,115 $ 985 13.2% =============================================================================== In the first quarter of 1998, SBC's net income reflected a cumulative effect of accounting change related to accounting for directory revenues and expenses (see Note 3 of Notes to Consolidated Financial Statements). SBC reported net income for the first quarter of 1999 of $1,115, or $0.56 per share assuming dilution, compared to $985, or $0.50 per share assuming dilution, in the first quarter of 1998. The primary factors contributing to this increase were growth in demand for services and products in SBC's landline telephone, cellular and Personal Communication Services (PCS) operations and a slowing of growth 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. 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 ended March 31, 1999 or 1998. Components of income before income taxes by segment for the first quarter of 1999 and 1998 are as follows: - -------------------------------------------------------------------------------- Three-Month Period ------------------------------- Percent 1999 1998 Change - -------------------------------------------------------------------------------- Wireline $ 1,298 $ 1,093 18.8% Wireless 133 95 40.0 Directory 270 247 9.3 Other 62 142 (56.3) Corporate, adjustments & eliminations (14) (44) - - -------------------------------------------------------------------- Total Income Before Income Taxes $ 1,749 $ 1,533 14.1% ================================================================================ Changes in income before income taxes in the Wireline, Wireless and Directory segments primarily reflect increases in operating income discussed below. Changes in operations included in the Other segment's income before income taxes result primarily from the changes in 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 first quarter of 1999 and 1998 are as follows: - -------------------------------------------------------------------------------- Three-Month Period ------------------------------- Percent 1999 1998 Change - -------------------------------------------------------------------------------- Wireline $ 1,481 $ 1,315 12.6% Wireless 205 174 17.8 Directory 272 247 10.1 Other (11) (6) - Corporate, adjustments & eliminations 46 45 - - -------------------------------------------------------------------- Total Operating Income $ 1,993 $ 1,775 12.3% ================================================================================ Components of segment operating revenues and expenses and discussion of the segment results for the first quarter of 1999 and 1998 follow. 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 $462, or 6.7%, in the first quarter of 1999. Components of operating revenues by segment for the first quarter of 1999 and 1998 are as follows: - -------------------------------------------------------------------------------- Three-Month Period ------------------------------- Percent 1999 1998 Change - -------------------------------------------------------------------------------- Wireline $ 5,667 $ 5,370 5.5% Wireless 1,093 947 15.4 Directory 584 554 5.4 Other 23 18 27.8 Corporate, adjustments & eliminations (50) (34) - - -------------------------------------------------------------------- Total Operating Revenues $ 7,317 $ 6,855 6.7% ================================================================================ Wireline Wireline operating revenues increased $297, or 5.5%, in the first quarter of 1999. Components of Wireline operating revenues for the first quarter of 1999 and 1998 are as follows: - -------------------------------------------------------------------------------- Three-Month Period --------------------------------- Percent 1999 1998 Change - -------------------------------------------------------------------------------- Local service $ 2,845 $ 2,707 5.1% Network access: Interstate 1,229 1,137 8.1 Intrastate 459 466 (1.5) Long distance service 557 589 (5.4) Other 577 471 22.5 - ---------------------------------------------------------------------- Total Wireline $ 5,667 $ 5,370 5.5% ================================================================================ Local service revenues increased $138, or 5.1%, in the first quarter of 1999 due primarily to increases in demand which totaled approximately $134, including increases in access lines and vertical services revenues. The number of access lines increased by 4.0%. Approximately 40% of access line growth was due to sales of additional access lines to existing residential customers. Approximately 46% of the access line growth was in California and 31% 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, call control options, Caller ID, voice mail and other enhanced services, increased by approximately 19% and totaled more than $510 for the first quarter of 1999. Local service revenues also increased as a result of regulatory actions that also had the effect of decreasing one or more other types of operating revenues. In the first quarter of 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 $34 and decreased long distance revenues by approximately $30 and intrastate network access revenues by approximately $13. The net effect on Wireline operating revenues was a reduction of approximately $9 in the first quarter of 1999. The California Public Utilities Commission (CPUC) has stated that the CHCFB is 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 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 $24 and reductions in pay phone per call compensation rates of approximately $9. Network access Interstate network access revenues increased $92, or 8.1%, in the first quarter of 1999 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 $109. In addition, customer number portability cost recovery, which began in February 1999, contributed approximately $29 to the increase. Partially offsetting these increases were the effects of rate reductions related to the Federal Communication Commission's (FCC) productivity factor adjustment, access reform and other changes totaling approximately $48. Intrastate network access revenues decreased $7, or 1.5%, in the first quarter of 1999. Increases in demand at Southwestern Bell Telephone Company (SWBell), PacBell, The Southern New England Telephone Company and Nevada Bell (collectively referred to as the Telephone Companies) totaled approximately $28, including usage by alternative intraLATA toll carriers. These increases were offset by state regulatory rate reductions totaling approximately $20 and the effects of the CHCFB described above in local service totaling approximately $13. Long distance service revenues decreased $32, or 5.4%, in the first quarter of 1999. Long distance service revenues decreased due to the effect of the regulatory shifts discussed in local service above related to the CHCFB and the introduction of extended area service plans of approximately $30, price competition from alternative intraLATA toll carriers of approximately $9 and regulatory rate orders of approximately $2. These decreases were partially offset by increased revenues related to the net effect of local exchange carrier billing settlements of approximately $9. Revenues also increased due to increased toll messages and demand at PacBell totaling approximately $3 and increased customer migration to SNET All Distance of approximately $2. Other operating revenues increased $106, or 22.5%, in the first quarter of 1999 due primarily to increased sales from nonregulated products and services at the Telephone Companies totaling approximately $48, increased equipment sales at the Telephone Companies of approximately $42 and revenues from new business initiatives, primarily Internet services, totaling approximately $16. 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 Wireless Wireless operating revenues increased $146, or 15.4%, in the first quarter of 1999. Components of Wireless operating revenues for the first quarter of 1999 and 1998 are as follows: - ------------------------------------------------------------------------------- Three-Month Period -------------------------------- Percent 1999 1998 Change - -------------------------------------------------------------------------------- Subscriber $ 985 $ 867 13.6% Other 108 80 35.0 - ---------------------------------------------------------------------- Total Wireless $ 1,093 $ 947 15.4% ================================================================================ Subscriber revenues consist of local service and wireless long distance. Wireless subscriber revenues increased $118, or 13.6%, in the first quarter of 1999 due primarily to growth in the number of customers of 17.8% and an increase in long distance revenues, including roaming revenues. These increases were partially offset by declines in average revenue per customer. At March 31, 1999, SBC had 6,142,000 traditional cellular customers, including resale customers and 1,008,000 PCS customers. Other wireless revenues increased $28, or 35%, in the first quarter of 1999 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 $30, or 5.4%, in the first quarter of 1999. Directory operating revenues for the first quarter of 1999 and 1998 are as follows: - ------------------------------------------------------------------------------- Three-Month Period -------------------------------- Percent 1999 1998 Change - -------------------------------------------------------------------------------- Total Directory $ 584 $ 554 5.4% ================================================================================ Directory operating revenues increased in the first quarter of 1999 due mainly to increased demand, including benefits from sales initiatives developed in the merger integration process. Partially offsetting the increase was approximately $8 related to net change in directories published, as compared to the first quarter of 1998. 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 $244, or 4.8%, in the first quarter of 1999. Components of operating expenses by segment for the first quarter of 1999 and 1998 are as follows: - -------------------------------------------------------------------------------- Three-Month Period -------------------------- Percent 1999 1998 Change - -------------------------------------------------------------------------------- Wireline $ 4,186 $ 4,055 3.2% Wireless 888 773 14.9 Directory 312 307 1.6 Other 34 24 41.7 Corporate, adjustments & eliminations (96) (79) 21.5 - ------------------------------------------------------------------------ Total Operating Expenses $ 5,324 $ 5,080 4.8% ================================================================================ Operations and support SBC's operations and support increased $198, or 5.1%, in the first quarter of 1999. Components of operations and support expenses by segment for the first quarter of 1999 and 1998 are as follows: ------------------------------------------------------------------------- Three-Month Period ------------------------- Percent 1999 1998 Change ------------------------------------------------------------------------- Wireline $ 3,109 $ 3,026 2.7% Wireless 736 634 16.1 Directory 304 298 2.0 Other 34 24 41.7 Corporate, adjustments & eliminations (106) (103) 2.9 ------------------------------------------------------------------ Total operations and support $ 4,077 $ 3,879 5.1% ========================================================================= Wireline operations and support increased $83, or 2.7%, in the first quarter of 1999. The increase includes costs of approximately $44 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 the first quarter of 1999 including lower contract labor costs, benefit costs, costs associated with customer number portability and right to use fees totaling approximately $48. These reductions primarily resulted from the realization of merger initiative benefits, offset by normal growth in operations and support expenses. Also offsetting the increases in operations and support were reduced costs for interconnection and regulatory mandated network enhancements of approximately $18 and reduced other non-labor costs of approximately $12. Another offset to the increase was the change in accounting for software costs (see Note 10 of Notes to Consolidated Financial Statements), which resulted in approximately $38 of such costs being capitalized rather than expensed at March 31, 1999. Operations and support expense increases in the first quarter of 1999 also includes costs associated with reciprocal compensation for the termination of Internet traffic of approximately $32 at the Telephone Companies. In addition, increased expenses of approximately $40 related to other business initiatives, primarily voicemail, Internet and cable. Additional costs in the first quarter of 1999 totaling approximately $102 related to increased wages and salaries, materials and research and development costs. 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 Wireless expenses increased $102, or 16.1%, in the first quarter of 1999 due primarily to growth in the number of customers and increased equipment sales. These increases were partially offset by a 10% decrease in customer acquisition costs. Directory expenses increased $6, or 2.0%, in the first quarter of 1999 as employee-related costs increased due to increased demand and a net change in directories published. This increase was partially offset by decreased product-related costs due to benefits from merger initiatives. Depreciation and amortization SBC's depreciation and amortization expense increased $46, or 3.8%, in the first quarter of 1999. Components of depreciation and amortization expense by segment for the first quarter of 1999 and 1998 are as follows: -------------------------------------------------------------------------- Three-Month Period ------------------------- Percent 1999 1998 Change -------------------------------------------------------------------------- Wireline $ 1,077 $ 1,029 4.7% Wireless 152 139 9.4 Directory 8 9 (11.1) Other - - - Corporate, adjustments & eliminations 10 24 (58.3) ------------------------------------------------------------------ Total depreciation and amortization $ 1,247 $ 1,201 3.8% ========================================================================== Depreciation and amortization expense is primarily in the Wireline and Wireless segments. Depreciation and amortization increased in the first quarter of 1999 due primarily to increased depreciation expense of approximately $49 in the Wireline segment and approximately $13 in the Wireless segment resulting from overall higher plant levels. The increases were partially offset by reduced depreciation expense of approximately $7 related to retirement of analog switching equipment in Connecticut and reduced depreciation expense of approximately $14 due to the sale of certain cable TV operations. Interest expense decreased $33, or 12.9%, in the first quarter of 1999. This decrease was due primarily to reductions resulting from both lower average debt levels and lower weighted average rates of interest. Equity in net income of affiliates increased $9, or 17%, in the first quarter of 1999 due primarily to increases from SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), SBC's wireless operations and SBC's investments in French cellular communications totaling $20. These increases were partially offset by reduced equity in net income from SBC's investment in Telkom SA Limited, 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 was net expense of $83 and $39 in the first quarter of 1999 and 1998. Expenses for the first quarter of 1999 increased $56 due to higher appreciation in the market value of Telmex L shares underlying certain SBC debt redeemable either in cash or Telmex L shares in the first quarter of 1999 than in 1998. Also affecting comparisons in the first quarter of 1998 was other income of approximately $158 related to receipt of a special dividend from a software affiliate, 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. The first quarter of 1999 also included a 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 gain of approximately $24 recognized from the sale of certain discontinued plant related to Advanced Communications Network (ACN). In 1997, ACN was impaired in conjunction with strategic initiatives arising from the merger with PAC. Income Taxes increased $71, or 12.6%, in the first quarter of 1999 due primarily to higher income before income taxes. COMPETITIVE AND REGULATORY ENVIRONMENT IntraLATA Toll Dialing Parity In a January 1999 decision, the United States Supreme Court (Supreme Court) ruled that the FCC had the authority to issue rules to guide the state commissions in implementing intrastate and intraLATA dialing parity. In March 1999, the FCC released an order establishing new deadlines by which local exchange carriers (LECs) must implement dialing parity for intraLATA long distance calls. Specifically, the FCC ordered carriers whose dialing parity plans had been approved by a state commission to implement dialing parity no later than May 7, 1999. Carriers that had not filed dialing parity plans with their state commissions were required to do so by April 22, 1999. If state commissions have not approved the plans by June 22, 1999, the carriers must file them with the FCC for approval. Carriers will be required to implement dialing parity within 30 days of state or FCC approval. SBC anticipates that implementation of dialing parity will contribute to a loss of intraLATA long distance revenue in 1999. In California, Nevada, Texas and Kansas, the Telephone Companies began providing dialing parity in early May 1999. SWBell began providing dialing parity in Oklahoma on March 25, 1999. In Arkansas and Missouri, SWBell filed dialing parity plans in accordance with the April 22, 1999 FCC deadline. SWBell is scheduled to provide dialing parity in Arkansas in May 1999 and in Missouri by the date ordered by the state commission, which is expected to be during the second quarter of 1999. In March 1999, U S WEST, Inc. (U S West) filed pleadings in the Eighth Circuit Court of Appeals (Eighth Circuit) challenging both the validity of the FCC's March 1999 order and the authority of the FCC to determine the date by which a state must provide intraLATA dialing parity. While SBC believes that the pleadings of U S West are meritorious, at present, it is uncertain how the Eighth Circuit will rule on these pleadings. InterLATA Long Distance Application SBC continues to seek entry into interLATA long distance by requesting favorable recommendation from state commissions and approval from the FCC. In April 1999, the Texas Public Utility Commission (TPUC) conditionally approved SWBell's interLATA long distance application, noting that SWBell has met the 14-point checklist requirements of the Telecommunications Act of 1996, intended to ensure its local market in Texas is open to competition. A final decision by the TPUC on whether to recommend SWBell's in-region interLATA long distance application to the FCC is expected when systems testing is completed in mid-1999. Once approved, the FCC will then have 90 days to rule on the application. Pay Phone Per Call Compensation In February 1999, the FCC issued a ruling that reduced the pay phone dial-around access or toll free call rate from 28.4 cents to 24 cents per call effective in April 1999. In addition, the FCC order determined that a reduced rate of 23.8 cents per call be applied retroactively from October 1997 to April 1999. The retroactive rate change did not significantly affect SBC's first quarter of 1999 results of operations. 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 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 LECs. 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. These rates are currently the subject of an FCC inquiry, which is expected to be completed by mid-1999. Although SBC cannot currently predict the results of this rate inquiry, it is not expected to have a material impact on SBC's results of operations or financial position. Texas Public Utility Regulatory Act Under the Texas Public Utility Regulatory Act, which became effective in May 1995, 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. The Texas legislature is currently considering many aspects of telecommunications regulation, including access fees and pricing flexibility. The TPUC may also consider these factors. The outcome of legislation or TPUC rulings, if any are enacted or issued, on these matters is not determinable at this time. FCC Audit In March 1999, the FCC released the results of its 1997 audit of regional holding companies' (RHCs) and GTE Corporation's (GTE) telecommunications and other equipment. The FCC's audit alleged that each of the RHCs and GTE were missing millions of dollars in equipment. Specifically, the audit alleged that SBC subsidiaries were missing $1.7 billion in equipment. SBC believes that the audit methodology was flawed and amounts of "missing" equipment dramatically overstated. For example, the FCC's auditors sometimes labeled equipment as missing because it was not in the precise location indicated in the property records, even if it had been relocated. In April 1999, the FCC opened an inquiry on the audit's ramifications. Among other things, the FCC is interested in feedback on the audit methodology and statistical validity, the impact of the audit findings on telephone customers and what action the FCC should take against the RHCs and GTE. As SBC uses composite group depreciation accounting for its telephone plant, most reductions in plant levels (e.g., sales, retirements) are not reflected in earnings, but are reflected as changes in accumulated depreciation. Accordingly, if a write down of equipment is required, it is not expected to have a material impact on SBC's results of operations or financial position. 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. Pending Mergers 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 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. 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. 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 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 will own between a 51% and 75% interest in Cellular Communications at closing. 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 is looking to offer wireline phone service in San Juan. The transaction, pending approval by Cellular Communications shareholders and regulators, is expected to be completed in the third quarter. 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. The inventory and assessment phase 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 1,500 suppliers of 15,000 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 March 31, 1999, SBC had completed 96% of the hardware and software fixes. 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 89% complete. 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. Ninety-three percent of the deployment phase was completed as of March 31, 1999. 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 SBC has budgeted $265 on the entire project, with approximately $171 spent through March 31, 1999. 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 $547 in cash and cash equivalents available at March 31, 1999. During the first quarter of 1999, as in 1998, SBC's primary source of funds continued to be cash provided by operating activities. 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. SBC had no borrowings outstanding under these lines of credit as of March 31, 1999. Commercial paper borrowings as of March 31, 1999 totaled $1,112. SBC's investing activities during the first quarter of 1999 consist of $1,399 in construction and capital expenditures, primarily in the Wireline and Wireless segments. SBC expects capital expenditures to be between $6,400 and $6,800 in 1999. 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. Cash paid for dividends in the first quarter of 1999 was $455, or 4.1% higher than in the first quarter of 1998 due to an increase in dividends per share to $0.24375 from $0.23375. SBC COMMUNICATIONS INC. Item 3. Quantitative and Qualitative Disclosures About Market Risk Dollars in millions except per share amounts There has been no material change in SBC's market risks since December 31, 1998. As planned, in March 1999 SBC completely exited the AirTouch Communications, Inc. (AirTouch) equity swap contract that expired in April 1999. SBC did not enter any new hedge for the remaining liability on its balance sheet for the unexercised AirTouch employee options. As a result, SBC will record in operations and support future changes in the value of underlying employee stock option exposure when AirTouch common stock deviates from $96 per share without any offsetting hedge. As of March 31, 1999, there were approximately 338,000 employee options still outstanding, with the last option grant expiring in January 2003. 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. SBC COMMUNICATIONS INC. PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds During the first 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 1,026 SBC shares and DSUs were purchased by non-employee directors at prices ranging from $47.50 to $57.687, 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 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 January 8, 1999, SBC filed a report on Form 8-K, reporting on Item 5. Other Events and Item 7. Financial Statements and Exhibits. In the report, SBC included a press release discussing its segment information by quarter for 1998 and 1997. On January 21, 1999, SBC filed a report on Form 8-K, reporting on Item 5. Other Events. In the report, SBC included a press release discussing its fourth quarter and annual earnings for 1998. 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. May 11, 1999 /s/ Donald E. Kiernan ------------------------ Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer EX-12 2 RATIO OF EARNINGS TO FIXED CHARGES SBC COMMUNICATIONS INC. EXHIBIT 12 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Dollars in Millions THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---------- --------- -------- --------- --------- -------- -------- Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Accounting Changes* $ 1,705 $ 1,525 $ 6,318 $ 2,558 $ 5,283 $ 4,670 $ 4,403 Add: Interest Expense 223 256 993 1,043 901 1,043 1,010 Dividends on Preferred Securities 20 20 80 80 60 - - 1/3 Rental Expense 38 34 147 129 115 85 93 ---------- --------- --------- --------- -------- --------- --------- Adjusted Earnings $ 1,986 $ 1,835 $ 7,538 $ 3,810 $ 6,359 $ 5,798 $ 5,506 ========== ========= ========= ========= ======== ========= ========= Total Interest Charges $ 237 $ 273 $ 1,052 $ 1,168 $ 1,043 $ 1,048 $ 1,010 Dividends on Preferred Securities 20 20 80 80 60 - - 1/3 Rental Expense 38 34 147 129 115 85 93 ---------- --------- --------- --------- -------- --------- --------- Adjusted Fixed Charges $ 295 $ 327 $ 1,279 $ 1,377 $ 1,218 $ 1,133 $ 1,103 ========== ========= ========= ========= ======== ========= ========= Ratio of Earnings to Fixed Charges 6.73 5.61 5.89 2.77 5.22 5.12 4.99 *Undistributed earnings on investments accounted for under the equity method have been excluded
EX-27 3 EXHIBIT 27: FINANCIAL DATA SCHEDULE, 3/31/99
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC COMMUNICATIONS INC.'S MARCH 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 547 1 5,846 470 0 7,663 74,350 44,306 45,396 9,795 11,404 0 0 1,988 11,545 45,396 0 7,317 0 4,077 1,247 106 223 1,749 634 1,115 0 0 0 1,115 0.57 0.56 THIS AMOUNT IS IMMATERIAL. 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. 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).
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