-----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, Ia297tu52fexwQl25qgI92IYFjXsa2Wr2tiDBVo9GoCf/Sk6XcLJxczmIqvW3o4r QAJuDSyCQLdgv2bu+Q9jFw== 0000732717-98-000007.txt : 19980312 0000732717-98-000007.hdr.sgml : 19980312 ACCESSION NUMBER: 0000732717-98-000007 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 26 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980311 SROS: CSX SROS: NYSE SROS: PCX 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-K405 SEC ACT: SEC FILE NUMBER: 001-08610 FILM NUMBER: 98563683 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-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-8610 SBC COMMUNICATIONS INC. Incorporated under the laws of the State of Delaware I.R.S. Employer Identification Number 43-1301883 175 E. Houston, San Antonio, Texas 78205-2233 Telephone Number 210-821-4105 Securities registered pursuant to Section 12(b) of the Act: (See attached Schedule A) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) Based on composite closing sales price on February 27, 1998, the aggregate market value of all voting stock held by non-affiliates was $69,458,800,000. As of February 27, 1998, 919,465,202 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of SBC Communications Inc.'s Annual Report to Shareowners for the fiscal year ended December 31, 1997 (Parts I and II). (2) Portions of SBC Communications Inc.'s Notice of 1998 Annual Meeting and Proxy Statement dated March 11, 1998 (Parts III and IV). SCHEDULE A Securities Registered Pursuant To Section 12(b) Of The Act: Name of each exchange Title of each class on which registered Common Shares (Par Value $1.00 Per New York, Chicago and Share) Pacific Stock Exchanges 7 3/4 % Exchangeable Notes, New York Stock Exchange Due March 15, 2001 7.56% Pacific Telesis Group (PAC) New York Stock Exchange Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts 8.5% PAC Corporation-obligated New York Stock Exchange mandatorily redeemable preferred securities of subsidiary trusts TABLE OF CONTENTS Item Page - ----- ---- PART I 1. Business....................................................... 4 2. Properties..................................................... 15 3. Legal Proceedings.............................................. 15 4. Submission of Matters to a Vote of Security Holders............ 15 Executive Officers of the Registrant.............................. 16 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 17 6. Selected Financial and Operating Data.......................... 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 17 7A. Quantitative and Qualitative Disclosures about Market Risk..... 17 8. Financial Statements and Supplementary Data.................... 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 20 PART III 10. Directors and Executive Officers of the Registrant............. 21 11. Executive Compensation......................................... 21 12. Security Ownership of Certain Beneficial Owners and Management. 21 13. Certain Relationships and Related Transactions................. 21 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22 PART I ITEM 1. BUSINESS GENERAL SBC Communications Inc. (SBC) is a holding company whose subsidiaries and affiliates operate predominantly in the communications services industry. SBC's subsidiaries and affiliates provide landline and wireless telecommunications services and equipment, directory advertising, publishing and cable television services. SBC's largest subsidiaries are Southwestern Bell Telephone Company (SWBell), providing telecommunications services over approximately 16 million access lines in Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area), and Pacific Bell (PacBell), providing telecommunications services over approximately 17 million access lines in California. SBC also provides telecommunications services through its Nevada Bell subsidiary over approximately 300 thousand access lines in Nevada. (SWBell, PacBell and Nevada Bell are collectively referred to as the Telephone Companies.) The Telephone Companies operate within an authorized region (in-region) providing local exchange services and are subject to regulation by each state in which they operate and by the Federal Communications Commission (FCC). SBC was incorporated under the laws of the State of Delaware in 1983 and has its principal executive offices at 175 E. Houston, San Antonio, Texas 78205-2233 (telephone number 210-821-4105). SBC was one of the original seven regional holding companies (RHCs) formed to hold AT&T Corp.'s (AT&T) local telephone companies. AT&T divested SBC by means of a spin-off of stock to its shareowners on January 1, 1984 (divestiture). As a result, SBC became a publicly traded company. The divestiture was made pursuant to a consent decree, referred to as the Modification of Final Judgment (MFJ), issued by the United States District Court for the District of Columbia (District Court). With the mergers of SBC and Pacific Telesis Group (PAC), and Bell Atlantic Corporation and NYNEX Corporation, there are now five RHCs. COMPLETION OF MERGER WITH PAC On April 1, 1997, SBC and PAC completed the merger of an SBC subsidiary with PAC, in a transaction in which each outstanding share of PAC common stock was exchanged for 1.4629 shares of SBC common stock (equivalent to approximately 626 million shares; both the exchange ratio and shares issued have been restated to reflect the two-for-one stock split, effected in the form of a stock dividend, declared January 30, 1998 with a record date of February 20, 1998 and payable March 19, 1998). With the merger, PAC became a wholly-owned subsidiary of SBC. The transaction was accounted for as a pooling of interests and a tax-free reorganization. Post-merger initiatives Several strategic decisions resulted from the merger integration process. 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. Reorganization SBC is centralizing several key functions that will support the operations of the Telephone Companies, including network planning, strategic marketing and procurement. It is also consolidating a number of corporate-wide support activities, including research and development, information technology, financial transaction processing and real estate management. The Telephone Companies will continue as separate legal entities. These initiatives will result in the creation of some jobs and the elimination and realignment of others, with many of the affected employees changing job responsibilities and in some cases assuming positions in other locations. SBC recognized charges during 1997 in connection with these initiatives. The charges were comprised mainly of postemployment benefits, primarily related to severance, and costs associated with closing down duplicate operations, primarily contract cancellations. Other charges arising out of the merger relating to relocation, retraining and other effects of consolidating certain operations are being recognized in the periods those charges are incurred. Additional information on these charges is contained in Note 3 of the 1997 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). MERGER WITH SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION On January 5, 1998, SBC and Southern New England Telecommunications Corporation (SNET) jointly announced a definitive agreement to merge an SBC subsidiary with SNET, in a transaction in which each share of SNET common stock will be exchanged for 1.7568 shares of SBC common stock (equivalent to approximately 120 million shares; both the exchange ratio and shares to be issued have been restated to reflect the two-for-one stock split declared January 30, 1998). The transaction is intended to be accounted for as a pooling of interests and to be a tax-free reorganization. Additional information on this matter is contained in Note 4 of the 1997 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). FEDERAL LEGISLATION AND THE MFJ On February 8, 1996, the Federal Government enacted the Telecommunications Act of 1996 (the Telecom Act), a major, wide-ranging amendment to the Communications Act of 1934. By its specific terms, the Telecom Act supersedes the jurisdiction of the District Court with regard to activities occurring after the date of enactment. The FCC is given authority for all post-enactment conduct, with the District Court retaining jurisdiction of pre-enactment conduct for a five-year period. As a result of these provisions, on April 11, 1996 the District Court issued its Opinion and Order terminating the MFJ and dismissing all pending motions as moot, thereby effectively ending 13 years of RHCs regulation under the MFJ. In July 1997, SBC brought suit in the U.S. District Court for the Northern District of Texas (U.S. Court), seeking a declaration that a portion of the Telecom Act is unconstitutional on the grounds that it improperly discriminates against the Telephone Companies by name by imposing restrictions that prohibit SBC from offering interLATA (Local Access Transport Area) long-distance and other services in-region that other Local Exchange Carriers (LECs) are free to provide. The suit challenged only that portion of the Telecom Act that excluded SBC from competing in certain lines of business. On December 31, 1997 the Court issued a ruling declaring unconstitutional, among other things, the prohibitions on SBC providing interLATA long-distance in-region. The FCC and competitor intervenors sought and received a stay of the decision by the Court, and SBC anticipates further opposition to this ruling from the Justice Department and interexchange carriers, but is unable to predict the outcome of subsequent appeals. Additional information relating to the Telecom Act is contained in the 1997 SBC Annual Report to Shareowners under the heading "Competitive Environment" beginning on page 25, and is incorporated herein by reference pursuant to General Instruction G(2). BUSINESS OPERATIONS SBC is among the largest telecommunications companies in the United States, with approximately 33 million access lines and approximately 5.5 million wireless customers in the United States. SBC serves the nation's two most populous states, California and Texas as well as 7 of the country's 10 largest metropolitan areas, 16 of the country's 50 largest metropolitan areas, and has investments in telecommunications businesses in selected international markets, including Mexico, France, South Africa, Chile, South Korea, The United Kingdom, Switzerland, Israel and Taiwan. SBC's broad operations offer customers an expansive range of services and products, varying by market, including: local exchange services, wireless communications, long-distance, Internet services, telecommunications equipment, enhanced services, and directory advertising. Services and products are provided through several subsidiaries, which include: the Telephone Companies, Southwestern Bell Mobile Systems, Inc. including its affiliates (Mobile Systems), Pacific Bell Mobile Services (PBMS), SBC International, Inc. (SBC International), Southwestern Bell Yellow Pages, Inc. (SWBYP), Pacific Bell Directory (PBD), Southwestern Bell Messaging Services, Inc. (SMSI), Pacific Bell Information Services (PBIS), Pacific Bell Internet (PBI), Southwestern Bell Internet Services (SBIS), and SBC Media Ventures, Inc. (Media Ventures). These services and products (which are described more fully below) include landline and wireless telecommunications services, sales of advertising for and publication of yellow pages and white pages directories, sales of customer premises, private business exchange (PBX) and wireless equipment, enhanced services, Internet services, and cable television services. Wireless telecommunications services are provided by Mobile Systems and PBMS (collectively SBC Wireless). Landline telecommunications services are provided to the in-region states by the Telephone Companies. In December 1996, substantially all of the operations of Southwestern Bell Telecommunications, Inc. (Telecom) moved into the operations of SWBell with enhanced services being moved into SMSI. SBC's revenues are categorized for financial reporting purposes as local service (substantially all of which was provided by the Telephone Companies and SBC Wireless), network access (provided by the Telephone Companies), long-distance service (substantially all of which was provided by the Telephone Companies and SBC Wireless), directory advertising (principally provided by SWBYP and PBD) and other (including equipment sales at SBC Wireless and SWBell, nonregulated products and services provided by the Telephone Companies, billing and collection services for interexchange carriers provided by the Telephone Companies, Internet services provided by PBI and SBIS, and cable television services provided by Media Ventures). With the passage of the Telecom Act, SBC Wireless offers interLATA and intraLATA wireless long-distance services. In 1996, two SBC subsidiaries, Southwestern Bell Communications Services, Inc. (SBCS) and Pacific Bell Communications, began offering landline interLATA long-distance services to customers in selected areas outside the Telephone Companies' authorized regions (out-region). The Telephone Companies provide intraLATA long-distance services in-region. The following table sets forth for SBC the percentage of total operating revenues by any class of service which accounted for 10% or more of total operating revenues in any of the last three fiscal years. - ----------------------------------------------- ------------------------------- Percentage of Total Operating Revenues - ----------------------------------------------- ------------------------------- 1997 1996 1995 - ----------------------------------------------- ---------- --------- ---------- Local service: Landline 38% 36% 37% Wireless 12% 11% 10% Network access 23% 24% 25% - ----------------------------------------------- ---------- --------- ---------- Communication Services Communication services include local, long-distance and network access services. Local services involve the transport of landline and wireless telecommunications traffic between telephones and other customer premises equipment (CPE) located within the same local service calling area. Local services include: basic local exchange service, certain extended area service, dedicated private line services for voice and special services, directory assistance and various vertical services, including custom calling services, call control options and Caller ID services. Until the passage of the Telecom Act, SBC's long-distance services involved the transport of intraLATA telecommunications traffic, except for certain wireless service areas that cover more than one LATA, for which SBC had obtained MFJ waivers. In addition to these services, beginning in 1996, SBC provided both interLATA and intraLATA cellular long-distance services to its wireless customers, as well as landline interLATA long-distance services in selected out-region areas. Long-distance services also include other services such as Wide Area Telecommunications Service (WATS or 800 services) and other special services. Network access services connect a subscriber's telephone or other equipment to the transmission facilities of other carriers that provide long-distance (principally interLATA) and other communications services. Network access services are either switched, which use a switched communications path between the carrier and the customer, or special, which use a direct nonswitched path. Landline Network Services During the latter half of 1996 and over the course of 1997, the Telephone Companies have been offering certain services on a "wholesale" basis to competitors, as well as providing elements of the Telephone Companies' networks on an "unbundled" basis for local competition. These services are being offered as specified by the Telecom Act and state actions and agreements. That legislation and the regulations promulgated by state and federal agencies to implement it have resulted in SBC facing increased competition in significant portions of its business. At December 31, 1997 SBC provided wholesale services to approximately 500 thousand access lines. Management cannot quantify the impact to SBC's business in 1998 from local exchange competition, as uncertainty exists as to the breadth and scope of competitors' offering of local exchange services to all portions of the market in-region, and as certain regulations, tariffs and negotiations governing such competition are not yet finalized. The Telephone Companies are SBC's largest subsidiaries, providing approximately 82% of SBC's operating revenues in 1997. The Telephone Companies provide their services to approximately 20.9 million residential and 12.1 million business access lines in the seven states in which they operate. During 1997 total access lines grew by 5%, of which 50% of the increase was due to growth in California and over 30% of the increase was due to growth in Texas. During 1997, the Telephone Companies continued to expand their offering of vertical services throughout their operating areas. These services include, among other things Caller ID, a feature which displays the telephone number of the person calling and the caller's name in certain markets; Call Return, a feature that redials the number of the last incoming call; and Call Blocker, a feature which allows customers to automatically reject calls from a designated list of telephone numbers. SMSI provides voice messaging services under the registered trademark CallNotes to residential and business customers. PBIS has several registered trademark products, which include residential voice messaging services (The Message Center), business messaging services (Pacific Bell Voice Mail), and business call management services (Pacific Bell Call Management). During 1996, PBI and SBIS began providing Internet services in selected in-region metropolitan areas. Internet access services were introduced throughout many other in-region metropolitan areas in 1997. Wireless At the end of 1997, Mobile Systems provided wireless services to 5,068,000 customers over its traditional cellular networks, or 12.2 out of every 100 residents in its service areas. Mobile Systems provides services in 39 metropolitan markets in 10 states and the District of Columbia, including 5 of the nation's top 15 metropolitan areas, as follows: Washington, D.C.; Chicago, Illinois; Boston, Massachusetts; St. Louis, Missouri; and Dallas-Fort Worth, Texas. Mobile Systems is licensed to provide service in 40 rural service areas (RSA) and is currently providing service in all of these markets. Each RSA is contiguous to an existing metropolitan service area or another RSA operated by Mobile Systems, which allows for the expansion of service in a way that may add value to customers' service. Mobile Systems also operates one RSA in Arkansas under an interim operating authority granted by the FCC. In January 1997, Mobile Systems began doing business within the five-state area as Southwestern Bell Wireless, Inc. Mobile Systems operates in out-region areas under the name of Cellular One by means of licenses from Cellular One Group, a partnership among affiliates of Mobile Systems, AT&T Wireless Services and Vanguard Cellular Systems, Inc. These areas include metropolitan service areas, such as Washington, D.C.; Chicago, Illinois; Albany, Buffalo, and Rochester, New York and Boston, Massachusetts; and rural service areas in Illinois, Massachusetts, New York, Virginia and West Virginia. Cellular One does or can offer, on a resale basis, landline interLATA long-distance service in all out-region markets where it provides local wireless service. In January 1997, Cellular One also began offering landline local service, on a resale basis, in Rochester, New York. In October 1994, SBC formed a long-term marketing alliance between Mobile Systems and GTE in Texas. This alliance has enabled both Mobile Systems and GTE to offer wireless service in each other's Texas wireless markets, using the host company's wireless system. As a result, Mobile Systems provides wireless service in Houston, Austin and Beaumont and has the right, under this alliance, to market wireless service in a number of additional markets including El Paso and Galveston. Mobile Systems now offers digital service, including advanced features in most of the metropolitan areas where it's licensed to provide wireless service. Mobile Systems first began providing commercial digital service in Chicago in July 1993. Digital service improves sound quality, provides a greater degree of privacy on individual calls, increases call-handling capacity of the networks, allows additional service offerings, and reduces exposure to billing fraud. Mobile Systems also markets wireless communications equipment in each of its service areas. In 1993, the FCC adopted an order allocating radio spectrum and outlining the development of licenses for new personal communications services (PCS). PCS utilizes wireless telecommunications digital technology at a higher frequency radio spectrum than cellular using lower powered transmission equipment. Like cellular, it is designed to permit access to a variety of communications services regardless of subscriber location. In an FCC auction, which concluded in March 1995, PCS licenses were awarded in 51 major markets. SBC or affiliates acquired PCS licenses in the Major Trading Areas (MTAs) of Los Angeles-San Diego, California; San Francisco-San Jose, California; Memphis, Tennessee; Little Rock, Arkansas; and Tulsa, Oklahoma. The California licenses cover substantially all of California and Nevada. SBC is currently operational in all of its major California-Nevada markets and Tulsa, Oklahoma. During 1996, SBC received several AT&T cellular networks in Arkansas in exchange for SBC's PCS licenses in Memphis, Tennessee and Little Rock, Arkansas and other considerations. PBMS was formed to offer PCS services across California and Nevada. The network incorporates the Global System for Mobile Communications (GSM) standard, which is widely used internationally, and its phones feature a built-in pager and answering machine. PBMS began trials in August 1996 and began offering services in January 1997, and by mid-1997 provided widespread offerings of PCS services to all of California and Nevada. At the end of 1997, PBMS provided wireless services to 340,000 customers over its PCS networks. In an FCC auction concluded in January 1997, SBC acquired the following additional PCS licenses for Basic Trading Areas (BTAs) that are within the five-state area: Springfield, Missouri; McAlester, Oklahoma; Joplin, Missouri; Pittsburgh, Kansas; Temple-Killeen, Texas; Waco, Texas; Tyler, Texas and Longview-Marshall, Texas. Overall, at the end of 1997, SBC Wireless operations provided local wireless services to 5,493,000 customers throughout its wireless markets. In addition, since the Telecom Act passed, Mobile Systems began providing wireless long-distance service to its wireless customers, and at year-end 1997 had been selected as the long-distance carrier by approximately 3,286,000, or 63 percent, of its wireless customers. International Mexico A consortium consisting of SBC International, together with a subsidiary of France Telecom and a group of Mexican investors led by Grupo Carso, S.A. de C.V. (Grupo Carso), has voting control of Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's largest national telecommunications company, through its ownership of all of Telmex's Class AA shares. The Mexican investors have voting control of the consortium. During 1996, Grupo Carso transferred its Telmex interest to a spin-off company named Carso Global Telecom, S.A. de C.V. This transaction had no effect on SBC International's Telmex holdings. SBC International also owns Class L shares, which have limited voting rights. Telmex made significant purchases under various share repurchase programs from 1995 through 1997, buying back 23% of its stock. Throughout 1997 and in February 1998, SBC International sold portions of its Class L shares to Telmex so that SBC's total equity investment (including both AA shares and L shares) was slightly below 10% of Telmex's total equity capitalization. Telmex provides complete landline and wireless telecommunications services within Mexico. At the end of 1997, Telmex had 9.3 million access lines in service and provided cellular service to approximately 1.1 million subscribers. Telmex began providing cable television services through its purchase in 1995 of a 49% stake of Grupo Televisa's cable television subsidiary, Cablevision. In March 1997, SBC issued approximately $396 million in debt due March 2001 which, at SBC's option, may be redeemed upon maturity either in cash or Telmex L shares (equivalent to up to 2.4% of Telmex's equity capitalization at March 31, 1997). France In October 1994, SBC International formed a strategic alliance with Compagnie Generale des Eaux (CGE), a French diversified public company. Through this alliance, SBC International acquired an indirect 10% ownership of Societe Francaise du Radiotelephone S.A. (SFR), a nationwide cellular company in France, and minority ownership interests in other communications businesses controlled by CGE, and CGE obtained an effective 10% interest in SBC's wireless operations in Washington, D.C.- Baltimore, and surrounding rural markets. SBC and CGE both made contributions to the alliance. In 1997, SBC International contributed its indirect 10% ownership of SFR shares and an additional $240 million to acquire a 15% interest in Cegetel, S.A., a new French company formed by CGE to provide a broad base of telecommunications services throughout France. Operations on a limited scale are scheduled to begin during the first half of 1998. At the end of 1997, SFR had 2.2 million wireless subscribers. Chile In February 1995, SBC International purchased 40% of VTR S.A. (VTR), a privately owned telecommunications holding company in Chile. During 1996 SBC International increased its stake to 49% through the purchase of shares from a minority investor. VTR is 51% indirectly owned by Grupo Luksic (Luksic), a large Chilean conglomerate. During 1997, Luksic exercised an option to purchase more shares of VTR from SBC International, reducing SBC's ownership to 44%. Through its subsidiaries, VTR provides local, long-distance, wireless and cable television services in Chile. In December 1997, VTR sold its wireless service operations. At the end of 1997, local services were provided to approximately 123,000 access lines and cable television services were provided to approximately 367,000 subscribers. United Kingdom In October 1995, SBC International combined its United Kingdom cable television operations, which included Midlands Cable Communications and Northwest Cable Communications, with those of TeleWest Communications, P.L.C., a publicly held joint venture between Telecommunications, Inc. and U S WEST, Inc. The resulting entity, TeleWest P.L.C., is the largest cable television operator in the United Kingdom and also provides local exchange services. SBC International owns approximately 15% of TeleWest P.L.C. Israel SBC International through its subsidiaries holds a minority interest in Golden Channels, a cable television provider in Israel. At the end of 1997, Golden Channels' systems passed 449,000 households and provided service to approximately 292,000 households, a penetration rate of approximately 65%. SBC International also has interests in companies involved in the publication of yellow pages directories, and marketing directory and other software in Israel. In 1996, a consortium in which SBC International participated received one of two licenses for international telecommunications service in Israel. Other consortium members are STET (Italy's national telephone company), the US/Israeli Aurec Group, and the Israeli Globescom and Kahn groups. At the present time, the award of these licenses is undergoing judicial review. Australia In 1997, SBC International sold its directory interests in Australia to Telstra Corporation Limited, the principal provider of telecommunications services in Australia. South Africa In 1997, SBC International acquired an effective 18% stake in Telkom, S.A. Limited (Telkom), South Africa's state-owned local exchange, long distance, and cellular company. SBC International's partner in the acquisition is Telekom Malaysia, which acquired a 12% stake in Telkom. SBC International's still holds its 15.5% ownership stake in MTN, one of South Africa's two national cellular companies, but is obligated to divest it as part of the acquisition of Telkom. At the end of 1997, Telkom provided local exchange services to 4.5 million access lines. Telkom provides long-distance service to all of its local exchange customers. Switzerland In June 1997, SBC International purchased a 40% interest in diAx, a new company formed by SBC International and a Swiss-based company. diAx is currently building a network to provide long-distance telephone service in Switzerland. The target date for commencement of service is mid-1998. China In December 1997, SBC International signed a Cable and Maintenance Agreement with China Telecom and twelve other telecommunications companies to construct a direct undersea cable link between the United States and China. The cable is expected to be completed by the year 2000. South Korea SBC also has wireless interests in South Korea where its affiliate provided wireless service to approximately 1.1 million subscribers at the end of 1997. Taiwan SBC International owns a 20% interest in a consortium that formed TransAsia Telecommunications, Inc., a new cellular service provider in Taiwan. Offering of services commenced in January 1998. Directory Advertising SWBYP publishes more than 43 million books, representing approximately 347 directories, principally within the five-state area. PBD, the publisher of Pacific Bell SMART Yellow Pages, publishes 35 million books, representing approximately 112 directories in California and Nevada. SBC recognizes all directory advertising revenues and expenses in the month the related directory is published. SWBYP's nine largest revenue-producing yellow pages directories are currently published in the second half of SBC's fiscal year, while PBD's publishing schedule is spread throughout the year for its directories. SWBYP's directories are printed by R.R. Donnelley & Sons and PBD's directories are printed by World Color Press. Customer Premises Equipment and Other Equipment Sales In December 1996, substantially all of the operations of Telecom were moved into the operations of SWBell. Equipment offerings range from single-line and cordless telephones to sophisticated digital PBX systems. PBX is a private telephone switching system, usually located on a customer's premises, which provides intra-premise telephone services as well as access to the public switched network. Telecom, through an exclusive, long-term distribution agreement with Conair Corporation, also markets a full line of residential telephones to retailers nationwide, under the Southwestern Bell Freedom Phone name. Domestic Video Services As part of the changes in strategic direction of the post-merger initiatives, SBC announced during 1997 that it is scaling back its limited direct investment in a number of video services. Additional information on these matters is contained in Note 3 of the 1997 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). As part of this curtailment, SBC has halted construction on the Advanced Communications Network (ACN) in California. As part of an agreement with the ACN vendor, SBC paid the liabilities of the ACN trust that owns and finances ACN construction and incurred costs to shut down all construction previously conducted under the trust and receive certain consideration from the vendor. SBC also curtailed several other video-related activities, including its broadband network video trials in Richardson, Texas. SBC has also substantially scaled back its involvement in the Tele-TV joint venture. Media Ventures owns two cable television systems serving the suburban Washington, D.C. area. Cable TV Montgomery serves Montgomery County, Maryland and Cable TV Arlington serves Arlington County, Virginia. At the end of 1997, these systems passed 432,000 homes and served 278,000 customers. In August 1996, Media Ventures contributed Cable TV Montgomery and Cable TV Arlington to SBC Media Ventures, LP (Partnership), a recently formed partnership between Media Ventures and affiliates of Prime Cable (Prime). Media Ventures became the general partner and retained an approximate 95% ownership interest in the Partnership. Prime contributed $20 million to the Partnership and now manages the cable systems on behalf of the Partnership. In October 1997, SBC entered a definitive agreement to sell Media Ventures' interest in the Partnership to Prime and other investors. These transactions are expected to close during 1998. On the same date, SBC entered into definitive agreements to sell its interests in Prime Cable of Chicago, Inc. to Prime and other investors. A PAC subsidiary had acquired these interests prior to the merger with SBC. During 1995, SBC became an equal partner in a venture with Ameritech Corporation, BellSouth Corporation, GTE, and The Walt Disney Company, to design, market and deliver video programming and interactive services. In 1996, SNET became a minority partner in this venture. In mid-1997, SBC Interactive Media, Inc. (SBC Interactive), a wholly-owned subsidiary of SBC, notified the venture of its withdrawal. On October 7, 1997 the remaining partners in the venture attempted to initiate arbitration against SBC Interactive regarding the validity of its withdrawal. On October 15, 1997, SBC Interactive filed a declaratory judgement action in and sought a preliminary injunction from Delaware Chancery Court to halt the arbitration attempt. On December 24, 1997, the Chancery Court directed that the arbitration proceed, and on January 22, 1998, SBC appealed that ruling. This matter is still being litigated. In connection with the post-merger initiatives, SBC reviewed the carrying values of certain wireless video assets and other related long-lived assets. This review included estimating remaining useful lives and cash flows and identifying certain assets to be abandoned. Where this review indicated impairment, discounted cash flows related to those assets were analyzed to determine the amount of the impairment. In 1997, SBC recognized impairments and took writeoffs of equipment related to the wireless digital TV operations in southern California. GOVERNMENT REGULATION In the in-region states, the Telephone Companies are subject to regulation by state commissions which have the power to regulate, in varying degrees, intrastate rates and services, including local, long-distance and network access (both intraLATA and interLATA access within the state) services. The Telephone Companies are also subject to the jurisdiction of the FCC with respect to interstate and international rates and services, including interstate access charges. Access charges are designed to compensate the Telephone Companies for the use of their facilities for the origination or termination of long-distance and other communications by other carriers. There are currently no access charges for access to the Internet. Additional information relating to federal and state regulation of the Telephone Companies is contained in the 1997 SBC Annual Report to Shareowners under the heading "Regulatory Environment" on page 23, and is incorporated herein by reference pursuant to General Instruction G(2). SBC's cable systems are subject to federal and local regulation, including regulation by the FCC and local franchising authorities, concerning rates, service and programming access. IMPORTANCE, DURATION AND EFFECT OF LICENSES The FCC authorizes the licenses for multiple wireless carriers in each geographic market. The cellular licenses, of which there are only two in each geographic region have a standard duration of ten years, and upon application and a showing of compliance with FCC use and conduct standards may be renewed. Renewal applications were filed in the following markets during 1997: Abilene, Texas; Brownsville-Harlingen, Texas; Champaign-Urbana-Rantoul, Illinois; Decatur, Illinois; McAllen-Edinburgh-Mission, Texas; Midland, Texas; Odessa, Texas; Springfield, Illinois and Fayetteville-Springdale, Arkansas. Renewals for these licenses were granted in January 1998. Renewal applications will be filed in the following markets during 1998: Bloomington-Normal, Illinois; Glen Falls, New York; Laredo, Texas; Little Rock-North Little Rock, Arkansas; and Pine Bluff, Arkansas. Under the auction process of an FCC order outlining the development of PCS, licenses with durations of ten years were awarded in 51 major markets. SBC's licenses for Los Angeles-San Diego, California, San Francisco-San Jose, California and Tulsa, Oklahoma expire in 2005. These licenses, upon application and a showing of compliance with FCC use and conduct standards, may be renewed. Cable television systems generally are operated under nonexclusive permits or "franchises" granted by local governmental authorities. SBC operates its suburban Washington, D.C. cable systems under franchises granted by Montgomery County, Maryland, which expires in May 1998; Arlington County, Virginia, which expires in October 2000; and the City of Gaithersburg, Maryland, which expires in November 2001. During 1995, SBC received a franchise to operate a cable system in Richardson, Texas, which expires in September 2013. Each franchise is renewable upon a showing of compliance with established local and federal standards. A number of SBC subsidiaries hold FCC channel licenses for wireless video services. These subsidiaries also have numerous leases with Instructional Television Fixed Service (ITFS) channel licensees to use their excess channel capacity. The channels under these licenses and leases are primarily in southern California. MAJOR CUSTOMER No customer accounted for more than 10% of SBC's consolidated revenues in 1997, 1996 or 1995. COMPETITION Communication Services Information relating to competition in the communications industry is contained in SBC's Annual Report to Shareowners for 1997 under the heading "Competitive Environment" beginning on page 25, and is incorporated herein by reference pursuant to General Instruction G(2). International Information relating to international competition is contained in SBC's Annual Report to Shareowners for 1997 under the heading "International" on page 28, and is incorporated herein by reference pursuant to General Instruction G(2). Directory Advertising and Publishing Both SWBYP and PBD face competition from over 100 publishers of printed directories in their operating areas. Direct and indirect competition also exist from other advertising media, including newspapers, radio, television, and direct mail providers, as well as from directories offered over the Internet. Customer Premises Equipment and Other Equipment Sales SBC faces significant competition from numerous companies in marketing its telecommunications equipment. RESEARCH AND DEVELOPMENT Certain company-sponsored basic and applied research was conducted at Bell Communications Research, Inc. (Bellcore). The Telephone Companies owned a two-seventh interest in Bellcore, with the remainder owned by the other four remaining RHCs. In November 1997, the sale of Bellcore was completed. The RHCs have retained the activities of Bellcore that coordinate the Federal Government's telecommunications requirements for national security and emergency preparedness. Applied research is also conducted at SBC Technology Resources, Inc. (TRI), a subsidiary of SBC. TRI provides research, technology planning and evaluation services to SBC and its subsidiaries. EMPLOYEES As of December 31, 1997, SBC and its subsidiaries employed 118,340 persons. Approximately 67% of the employees are represented by the Communications Workers of America (CWA). Contracts covering an estimated 73,000 employees between the CWA and the Telephone Companies end in August 1998. New contracts are scheduled to be negotiated in 1998. A three-year contract (which covers an estimated 2,000 employees) was negotiated between the CWA and SWBYP, which became effective in December 1995. A new contract is scheduled to be negotiated in 1998. In 1995, PBD negotiated two new three-year contracts with the International Brotherhood of Electrical Workers (IBEW), covering approximately 1,600 employees in northern and southern California. PBD also is scheduled to negotiate new contracts with the IBEW in 1998. The CWA also represents an estimated 2,000 employees in other subsidiaries of SBC. ITEM 2. PROPERTIES The properties of SBC do not lend themselves to description by character and location of principal units. At December 31, 1997, 94% of the property, plant and equipment of SBC was owned by the Telephone Companies. Network access lines represented 42% of the Telephone Companies' investment in telephone plant; central office equipment represented 39%; land and buildings represented 10%; other miscellaneous property, comprised principally of furniture and office equipment and vehicles and other work equipment, represented 6%; and information origination/termination equipment represented 4%. ITEM 3. LEGAL PROCEEDINGS Six putative class actions in Texas, Missouri, Oklahoma, and Kansas that involved the provision by SWBell of maintenance and trouble diagnosis services relating to telephone inside wire located on customer premises have been settled. These actions alleged that SWBell's sales practices in connection with these services violated antitrust, fraud and/or deceptive trade practices statutes. The trial court has approved the settlement, which is not expected to materially affect the financial results of SBC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareowners in the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position Held Since Edward E. Whitacre,Jr. 56 Chairman and Chief Executive Officer 1-90 John H. Atterbury III 49 Senior Vice President - International 6-97 Operations Royce S. Caldwell 59 President - SBC Operations 7-95 Cassandra C. Carr 53 Senior Vice President - Human Resources 5-94 William E. Dreyer 60 Senior Executive Vice President - 7-93 External Affairs James D. Ellis 54 Senior Executive Vice President and 3-89 General Counsel Charles E. Foster 61 Group President - SBC 7-95 James S. Kahan 50 Senior Vice President - Corporate 7-93 Development Donald E. Kiernan 57 Senior Vice President, Treasurer and 7-93 Chief Financial Officer Stanley T. Sigman 50 President and Chief Executive Officer 4-97 SBC Wireless Inc. All of the above executive officers have held high-level managerial positions with SBC or its subsidiaries for more than the past five years. Executive officers are not appointed to a fixed term of office. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The number of shareowners of record as of December 31, 1997 and 1996 were 1,059,158 and 800,465. Other information required by this Item is included in the SBC Annual Report to Shareowners for the fiscal year ended December 31, 1997 under the headings "Quarterly Financial Information" on page 45, "Selected Financial and Operating Data" on page 18, and "Stock Trading Information" on the inside of back cover, which are incorporated herein by reference pursuant to General Instruction G(2). ITEM 6. SELECTED FINANCIAL AND OPERATING DATA Information required by this Item is included in the SBC Annual Report to Shareowners for the fiscal year ended December 31, 1997 under the heading "Selected Financial and Operating Data" on page 18 which is incorporated herein by reference pursuant to General Instruction G(2). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information required by this Item is included in the SBC Annual Report to Shareowners for the fiscal year ended December 31, 1997 on page 19 through page 30, which is incorporated herein by reference pursuant to General Instruction G(2). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative Information about Market Risk - -------------------------------------------------------------------------------- Foreign Exchange Risk Sensitivity Analysis - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- December 31, US Dollar Value Net Underlying Net Exposed Foreign Exchange 1997 of Net Foreign Foreign Long/Short Loss from a 10% (millions of $) Exchange Currency Currency Depreciation of Contracts Transaction Position the US dollar Exposures - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Swiss Franc $ 14 $ 14 $ 0 $0 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Japanese Yen 142 142 0 0 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Exposure $ 156 $156 $0 $0 - -------------------------------------------------------------------------------- The preceding table describes the effects of a change in the value of the Swiss franc and Japanese yen. Since the identified exposure is fully covered with forward contracts, changes in the value of the US dollar which affect the value of the underlying foreign currency commitment are fully offset by changes in the value of the foreign currency contract. Were the underlying currency transaction exposure to change, the resulting mismatch would expose the company to currency risk of the foreign exchange contract. For this reason, all contracts are related to firm commitments and matched by maturity and currency. - -------------------------------------------------------------------------------- Equity Price Risk Sensitivity Analysis - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- December 31, 1997 Net Value of Net Loss from a 40% (millions of $) Appreciated Underlying Exposed Increase in the Value of Employee Long/Short price of AirTouch Equity Swap Stock Option Equity Common Contract Exposures Position - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AirTouch $12 $14 $2 $(.8) Communications Inc. (AirTouch) Common - -------------------------------------------------------------------------------- The table above describes the effects of an appreciation in the price of AirTouch common used in settlement of employee stock options. At December 31, 1997 the notional value of an equity swap contract entered in 1994 had appreciated by $12 million, while the value of the underlying options for AirTouch common had increased to $14 million, a difference of $2 million. If the obligations under the options granted were left exposed to a 40 percent rise in the value of the stock, the result would have been an $800,000 loss. Since 1995 the average yearly rate of change in the price of AirTouch common stock has ranged from 25%-40%. The equity swap contract expires April 1999. - ---------------------------------------------------------------------------------------- Interest Rate Risk Related to Debt Derivatives Table Presentation - ----------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------- Interest Exposure Exposure Exposure Exposure Exposure Exposure There- Fair Market Rate Swaps 1997 1998 1999 2000 2001 2002 after Value as of 12/31/97 (millions of $) - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Receive -0- -0- $50 -0- -0- -0- -0- $1.0 Variable/Pay Fixed - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Fixed Rate 7.2% 7.2% 7.2% -0- -0- -0- -0- Payable - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Variable 5.66% Constant Constant -0- -0- -0- -0- Rate Maturity Maturity Receivable Treasury Treasury Rate Rate minus minus .20% .20% - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Receive -0- -0- -0- -0- -0- -0- $10.2* $.4 Variable/Pay Fix - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Fixed Rate 6.705% 6.705% 6.705% 6.705% 6.705% 6.705% 6.705% Payable - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Variable 5.9375% One One One One One One Rate Month Month Month Month Month Month Receivable LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Receive -0- -0- -0- -0- -0- -0- $2.9* $.1 Variable/Pay Fix - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Fixed Rate 6.555% 6.555% 6.555% 6.555% 6.555% 6.555% 6.555% Payable - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Variable 5.9375% One One One One One One Rate Month Month Month Month Month Month Receivable LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR - ---------------------------------------------------------------------------------------- * Both swaps mature on April 30, 2004
The above table describes the results of entering an interest rate swap for the purpose of providing variable rate payment streams to pay a floating rate note, in exchange for fixed rate payments. As a result of interest rate fluctuations if SBC were to terminate the contract it would be required to pay $1.5 million to replace the fixed rate flow. SBC does not intend to terminate the contract as it is linked to a bond issued by SBC. Qualitative Information about Market Risk Foreign Exchange Risk SBC has operations in ten countries. From time to time SBC is required to make investments, receive dividends, or borrow funds in foreign currency. To maintain the dollar cost of the investment or limit the dollar cost of the funding, SBC will enter into forward foreign exchange contracts. The contracts are used to provide currency at a fixed rate. SBC's policy is to measure the risk of adverse currency fluctuations by calculating the potential dollar losses resulting from changes in exchange rates that have a reasonable probability of occurring. Changes that exceed acceptable loss limits require that SBC cover the exposure. SBC does not speculate in foreign exchange markets, and does not hedge all foreign exchange exposures due to uncertainty in foreign exchange cash flows. Equity Risk PAC entered into an equity swap contract to hedge exposure to risk of market changes related to its recorded liability for outstanding employee stock options for common stock of AirTouch (spun-off operations). PAC plans to make open market purchases of the stock of spun-off operations to satisfy its obligation for options that are exercised. Off-balance-sheet risk exists to the extent the market price of AirTouch rises in value. The equity swap was entered into to hedge this exposure and minimize the impact of market fluctuations. The contract entitles PAC to receive settlement payments to the extent the price of the common stock of spun-off operations rises above the notional value of $23.74 per share, but imposes an obligation to make payments to the extent the price declines below this level. The swap also obligates PAC to make a monthly payment of a fee based on LIBOR. The additional cost of AirTouch shares is offset by the gain in the value of the shares obtained by proportionate sales of the swap. SBC does not seek to profit from changes in the value of the swap. For this reason the swap transactions are matched to exercise activity as closely as possible. Interest Rate Risk SBC issues debt in fixed and floating rate instruments. Interest rate swaps are used for the purpose of controlling interest expense by fixing the interest rate of floating rate debt. When market conditions favor issuing debt in floating rate instruments, and SBC prefers not to take the risk of floating rates, SBC will enter interest rate swap contracts to obtain floating rate payments to service the debt in exchange for paying a fixed rate. SBC does not seek to make a profit from changes in interest rates. In order to maintain flexibility in funding amounts, it is necessary to accept exposure to volatile interest rates. SBC manages interest rate sensitivity by measuring potential increases in interest expense that would result from a probable change in interest rates. When the potential increase in interest expense exceeds an acceptable limit, SBC reduces risk through fixed rate instruments and derivatives. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is included in the SBC Annual Report to Shareowners for the fiscal year ended December 31, 1997 on page 31 through page 45, which is incorporated herein by reference pursuant to General Instruction G(2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in accountants or disagreements with accountants on any accounting or financial disclosure matters occurred during the period covered by this report. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure at the end of Part I of this report since the registrant did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. Other information required by this Item is included in the registrant's definitive proxy statement, dated March 11, 1998, under the heading "Board of Directors" beginning on page 3 which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is included in the registrant's definitive proxy statement, dated March 11, 1998, under the headings "Compensation of Directors" from page 11 through page 12, and "Compensation Committee Interlocks and Insider Participation", "Executive Compensation", "Pension Plans", and "Contracts with Management" from page 20 through page 31, which are incorporated herein by reference pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is included in the registrant's definitive proxy statement, dated March 11, 1998, under the heading "Common Stock Ownership of Directors and Officers" on page 13, which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is included in the registrant's definitive proxy statement, dated March 11, 1998, under the heading "Compensation of Directors" from page 11 through page 12 and "Contracts with Management" from page 30 through 31, which are incorporated herein by reference pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report: Page --- (1) Report of Independent Auditors.......................... * Financial Statements covered by Report of Independent Auditors: Consolidated Statements of Income....................... * Consolidated Balance Sheets............................. * Consolidated Statements of Cash Flows................... * Consolidated Statements of Shareowners' Equity.......... * Notes to Consolidated Financial Statements.............. * *Incorporated herein by reference to the appropriate portions of the registrant's annual report to shareowners for the fiscal year ended December 31, 1997. (See Part II.) Page --- (2) Financial Statement Schedules: II - Valuation and Qualifying Accounts.................. 26 Financial statement schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto, or because such schedules are not required or applicable. (3) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission (SEC), are incorporated herein by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610. Exhibit Number...................................................... 2-a Agreement and Plan of Merger, among Pacific Telesis Group, SBC Communications Inc. and SBC Communications (NV) Inc., dated as of April 1, 1996. (Exhibit 2 to Form 8-K, dated April 1, 1996.) 2-b Agreement and Plan of Merger, among Southern New England Telecommunications Corporation, SBC Communications Inc., and SBC (CT), dated as of January 4, 1998. (Exhibit 2 to Form 8-K, dated January 4, 1998.) 3-a Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on April 29, 1996. (Exhibit 3 to Form 10-Q dated March 31, 1996.) 3-b Certificate of Designation, filed with the Secretary of State of Delaware on March 31, 1997. 3-c Bylaws dated January 30, 1998. (Exhibit to SBC Communications Inc. (SBC) Form 8-K dated February 5, 1998.) 4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which defines the rights of holders of long-term debt of the registrant or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 4-b Support Agreement dated November 10, 1986, between SBC and SBC Communications Capital Corporation. (Exhibit 4-b to Registration Statement No. 33-11669.) 4-c Form of Rights Agreement, dated as of January 27, 1989, between SBC and American Transtech, Inc., the Rights Agent, which includes as Exhibit B thereto the form of Rights Certificate. (Exhibit 4-a to Form 8-A dated February 9, 1989.) 4-d Amendment of Rights Agreement, dated as of August 5, 1992, among SBC, American Transtech, Inc., and The Bank of New York, the successor Rights Agent, which includes the Form of Rights Certificate as an attachment identified as Exhibit B. (Exhibit 4-a to Form 8-K, dated August 7, 1992.) 4-e Form of Rights Certificate (included in the attachment to the Amendment of Rights Agreement and identified as Exhibit B.) (Exhibit 4-b to Form 8-K, dated August 7, 1992.) 4-f Second Amendment of Rights Agreement, dated June 15, 1994, between SBC and The Bank of New York, as successor Rights Agent. (Exhibit 4-e to Form 8-A/A, dated June 22, 1994.) 4-g Resolutions guaranteeing certain obligations of Pacific Telesis Group. 10-a Short Term Incentive Plan. 10-b Senior Management Long Term Incentive Plan. (Exhibit 10-b to Form 10-K for 1992.) 10-c Supplemental Life Insurance Plan. 10-d Supplemental Retirement Income Plan. 10-e Senior Management Deferred Compensation Plan (effective for Units of Participation Having a Unit Start Date Prior to January 1, 1988), revised July 30, 1993. (Exhibit 10.5 to Registration Statement No. 33-54795.) 10-f Senior Management Deferred Compensation Plan of 1988 (effective for Units of Participation Having a Unit Start Date of January 1, 1988 or later), revised July 30, 1993. (Exhibit 10.6 to Registration Statement No. 33-54795.) 10-g Senior Management Long Term Disability Plan. (Exhibit 10-f to Form 10-K for 1986.) 10-h Salary and Incentive Award Deferral Plan. 10-i Financial Counseling Program. 10-j Supplemental Health Plan. 10-k Retirement Plan for Non-Employee Directors. 10-l Form of Indemnity Agreement, effective July 1, 1986, between SBC and its directors and officers. (Appendix 1 to Definitive Proxy Statement dated March 18, 1987.) 10-m Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Exhibit 10-p to Form 10-K for 1988.) 10-n Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Approved November 21, 1997). 10-o Stock Savings Plan. 10-p 1992 Stock Option Plan. 10-q Officer Retirement Savings Plan. 10-r 1996 Stock and Incentive Plan. 10-s Non-Employee Director Stock and Deferral Plan. 10-t Agreement with Philip J. Quigley dated March 28, 1997 (Exhibit 10pp (vii) to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609)) 10-u Agreement with Philip J. Quigley, dated October 24, 1998. 10-v Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors. (Exhibit 10gg to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-v(i) Resolutions amending the Plan, effective November 21, 1997. 10-w Pacific Telesis Group Outside Directors' Deferred Stock Unit Plan. (Exhibit 10oo to Form 10-K for 1995 of Pacific Telesis Group (Reg. 1-8609).) 10-x Pacific Telesis Group 1996 Directors' Deferred Compensation Plan. (Exhibit 10qq to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-x(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to this Form 10-K.) 10-y Pacific Telesis Group Executive Supplemental Cash Balance Pension Plan. (Exhibit 10kk to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-z Pacific Telesis Group Executive Deferral Plan. (Exhibit 10ll to Form 10-K for 1995 of Pacific Telesis Group (Reg. 1-8609).) 10-aa Pacific Telesis Group 1996 Executive Deferred Compensation Plan. (Exhibit 10nn to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-aa(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to this Form 10-K.) 10-bb Pacific Telesis Group 1994 Stock Incentive Plan. (Attachment A to Pacific Telesis Group's 1994 Proxy Statement filed March 11, 1994, and amended March 14 and March 25, 1994.) 10-bb(i) Resolutions amending the Plan, effective January 1, 1995. (Attachment A to Pacific Telesis Group's 1995 Proxy Statement, filed March 13, 1995.) 10-cc Pacific Telesis Group Nonemployee Director Stock Option Plan. (Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed February 26, 1990.) 10-cc(i) Resolutions amending the Plan, effective April 1, 1994. (Exhibit 10xx(i) to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 12 Computation of Ratios of Earnings to Fixed Charges. 13 Portions of SBC's Annual Report to shareowners for the fiscal year ended December 31, 1997. Only the information incorporated by reference into this Form 10-K is included in the exhibit. 21 Subsidiaries of SBC. 23-a Consent of Ernst & Young LLP. 23-b Consent of Coopers & Lybrand L.L.P. 24 Powers of Attorney. 27 Financial Data Schedule. 99-a Annual Report on Form 11-K for the Savings Plan for the year 1997 to be filed under Form 10 K/A. 99-b Annual Report on Form 11-K for the Savings and Security Plan for the year 1997 to be filed under Form 10-K/A. 99-c Report of Independent Auditors Coopers & Lybrand L.L.P. SBC will furnish to shareowners upon request, and without charge, a copy of the annual report to shareowners and the proxy statement, portions of which are incorporated by reference in the Form 10-K. SBC will furnish any other exhibit at cost. (b) Reports on Form 8-K: None. SBC COMMUNICATIONS INC. Schedule II -Sheet 1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Allowance for Uncollectibles Dollars in Millions
- ------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------- Additions ------------------------------- (1) (2) Charged Balance at Charged to Other Balance Beginning of to Costs and Accounts Deductions at End of Description Period Expenses Note -Note (a) -Note (b) Period - ------------------------------------------------------------------------------------------------------------------- Year 1997.............................. $ 311 523 377 816 $ 395 Year 1996.............................. $ 266 395 235 585 $ 311 Year 1995.............................. $ 264 346 200 544 $ 266 (a) Amounts previously written off which were credited directly to this account when recovered. (b) Amounts written off as uncollectible.
SBC COMMUNICATIONS INC. Schedule II -Sheet 2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Accumulated Amortization of Intangibles Dollars in Millions
- --------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - --------------------------------------------------------------------------------------------------------------------- Additions ------------------------------- (1) (2) Balance at Charged Balance Beginning of Charged to Other at End of Description Period to Expense Accounts Deductions Period - --------------------------------------------------------------------------------------------------------------------- Year 1997.............................. $ 611 391 4 4 $ 1,002 Year 1996.............................. $ 543 121 1 54(a) $ 611 Year 1995.............................. $ 423 122 - 2 $ 543 (a) Primarily related to the disposition of Associated Directory Services, Inc.
SBC COMMUNICATIONS INC. Schedule II - Sheet 3 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Reserve for Restructuring Dollars in Millions
- --------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - --------------------------------------------------------------------------------------------------------------------- Additions ------------------------------- (1) (2) Charged Balance at Charged to Other Balance Beginning of to Costs and Accounts Deductions at End of Description Period Expenses -Note -Note (a) Period - --------------------------------------------------------------------------------------------------------------------- Year 1997.............................. $ 110 - - 110 $ - Year 1996.............................. $ 260 - - 150 $ 110 Year 1995.............................. $ 870 - - 610 $ 260 (a) The 1996 and 1995 amounts reflect $(64), and $219 of costs, respectively, for enhanced retirement benefits paid from pension fund assets which do not require current outlays of the Company's funds. The 1996 reversal of $64 resulted from revised estimates of these retirement costs.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 11th day of March, 1998. SBC COMMUNICATIONS INC. By /s/ Donald E. Kiernan (Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer: Edward E. Whitacre, Jr.* Chairman and Chief Executive Officer Principal Financial and Accounting Officer: Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer /s/ Donald E. Kiernan Directors: (Donald E. Kiernan, as attorney-in-fact and on his own behalf as Principal Edward E. Whitacre, Jr.* Financial Officer and Principal Clarence C. Barksdale* Accounting Officer) James E. Barnes* August A. Busch III* Royce S. Caldwell* March 11, 1998 Ruben R. Cardenas* William P. Clark* Martin K. Eby, Jr.* Herman E. Gallegos* Jess T. Hay* Bobby R. Inman* Charles F. Knight* Mary S. Metz* Haskell M. Monroe, Jr.* Toni Rembe* S. Donley Ritchey* Richard M. Rosenberg* Patricia P. Upton* * by power of attorney EXHIBIT INDEX Exhibits identified in parentheses below, on file with the Securities and Exchange Commission (SEC), are incorporated herein by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610. Exhibit Number...................................................... 2-a Agreement and Plan of Merger, among Pacific Telesis Group, SBC Communications Inc. and SBC Communications (NV) Inc., dated as of April 1, 1996. (Exhibit 2 to Form 8-K, dated April 1, 1996.) 2-b Agreement and Plan of Merger, among Southern New England Telecommunications Corporation, SBC Communications Inc., and SBC (CT), dated as of January 4, 1998. (Exhibit 2 to Form 8-K, dated January 4, 1998.) 3-a Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on April 29, 1996. (Exhibit 3 to Form 10-Q dated March 31, 1996.) 3-b Certificate of Designation, filed with the Secretary of State of Delaware on March 31, 1997. 3-c Bylaws dated January 30, 1998. (Exhibit to SBC Communications Inc. (SBC) Form 8-K dated February 5, 1998.) 4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which defines the rights of holders of long-term debt of the registrant or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 4-b Support Agreement dated November 10, 1986, between SBC and SBC Communications Capital Corporation. (Exhibit 4-b to Registration Statement No. 33-11669.) 4-c Form of Rights Agreement, dated as of January 27, 1989, between SBC and American Transtech, Inc., the Rights Agent, which includes as Exhibit B thereto the form of Rights Certificate. (Exhibit 4-a to Form 8-A dated February 9, 1989.) 4-d Amendment of Rights Agreement, dated as of August 5, 1992, among SBC, American Transtech, Inc., and The Bank of New York, the successor Rights Agent, which includes the Form of Rights Certificate as an attachment identified as Exhibit B. (Exhibit 4-a to Form 8-K, dated August 7, 1992.) 4-e Form of Rights Certificate (included in the attachment to the Amendment of Rights Agreement and identified as Exhibit B.) (Exhibit 4-b to Form 8-K, dated August 7, 1992.) 4-f Second Amendment of Rights Agreement, dated June 15, 1994, between SBC and The Bank of New York, as successor Rights Agent. (Exhibit 4-e to Form 8-A/A, dated June 22, 1994.) 4-g Resolutions guaranteeing certain obligations of Pacific Telesis Group. 10-a Short Term Incentive Plan. 10-b Senior Management Long Term Incentive Plan. (Exhibit 10-b to Form 10-K for 1992.) 10-c Supplemental Life Insurance Plan. 10-d Supplemental Retirement Income Plan. 10-e Senior Management Deferred Compensation Plan (effective for Units of Participation Having a Unit Start Date Prior to January 1, 1988), revised July 30, 1993. (Exhibit 10.5 to Registration Statement No. 33-54795.) 10-f Senior Management Deferred Compensation Plan of 1988 (effective for Units of Participation Having a Unit Start Date of January 1, 1988 or later), revised July 30, 1993. (Exhibit 10.6 to Registration Statement No. 33-54795.) 10-g Senior Management Long Term Disability Plan. (Exhibit 10-f to Form 10-K for 1986.) 10-h Salary and Incentive Award Deferral Plan. 10-i Financial Counseling Program. 10-j Supplemental Health Plan. 10-k Retirement Plan for Non-Employee Directors. 10-l Form of Indemnity Agreement, effective July 1, 1986, between SBC and its directors and officers. (Appendix 1 to Definitive Proxy Statement dated March 18, 1987.) 10-m Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Exhibit 10-p to Form 10-K for 1988.) 10-n Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Approved November 21, 1997). 10-o Stock Savings Plan. 10-p 1992 Stock Option Plan. 10-q Officer Retirement Savings Plan. 10-r 1996 Stock and Incentive Plan. 10-s Non-Employee Director Stock and Deferral Plan. 10-t Agreement with Philip J. Quigley, dated March 28, 1997 (Exhibit 10pp (vii) to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609)) 10-u Agreement with Philip J. Quigley, dated October 24, 1998. 10-v Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors. (Exhibit 10gg to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-v(i) Resolutions amending the Plan, effective November 21, 1997. 10-w Pacific Telesis Group Outside Directors' Deferred Stock Unit Plan. (Exhibit 10oo to Form 10-K for 1995 of Pacific Telesis Group (Reg. 1-8609).) 10-x Pacific Telesis Group 1996 Directors' Deferred Compensation Plan. (Exhibit 10qq to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-x(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to this Form 10-K.) 10-y Pacific Telesis Group Executive Supplemental Cash Balance Pension Plan. (Exhibit 10kk to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-z Pacific Telesis Group Executive Deferral Plan. (Exhibit 10ll to Form 10-K for 1995 of Pacific Telesis Group (Reg. 1-8609).) 10-aa Pacific Telesis Group 1996 Executive Deferred Compensation Plan. (Exhibit 10nn to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-aa(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to this Form 10-K.) 10-bb Pacific Telesis Group 1994 Stock Incentive Plan. (Attachment A to Pacific Telesis Group's 1994 Proxy Statement filed March 11, 1994, and amended March 14 and March 25, 1994.) 10-bb(i) Resolutions amending the Plan, effective January 1, 1995. (Attachment A to Pacific Telesis Group's 1995 Proxy Statement, filed March 13, 1995.) 10-cc Pacific Telesis Group Nonemployee Director Stock Option Plan. (Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed February 26, 1990.) 10-cc(i) Resolutions amending the Plan, effective April 1, 1994. (Exhibit 10xx(i) to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 12 Computation of Ratios of Earnings to Fixed Charges. 13 Portions of SBC's Annual Report to shareowners for the fiscal year ended December 31, 1997. Only the information incorporated by reference into this Form 10-K is included in the exhibit. 21 Subsidiaries of SBC. 23-a Consent of Ernst & Young LLP. 23-b Consent of Coopers & Lybrand L.L.P. 24 Powers of Attorney. 27 Financial Data Schedule. 99-a Annual Report on Form 11-K for the Savings Plan for the year 1997 to be filed under Form 10 K/A. 99-b Annual Report on Form 11-K for the Savings and Security Plan for the year 1997 to be filed under Form 10-K/A. 99-c Report of Independent Auditors Coopers & Lybrand L.L.P. EX-3.(II) 2 CERTIFICATE OF DESIGNATION EXHIBIT 3b CERTIFICATE OF INCREASE OF SHARES DESIGNATED AS SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF SBC COMMUNICATIONS INC. SBC Communications Inc., a corporation duly organized and existing under the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: That the Restated Certificate of Incorporation of said corporation was filed in the office of the Secretary of State of Delaware on April 28, 1995 and a Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock was filed in said office of the Secretary of State on February 14, 1989. That the Restated Certificate of Incorporation of said corporation authorizes 10,000,000 shares of Preferred Stock, par value $1.00 per share, for issuance, none of which have been issued. That the Board of Directors of said corporation, on January 27, 1989, duly adopted a resolution designating 4,000,000 shares of Preferred Stock as Series A Junior Participating Preferred Stock. That the Board of Directors of said corporation at a meeting held on March 28, 1997, duly adopted a resolution authorizing and directing an increase in the number of shares designated as Series A Junior Participating Preferred Stock of the Corporation, from 4,000,000 shares to 8,000,000 shares, in accordance with the provisions of section 151 of The General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the said corporation has caused this certificate to be executed by its Senior Vice President, Treasurer and Chief Financial Officer this 28th day of March 1997. SBC COMMUNICATIONS INC. /s/ Donald E. Kiernan Donald Kiernan Senior Vice President, Treasurer and Chief Financial Officer EX-4 3 RESOLUTIONS GUARANTEEING PTG EXHIBIT 4g BOARD OF DIRECTORS APPROVED January 30, 1998 Whereas, Pacific Telesis Group ("PTG") is the owner of all the common securities (the "Common Securities") of Pacific Telesis Financing I ("Financing I") and of Pacific Telesis Financing II ("Financing II" and, together with Financing I, the "trusts"); and Whereas, Financing I is the issuer of 7.56% Trust Originated Preferred Securities (the "Financing I Preferred Securities") and Financing II is the issuer of 8 1/2% Trust Originated Preferred Securities issued by Financing II (the "Financing II Preferred Securities" and, together with the Financing I Preferred Securities, the "Preferred Securities" and, the Preferred Securities together with the Common Securities, the "Trust Securities"); and Whereas, in connection with the issuance of the Preferred Securities by the Trusts, PTG has (i) pursuant to a Preferred Securities Guarantee Agreement, dated as of January 9, 1996, between PTG and The First National Bank of Chicago, as Trustee (the "PTG Financing I Guarantee"), agreed to guarantee, on a subordinated basis, certain payments to be made with respect to the Financing I Preferred Securities, to the extent that Financing I has funds sufficient to make such payments and (ii) pursuant to the Preferred Securities Guarantee Agreement, dated as of June 18, 1996, as amended by a First Amendment thereto, dated as of June 18, 1996, each between PTG and the First National Bank of Chicago, as trustee (the "PTG Financing II Guarantee" and, together with the PTG Financing I Guarantee, the "PTG Guarantees"), agreed to guarantee, on a subordinated basis, certain payments to be made with respect to the Financing II Preferred Securities, to the extent that Financing II has funds sufficient to make such payments; and Whereas, in connection with the issuance of the Preferred Securities by the Trusts, PTG has issued approximately $515.5 million in principal amount of its 7.56% Subordinated Deferrable Interest Debentures due January 31, 2026 (the "7.56% Debentures") to Financing I and approximately $514.5 million in principal amount of its 8 1/2% Subordinated Deferrable Interest Debentures due June 30, 2026 (the "8 1/2% Debentures" and, together with the 7.56% Debentures, the "Junior Subordinated Debentures") to Financing II; and Whereas, in connection with the issuance of the Preferred Securities by the Trusts, PTG has agreed, pursuant to the trust agreements of the Trusts and the Indenture, dated as of January 9, 1996, between PTG and the First National Bank of Chicago, as trustee (as supplemented, the "Indenture"), to pay (i) all costs and expenses relating to the offering of the Trust Securities and the Junior Subordinated Debentures, (ii) all debts and other obligations (other than with respect to the Trust Securities) and all costs and expenses of the Trusts (including costs and expenses relating to the organization, maintenance and dissolution of the Trusts, the fees and expenses of the Trustees of the Trusts and the costs and expenses relating to the operation of the Trusts and the enforcement by the Property Trustee of the Trusts of the rights of the holders of the Preferred Securities) and (iii) all taxes (other than United States withholding taxes) to which the Trusts may become subject and all costs and expenses with respect thereto (collectively, the "PTG Expense Undertakings"); and Whereas, on April 1, 1997, SBC Communications Inc. (the "Corporation") and PTG completed the merger of a subsidiary of the Corporation into PTG, whereupon PTG became a wholly-owned subsidiary of the Corporation; and Whereas, the Corporation is a reporting company current in all of its reporting obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and wishes to have PTG cease its reporting under the Exchange Act without giving rise to any reporting obligations for the Trusts; Therefore, be it: RESOLVED, the Corporation hereby irrevocably, fully and unconditionally guarantees the Preferred Securities of each Trust (these "Preferred Securities Guarantees") on the following terms: (i) the Corporation is jointly and severally liable with PTG for the payment in full of the payments due under the PTG Guarantees (without duplication of amounts theretofore paid by the related Trustee) as and when due, regardless of any defense, right of set-off or counterclaim that the related Trust may have or assert, provided, however, that these Preferred Securities Guarantees will not apply to any distributions if and to the extent that the related Trust does not have funds sufficient to make such payments and PTG would not be obligated therefor under the related PTG Guarantee; (ii) the holders of the Preferred Securities are entitled to enforce their rights under the related Preferred Securities Guarantee directly against the Corporation, without first instituting a proceeding against the applicable Trust, PTG or any other person or entity; and (iii) these Preferred Securities Guarantees are unsecured and rank (a) junior in right of payment to all other liabilities of the Corporation (including the Junior Subordinated Debenture Guarantee discussed below) except for those obligations that are made pari passu with or subordinate to these Preferred Securities Guarantees by their terms, (b) pari passu with the most senior preferred or preference stock now or hereafter issued by the Corporation and with any guarantee now or hereafter entered into by the Corporation in respect of any preferred or preference stock of any affiliate of the Corporation and (c) senior to the common stock of the Corporation; and RESOLVED, that the Corporation hereby irrevocably, fully and unconditionally guarantees PTG's payment obligations under its Junior Subordinated Debentures (these "Debentures Guarantees") on the following terms: (i) these Debentures Guarantees are unsecured and subordinated with respect to the Senior Indebtedness of the Corporation in the same manner and to the same extent as the Junior Subordinated Debentures are subordinated with respect to the Senior Indebtedness of PTG (for this purpose, "Senior Indebtedness" of the Corporation has the same meaning as "Senior Indebtedness" of PTG under the Indenture except that (a) the Corporation is substituted for PTG, (b) the Debentures Guarantees are substituted for the Subordinated Debentures and (c) the descriptive inclusionary clauses referring to PTG subsidiaries are omitted as inapplicable); (ii) the Corporation is jointly and severally liable with PTG to make payments of interest, principal and premium, if any, on any Junior Subordinated Debentures on the date such interest or principal is due and payable; (iii) the holders of the Junior Subordinated Debentures are entitled to enforce the related Debentures Guarantee directly against the Corporation, without first proceeding against PTG or any other person or entity; (iv) if any Junior Subordinated Debentures are held by a Trust, (a) the Corporation may satisfy its payment obligation under the related Debentures Guarantee by directly paying to each holder of the Preferred Securities of such Trust the due and unpaid principal of or interest on such Junior Subordinated Debentures having a principal amount equal to the aggregate liquidation amount of the related Preferred Securities held by such holder and (b) each holder of the Preferred Securities of a Trust is entitled to enforce the related Debenture Guarantee directly against the Corporation, without first proceeding against PTG or any other person or entity; and RESOLVED, that the Corporation hereby irrevocably, fully and unconditionally assumes joint and several liability with PTG for all payment obligations under the PTG Expense Undertakings (these "Expense Undertakings") on the following terms: (i) these Expense Undertakings are for the benefit of and enforceable by the beneficiaries of the PTG Expense Undertakings; and (ii) the beneficiaries of the PTG Expense Undertakings are entitled to enforce such undertakings directly against the Corporation without first proceeding against PTG, the related Trust or any other person or entity; and RESOLVED, that the Preferred Securities Guarantees, Debenture Guarantees and Expense Undertakings are effective on the date hereof and are irrevocable. EX-10 4 SHORT TERM INCENTIVE PLAN EXHIBIT 10a LOGO SBC Communications Inc. SHORT TERM INCENTIVE PLAN Plan Effective: January 1, 1984 Revisions Effective: November 21, 1997 SHORT TERM INCENTIVE PLAN TABLE OF CONTENTS Section Subject Page 1. Purpose...............................................1 2. Definitions...........................................1-2 3. Eligibility...........................................2 4. Awards................................................2-4 5. Adjustments ..........................................4 6. Other Conditions .....................................5 7. Designation of Beneficiaries..........................5 8. Plan Administration...................................5&6 9. Modification or Termination of Plan...................6 SHORT TERM INCENTIVE PLAN 1. Purpose. The purpose of the Short Term Incentive Plan (the "Plan") is to provide Eligible Employees with incentive compensation based upon the achievement of financial, service, and operating performance levels and management effectiveness. 2. Definitions. For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Award Year. "Award Year" shall mean the calendar year for which performance is used to determine one's award under the Plan. Chairman. "Chairman" shall mean the Chairman of the Board of SBC Communications Inc. Committee. "Committee" shall mean the Human Resources Committee of the Board of SBC Communications Inc. Eligible Employee. "Eligible Employee" shall mean an Officer or a non-Officer employee of any SBC company who is designated by the Chairman as eligible to participate in the Plan. Officer. "Officer" shall mean an individual who is designated by the Chairman as eligible to participate in the Plan who is an elected officer of SBC or of any SBC subsidiary (direct or indirect). Retirement. "Retirement" shall mean the termination of an Eligible Employee's employment with SBC or any of its subsidiaries, for reasons other than death, on or after the earlier of the following dates: (1) the date the Eligible Employee is Retirement Eligible as such term is defined in the SBC Supplemental Retirement Income Plan ("SRIP"); or (2) the date the Eligible Employee has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 years or more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to an Eligible Employee who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program ("SBCPBP") upon termination of Employment, the term "Retirement" shall include such Eligible Employee's termination of employment. SBC. "SBC" shall mean SBC Communications Inc. 3. Eligibility. Each Eligible Employee who during an Award Year was ----------- in active service is eligible for an award under the Plan (whether or not so employed or living at the date an award is made); provided that the employee had at least three months of active service (excluding any time the employee was absent on account of disability and receiving any sickness or accident disability benefits under any SBC disability benefit plan (("Disability Benefits") during the Award Year). Employees are not rendered ineligible by reason of being a member of the Board. 4. Awards. The Committee with respect to Officers, or the Chairman with respect to non-Officer Eligible Employees, shall approve a Target Award for each employee eligible for an award under the Plan for each Award Year that the Committee or the Chairman, as applicable, intends to make awards. The Target Award applicable to an employee otherwise eligible for an award under the Plan for an Award Year shall be prorated over the Award Year or the employee shall be ineligible for an award, as follows: (1) become eligible or ineligible prorate according to time of active for an award under Plan or service in each eligible position change from one eligible to the nearest half month position to another after the beginning of the Award Year (2) inter-company transfers prorate for each respective entities' performance according to time of active service at each entity to the nearest half month (3) receipt of Disability Benefits prorate to the day based on service for more than three months in while not receiving Disability an Award Year Benefits (4) receipt of Disability no reduction is applicable Target Benefits for three months or Award less in an Award Year (5) Retirement or resignation prorate to date of Retirement or resignation (6) leave of absence prorate to date leave commences and from date leave ceases unless otherwise provided by the Committee or the Chairman, as applicable (7) death during an Award Year prorate to date of death (8) dismissal for cause during or no award after an Award Year A percentage of the Target Award for each Award Year to be distributed to the award recipient will be determined by the Committee, or Chairman, for Officers and non-Officer Eligible Employees, respectively, based upon achievement of performance levels during such Award Year of criteria established by the Committee, or the Chairman, respectively. The criteria established by the Committee for Officers, or the Chairman with respect to non-Officer Eligible Employees, upon which the percentages of the Target Awards referred to above are determined shall give due regard, as the Committee, or the Chairman, as applicable, deems appropriate, to one or more of the following for the Award Year: (a) Financial performance of SBC, individual operating entities thereof and/or SBC and its consolidated subsidiaries. (b) Service performance of SBC and of individual operating entities; or other appropriate operating performance criteria for entities where service performance is not relevant. (c) Other criteria in lieu of or in addition to the above as determined by the Committee or the Chairman, as applicable. The Committee then with respect to Officers, or the Chairman with respect to non-Officer Eligible Employees, shall determine the payout of Awards in such amounts and to such of the Eligible Employees as each may determine in its sole discretion. Awards shall be paid in cash in the calendar year the awards are determined, except to the extent that an Eligible Employee has made an election to defer the receipt of such award pursuant to the SBC Salary and Incentive Award Deferral Plan or other SBC deferred compensation plan. The award to be distributed to an individual may be more or less in the Committee's or the Chairman's discretion, as applicable, including no award, than the percentage of the Target Award determined for such individual; for example, the Committee or the Chairman, as applicable, may approve an award greater than the Target Award, adjusted for performance, based on individual performance. 5. Adjustments. (a) In order to assure the incentive features of the Plan and to avoid distortion in the operation of the Plan, the Committee or the Chairman, as applicable, may make adjustments in the criteria established for any Award Year, whether before or after the end of the Award Year, to the extent the Committee or the Chairman, as applicable, deems appropriate, to compensate for or reflect any extraordinary changes which may have occurred during the Award Year which significantly alter the basis upon which performance levels were determined. Such changes may include, without limitation, changes in accounting practices, tax laws, or other laws or regulations, or economic changes not in the ordinary course of business cycles. (b) In the event of any change in outstanding shares of SBC by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the Committee or the Chairman, as applicable, shall make such adjustments, if any, that the Committee or the Chairman, as applicable, deems appropriate in the performance levels established for any Award Year. (c) The Senior Vice President-Human Resources shall approve a new Target Award for any Officer or non-Officer Eligible Employee whose position is modified by changes in job responsibilities, reorganization, etc.; provided, however, that such authority may not be exercised for positions with a total compensation market rate exceeding $1.5 million (in such a case the new Target Award shall be approved by the Committee). 6. Other Conditions. (a) No person shall have any claim to be granted an award under the Plan and there is no obligation for uniformity of treatment of Eligible Employees under the Plan. Awards under the Plan may not be assigned or alienated. (b) Neither the Plan nor any action taken hereunder shall be construed as giving to any employee the right to be retained in the employ of SBC or any subsidiary thereof. (c) SBC or subsidiary thereof, as applicable, shall have the right to deduct from any award to be paid under the Plan any federal, state or local taxes required by law to be withheld with respect to such payment. (d) Unless otherwise provided by the Committee, awards under the Plan shall be excluded in determining benefits under any pension, retirement, savings, disability, death, or other benefit plans of SBC except where required by law. 7. Designation of Beneficiaries. An Eligible Employee may designate ---------------------------- pursuant to SBC's Rules for Employee Beneficiary Designations as may hereafter be amended from time-to-time ("Rules"), which Rules shall apply hereunder and are incorporated herein by this reference, a beneficiary or beneficiaries to receive in case of the employee's death all or part of the awards which may be made to the employee under the Plan. A designation of beneficiary may be replaced by a new designation or may be revoked by the employee at any time. A designation or revocation shall be on a form to be provided for the purpose and shall become effective only when filed with SBC during the employee's lifetime with written acknowledgement of receipt from SBC. In case of the employee's death, an award made under the Plan with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be paid to the designated beneficiary or beneficiaries. Any award made to an employee who is deceased and not subject to such a designation shall be distributed in accordance with the Rules. 8. Plan Administration. (a) The Committee or the Chairman, as applicable, shall have full power to administer and interpret the Plan and to establish rules for its administration. Awards under the Plan shall be conclusively determined by the Committee or the Chairman, as applicable. Any determinations or actions required or permitted to be made by the Committee or the Chairman, as applicable, may be delegated by the Committee or the Chairman in its sole discretion. The Committee or the Chairman, as applicable, or any delegate thereof, in making any determinations under or referred to in the Plan shall be entitled to rely on opinions, reports or statements of officers or employees of SBC and/or of any subsidiary thereof and of counsel, public accountants and other professional or expert persons. (b) The Plan shall be governed by the laws of the State of Texas and applicable Federal law. 9. Modification or Termination of Plan. This Plan may be modified or terminated at any time in accordance with the provisions of SBC's Schedule of Authorizations. A modification may affect present and future Eligible Employees. i SHORT TERM INCENTIVE PLAN ADMINISTRATIVE GUIDELINES TABLE OF CONTENTS Section Subject Page 1. Purpose............................................... 1 2 Award Process......................................... 1 3. Performance Criteria..................................1&2 4. Funding...............................................1&2 5. Distribution of Awards................................ 2 6. Changes/Exceptions.................................... 3 4 SHORT TERM INCENTIVE PLAN ADMINISTRATIVE GUIDELINES 1. Purpose. The purpose of these Guidelines is to outline the procedures to be followed in administering SBC's Short Term Incentive Plan (the "Plan"). 2. Award Process. The Committee shall approve a Target Award for each eligible Officer. The Chairman shall approve a Target Award for each non-Officer Eligible Employee. These Target Awards are based on market-based rates established for each Eligible Employee and shall generally be established in January of the Award Year. Annual financial and/or other performance objectives for Officers for an Award Year shall be approved by the Committee each year, generally in January of the Award Year. Objectives for non-Officer Eligible Employees shall be approved by the Chairman. Annual financial and/or other performance results (upon which the payment of Awards for Officers shall be based), maximum funding levels, and payout recommendations requiring Committee approval, will be submitted to and approved by the Committee after the Award Year is completed. Results for non-Officer Eligible Employees shall be approved by the Chairman. An individual's Target Award will be prorated over the Award Year, if applicable, according to Section 3(b) of the Plan. Target Awards will be adjusted for distribution based upon achievement during the Award Year, of the financial and/or other performance criteria established by the Committee or the Chairman, as applicable. Discretionary awards may also be granted as described in Section 5, to be paid out of funds from the Discretionary Pools. 3. Performance Criteria. The performance criteria established by the Committee or the Chairman, as applicable, may be one or more of the following: Financial Performance Criteria Achievement of Value Added objectives or other financial objectives (e.g., gross contributions, revenues, etc.) will be used as financial performance criteria for all entities. Value Added shall be a measure of earnings above a return required by investors (i.e., generally, net operating contribution less a capital charge). Value Added performance is determined after adjustment in accordance with the following: In order to assure the incentive features of the Plan and to avoid distortion in the operation of the Plan, the Committee or the Chairman, as applicable, shall make adjustments in the criteria established for any Award Year, whether before or after the end of the Award Year to compensate for or reflect any extraordinary changes which may have occurred during the Award Year which alter the basis upon which performance levels were determined. Such changes include the following: accounting changes, extraordinary items, income from discontinued operations, and the impact of material events that have been publicly disclosed. Other Performance Criteria Other performance criteria may include, but are not limited to, Value Drivers, i.e., quantifiable operational and other indicators, such as revenue growth, customer or subscriber growth, operating margin, etc., that are tied to the strategy of the operating entity and are key barometers of value creation. 4. Funding. Each year, a maximum funding level of 1.0 percent of reported SBC net income (before any extraordinary loss and/or cumulative effect of changes in accounting principles) minus amounts paid as Key Executive Officer Short Term Award(s) pursuant to the 1996 Stock and Incentive Plan shall be available to payment or awards under the Plan with respect to the preceding Award Year. 5. Distribution of Awards. Awards for the preceding Award Year will generally be distributed after completion of the Award Year in accordance with the following paragraphs. Distribution of all awards is subject to approval by the Committee or the Chairman, as applicable, generally obtained in January following the completion of an Award Year. Formula-Driven Awards - The Committee, or the Chairman, as applicable, shall establish financial and/or other performance objectives for SBC and such other entities as deemed appropriate by the Committee or the Chairman, as applicable. Up to 100% of the Target Award for the preceding Award Year is paid to Officers and to non-Officer Eligible Employees in each entity based on the achievement of applicable financial and/or other performance results of their entity. An example of a Payout Table for formula-driven awards is included as Attachment l. For national or international subsidiaries with small Value Added commitments, the Committee for Officers and the Chairman for non-Officer Eligible Employees may establish Value Driver objectives/percentages to be substituted for Value Added commitments. Discretionary Pools - After determination of formula-driven awards, the Committee for Officers and the Chairman for non-Officer Eligible Employees may establish Discretionary Pools to reward individuals and/or entities for exceptional performance. Maximum funding available for Discretionary Pools is the maximum funding level described in Section 4 less the formula-driven amounts distributed. The Committee or the Chairman, as applicable, will determine funding for each pool and provide guidelines for distribution of awards. The following are examples of factors that may be considered: Value Added results above objective Value Driver results Outstanding customer service results Advancement of workforce diversity Outstanding individual contribution The Chairman will recommend to the Committee the discretionary awards for officers reporting directly to the Chairman. 6. Changes/Exceptions. Changes in these Guidelines and exceptions to their provisions may be authorized by the Committee. Exhibit 1 =============------------------==============---------------============== Value Added Target Award Target Payout $* % ------------------ --------------- $XXX or above 100% $XXX 98% $XXX 96% $XXX 93% $XXX 90% $XXX 87% $XXX 84% $XXX 81% $XXX 78% $XXX 75% $XXX 70% $XXX 65% $XXX 60% $XXX 55% $XXX 50% Below $XXX 0% *(expressed in millions $) ========================================================================== EX-10 5 SUPPLEMENTAL LIFE INSURANCE PLAN EXHIBIT 10c LOGO SBC Communications Inc. SUPPLEMENTAL LIFE INSURANCE PLAN Effective: January 1, 1986 Revisions Effective: November 21, 1997 SUPPLEMENTAL LIFE INSURANCE PLAN TABLE OF CONTENTS Section Subject Page 1. Purpose............................................... 1 2. Definitions...........................................1&2 3. Eligibility........................................... 2 4. Pre-Retirement Benefits and Post- Retirement Benefits.................................... 2 - Basic Death Benefit.................................2&3 - Optional Supplementary Benefit......................3-4 - Alternate Death Benefit............................. 5 - Salary Continuation Death Benefit................... 6 - Survivor Annuity Equivalent.........................6&7 5. Incidents of Ownership................................ 7 6. Premiums..............................................7&8 7. Termination of Coverage............................... 8 8. Non-Competition.......................................8&9 9. Restriction on Assignment............................. 9 10. Unsecured General Creditor............................9&10 11. Employment not Guaranteed............................. 10 12. Protective Provisions................................. 10 13. Change in Status...................................... 10 14. Named Fiduciary....................................... 10 15. Applicable Law........................................ 11 16. Administration of the Plan............................ 11 17. Relation to Prior Plans............................... 11 18. Amendments and Termination............................ 11 SUPPLEMENTAL LIFE INSURANCE PLAN 1. Purpose. The purpose of the Supplemental Life Insurance Plan ("Plan") is to allow for provision of additional survivor benefits for Eligible Employees. 2. Definitions. For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Annual Base Salary or Annual Salary or Salary. "Annual Base Salary" or "Annual Salary" or "Salary" shall mean an Eligible Employee's annual base salary rate determined by SBC, excluding (1) all differentials regarded as temporary or extra payments and (2) all payments and incentive awards and distributions made either as a long term award or as a short term award; and such Salary shall be as before reduction due to any contribution pursuant to any deferred compensation plan or agreement provided by SBC, including but not limited to compensation deferred in accordance with Section 401(k) of the Internal Revenue Code. Annual Salary or Salary shall mean an annualized amount determined from an Eligible Employee's Annual Base Salary rate. Beneficiary. "Beneficiary" shall mean any beneficiary or beneficiaries designated by the Eligible Employee pursuant to the SBC Rules for Employee Beneficiary Designations as may hereafter be amended from time-to-time ("Rules"). Chairman. "Chairman" shall mean the Chairman of the Board of SBC Communications Inc. Committee. "Committee" shall mean the Human Resources Committee of the Board of SBC Communications Inc. Eligible Employee. "Eligible Employee" shall mean an Officer or a non-Officer employee of any SBC company who is designated by the Chairman as eligible to participate in the Plan. Insurance Contract. "Insurance Contract" shall mean a contract(s) of life insurance insuring the life of the Eligible Employee entered into by SBC. Officer. "Officer" shall mean an individual who is designated by the Chairman as eligible to participate in the Plan who is an elected officer of SBC or of any SBC subsidiary (direct or indirect). Retirement. "Retirement" shall mean the termination of an Eligible Employee's employment with SBC or any of its subsidiaries, for reasons other than death, on or after the earlier of the following dates: (1) the date the Eligible Employee is Retirement Eligible as term is defined in the SBC Supplemental Retirement Income Plan ("SRIP"); or (2) the date the Eligible Employee has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 years or more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to an Eligible Employee who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program ("SBCPBP") upon termination of Employment, the term "Retirement" shall include such Eligible Employee's termination of employment. SBC. "SBC" shall mean SBC Communications Inc. 3. Eligibility. Each Eligible Employee shall be eligible to participate in the Plan 4. Pre-Retirement Benefits and Post-Retirement Benefits. Basic Death Benefit While this plan is in effect, the Beneficiary who is designated by the Eligible Employee shall be entitled to receive as a Basic Death Benefit from the proceeds of the Insurance Contract an amount equal to the result of multiplying the Eligible Employee's Annual Salary rounded to the next higher $1,000 by the following amounts: Chief Executive Officer 3 Direct Reporting Officer as such term is defined in SBC's Schedule of Authorizations 2 Other Eligible Employees 1 This amount shall be reduced (but not below zero) by any amount payable under any group term life insurance covering the Eligible Employee which is maintained by SBC, which amount of group term life insurance will be limited to a maximum of $50,000. The amount of Basic Death Benefit payable hereunder will automatically increase if pay increases. At Retirement, the pre-retirement benefit converts to a post-retirement benefit. This benefit is equal to one times Salary rounded to the next higher $1,000 (at the time of retirement) and shall be reduced (but not below zero) by any amount payable under any group term life insurance covering the Eligible Employee which is maintained by SBC, which amount of group term life insurance will be limited to a maximum of $50,000; provided, however, for an executive who first becomes a Plan participant on or after January 1, 1998, this post-retirement death benefit shall be reduced by 10% of its original post-retirement amount each year for five years beginning at the later of the date the Eligible Employee attains age 65 or Retirement. Optional Supplementary Benefit Subject to the limitations in the remaining paragraphs in this section describing optional supplementary benefits, each Eligible Employee may also purchase optional supplementary pre-retirement life insurance coverage from SBC in an amount equal to one times the Eligible Employee's Annual Salary rounded to the next higher $1,000, and an additional amount of such insurance in an amount equal to another one times such amount (for a total of two times the Annual Salary rounded to the next higher $1,000), which insurance shall be payable from the proceeds of the Insurance Contract. Each such amount of insurance ("one times salary") continued until such employee reaches age 65, by continuing to contribute for it, shall entitle the beneficiary under the Insurance Contract to receive an amount from the proceeds of such Insurance Contract equal to one times the Eligible Employee's final Annual Salary rounded to the next higher $1,000, when such Eligible Employee dies after Retirement. To elect this optional supplementary coverage, the Eligible Employee must complete an enrollment form on which he or she specifies the amount of coverage he or she wishes to purchase and authorizes his or her employing company to deduct his or her contributions for coverage from his or her salary. An Eligible Employee may not elect this coverage while receiving disability benefits under any Company disability benefit plan. An Eligible Employee must make his or her election to purchase optional supplementary coverage within three calendar months of being declared eligible to participate in the Plan; except any Eligible Employee who was declared an Eligible Employee before October 1, 1997, shall have until December 31, 1997 to enroll for such optional supplementary coverage or to increase such coverage. The optional supplementary life insurance is effective upon SBC's binding of life insurance coverage for the Eligible Employee pursuant to an Insurance Contract Effective January 1, 1998, once an Eligible Employee enrolls for optional supplementary coverage, he or she can later decrease or terminate such coverage but never increase or reinstate such coverage. Regardless of the amount of coverage elected, the amount in force will automatically increase if Salary increases. The cost for this coverage will increase accordingly. This optional supplementary life insurance is paid for on a contributory basis by those Eligible Employees who enroll in the coverage. The cost of coverage, and therefore, how much an Eligible Employee contributes, depends on age and the amount of coverage and shall be as determined by SBC. There will be no periodic waiver of premium payments. In the event of death, the Eligible Employee's optional supplementary life insurance benefit will be paid to the Eligible Employee's Beneficiary or Beneficiaries in a lump sum, unless the Salary Continuation Death Benefit form of payment was elected on the Eligible Employee's enrollment form. The option to elect other than a lump sum payment is limited to an Eligible Employee who became an Eligible Employee on or before January 1, 1998. If the Eligible Employee has no surviving beneficiaries, the benefit will be paid in a lump sum in accordance with the Rules. The optional supplementary life insurance coverage hereunder will automatically continue while an Eligible Employee is receiving disability benefits under any SBC disability benefit plan, provided the Eligible Employee continues his or her contributions. If an Eligible Employee terminates employment with SBC or any of its subsidiaries for any reason other than Retirement, this coverage will stop at the end of the month of termination; provided, however, Eligible Employees who are 65 at the time of their termination will continue to have non-contributory unreduced coverage after age 65. Alternate Death Benefit Alternate death benefit coverage shall only be available to an Eligible Employee who became an Eligible Employee before January 1, 1998. Such Eligible Employees shall be entitled to elect to receive alternate death benefit life insurance coverage; provided such election is made before January 1, 1998. Under such coverage, an Eligible Employee's Beneficiary or Beneficiaries will be entitled to receive from the proceeds of the Insurance Contract a payment equal to the Eligible Employee's final Annual Salary upon his or her death. This benefit will not be rounded to the next higher $1,000. The amount of insurance in force will automatically increase if salary increases. Coverage applies to death from any cause, except with respect to an on-the-job accident for which an Eligible Employee is protected while an active employee by any Accident Death Benefit feature of the SBCPBP. By enrolling in this coverage, an Eligible Employee automatically waives his or her eligibility for any Sickness Death Benefit and Pensioner Death Benefits otherwise payable under the SBCPBP. The coverage provided by the alternate death benefit life insurance coverage will continue after Retirement. To elect this coverage, an Eligible Employee must complete an irrevocable enrollment and waiver form. SBC pays the full cost of the alternate death benefit life insurance coverage. The insurance benefit provided under this alternate death benefit life insurance will be paid in a lump sum, unless otherwise elected on the Eligible Employee's enrollment form. Alternate death benefit coverage ceases upon an Eligible Employee's Termination of Employment other than a Retirement. This alternate death benefit life insurance may not be converted to an individual policy. Salary Continuation Death Benefit. The salary continuation death benefit shall only be available under the conditions specified hereunder, to an Eligible Employee who became an Eligible Employee before January 1, 1998. By a written election filed with SBC before January 1, 1998, an Eligible Employee may terminate his or her rights to a Basic Death Benefit and/or to Optional Supplementary Coverage (if any) and/or to an Alternate Death Benefit (if any). If such an election is filed, and the Eligible Employee dies on or after the first day of the calendar year following the year in which such election is filed and prior to the termination of coverage pursuant to Section 7, the Eligible Employee's Beneficiary or Beneficiaries theretofore named shall be paid by SBC an amount per annum for ten (10) years which amounts, in the aggregate, have a net present value, using an eleven percent (11%) discount rate, equal to one hundred eight-five percent (185%) of the (i)Basic Death Benefit amount and/or (ii) the amount elected as Optional Supplementary coverage(if any) and/or (iii) the amount elected as an Alternate Death Benefit (if any) which would be payable to his or her Beneficiary or Beneficiaries as of the date of the Eligible Employee's death, and no other benefit shall be payable hereunder as either a Basic Death Benefit, Optional Supplementary Coverage or Alternate Death Benefit . Such payment(s) shall commence no later than sixty (60) days following the date of the Eligible Employee's death. On or after January 1, 1998, an Eligible Employee who has elected death benefits in the form of salary continuation pursuant to this Section may cancel such election and have his or her Beneficiaries receive death benefits as insurance in a lump-sum but, an Eligible Employee who cancels his or her salary continuation election may not thereafter re-elect such option. Survivor Annuity Equivalent Additionally, each Eligible Employee who is not eligible for the Immediate Automatic Pre-retirement Survivor Annuity of the SBCPBP (or equivalent thereof) shall be eligible hereunder for a Survivor Annuity Equivalent benefit of one times salary payable to the surviving spouse of such Eligible Employee. Such benefit shall be paid as follows: an amount per annum for ten (10) years shall be paid to the Eligible Employee's surviving spouse which amounts, in the aggregate, shall have a net present value, using an eleven percent (11%) discount rate, equal to one hundred eighty-five percent (185%) of one times the Eligible Employee's salary at the time of his or her death; provided, however, no such Survivor Annuity Equivalent payments will be made on or after the date of death of the surviving spouse. Such payments shall commence no later than sixty (60) days following the date of the Eligible Employee's death. For the purposes of the Survivor Annuity Equivalent, the Eligible Employee's surviving spouse means a spouse legally married to the Eligible Employee at the time of the Eligible Employee's death. Eligibility for the Survivor Annuity Equivalent shall automatically cease on the date of termination of the Eligible Employee's employment. If the Eligible Employee becomes totally disabled prior to Retirement, the Eligible Employee shall continue to be eligible for the Survivor Annuity Equivalent until the expiration of disability benefits. If the Eligible Employee is granted a leave of absence, other than for military service of more than four weeks, the Eligible Employee shall continue to be eligible for the Survivor Annuity Equivalent during such leave of absence. The Eligible Employee shall cease to be eligible for the Survivor Annuity Equivalent at the conclusion of the day immediately preceding the date the Eligible Employee becomes eligible for the Immediate Automatic Pre-retirement Survivor Annuity of the SBCPBP. 5. Incidents of Ownership. SBC will be the owner and hold all the incidents of ownership in the Insurance Contract, including the right to dividends, if paid. The Eligible Employee may specify in writing to SBC, the Beneficiary or Beneficiaries and the mode of payment for any death proceeds not in excess of the amounts payable under this Plan. Upon receipt of a written request from the Eligible Employee, SBC will immediately take such action as shall be necessary to implement such Beneficiary appointment. Any balance of proceeds from the Insurance Contract not paid as either a Basic Death Benefit or otherwise pursuant to the Plan shall be paid to SBC. 6. Premiums. All premiums due on the Insurance Contract shall be paid by SBC. However, the Eligible Employee agrees to reimburse SBC by January 31 following the date of each premium payment in an amount such that, for Federal Income Tax purposes the reimbursement for each year is equal to the amount which would be required to be included in the Eligible Employee's income for Federal Income Tax purposes by reasons of the "economic benefit" of the Insurance Contract provided by SBC; provided, however, that SBC, in its sole discretion, may decline to accept any such reimbursement and require the inclusion of such "economic benefit" in the Eligible Employee's income. In its discretion SBC may deduct the Eligible Employee's portion of the premiums from the Eligible Employee's pay. 7. Termination of Coverage. An Eligible Employee's coverage under this Plan shall terminate immediately when the Eligible Employee realizes an "Event of Termination" which shall mean any of the following: (a) Termination of an Eligible Employee's employment with his or her employing company for any reason other than (i) death, (ii) Disability as such term is defined in the SRIP, or (iii) Retirement. (b) In the case of an Eligible Employee who terminates employment by reason of a disability but who does not realize an Event of Termination because of Section 7a(ii) above, a termination of the Eligible Employee's total Disability that is not accompanied by either a return to employment with his or her employing company or the Eligible Employee's death or Retirement. (c) Except in the case of an Eligible Employee who has theretofore terminated employment for a reason described in Section 7a(ii) or (iii) above, SBC elects to terminate the Eligible Employee's coverage under the Plan by a written notice to that effect given to the Eligible Employee. SBC shall have no right to amend the Plan or terminate the Eligible Employee's coverage under the Plan with respect to an Eligible Employee who has theretofore terminated employment for a reason described in Section 7a(ii) or (iii) above without the written consent of the Eligible Employee. 8. Non-Competition. Notwithstanding any other provision of this Plan, no coverage shall be provided under this Plan with respect to any Eligible Employee who shall, without the written consent of SBC, and while employed by SBC or any subsidiary thereof, or within three (3) years after termination of employment from SBC or any subsidiary thereof, engage in competition with SBC or any subsidiary thereof or with any business with which a subsidiary of SBC or an affiliated company has a substantial interest (collectively referred to herein as "Employer business"). For purposes of this Plan, engaging in competition with any Employer business shall mean engaging by Eligible Employee in any business or activity in the same geographical market where the same or substantially similar business or activity is being carried on as an Employer business. Such term shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer business. However, engaging in competition with an Employer business shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer business or that takes a position adverse to any Employer business. Accordingly, coverage shall not be provided under this Plan if, within the time period and without the written consent specified, Eligible Employee either engages directly in competitive activity or in any capacity in any location becomes employed by, associated with, or renders service to any company, or parent or affiliate thereof, or any subsidiary of any of them, if any of them is engaged in competition with an Employer business, regardless of the position or duties the Eligible Employee takes and regardless of whether or not the employing company, or the company that Eligible Employee becomes associated with or renders service to, is itself engaged in direct competition with an Employer business. 9. Restriction on Assignment. The Eligible Employee may assign all or any part of his or her right, title, claim, interest, benefits and all other incidents of ownership which he or she may have in the Insurance Contract to any other individual or trustee, provided that any such assignment shall be subject to the terms of this Plan; except neither the Eligible Employee nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable as a Salary Continuation Death Benefit hereunder , which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable as a Salary Continuation Death Benefit hereunder shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Eligible Employee or any other person, nor be transferable by operation of law in the event of the Eligible Employee's or any other person's bankruptcy or insolvency. Except as provided in this Section 8, no assignment or alienation of any benefits under the Plan will be permitted or recognized. 10. Unsecured General Creditor. Except to the extent of rights with respect to the Insurance Contract in the absence of an election to receive benefits in Salary Continuation Death Benefit form, the Eligible Employee and his or her Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of SBC, nor shall they be beneficiaries, or have any rights, claims or interests in, any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by SBC ("Policies"); such Policies or other assets of SBC shall not be held under any trust for the benefit of the Eligible Employee , his or her designated beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of SBC under this Agreement; any and all of SBC's assets and Policies shall be, and remain, the general, unpledged, unrestricted assets of SBC; SBC shall have no obligation to acquire any Policies or any other assets; and SBC's obligations under this Agreement shall be merely that of an unfunded and unsecured promise of SBC to pay money in the future. 11. Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving the Eligible Employee any right to be retained in the employ of any SBC company. 12. Protective Provisions. The Eligible Employee will cooperate with SBC by furnishing any and all information requested by SBC, in order to facilitate the payment of benefits hereunder, taking such physical examinations as SBC may deem necessary and taking such other relevant action as may be requested by SBC, in order to facilitate the payment of benefits hereunder. If the Eligible Employee refuses so to cooperate, the Eligible Employee's participation in the Plan shall terminate and SBC shall have no further obligation to the Eligible Employee or his or her designated Beneficiary hereunder. If the Eligible Employee commits suicide during the two-year period beginning on the date of eligibility under the Plan, or if the Eligible Employee makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable by reason of this Plan to the Eligible Employee or his or her designated Beneficiary, or in SBC's sole discretion, benefits may be payable in a reduced amount. 13. Change in Status. In the event of a change in the employment status of an Eligible Employee to a status in which he or she is no longer an Eligible Employee under the Plan, such Eligible Employee shall immediately cease to be eligible for any benefits under this Plan; provided, however, such survivor benefits as would be available to such employee by reason of his or her new status but which do not automatically become effective upon attainment of such new status shall continue to be provided under this Plan until such benefits become effective or until such employee has had reasonable opportunity to effectuate such benefits but has failed to take any requisite action necessary for such benefits to become effective. 14. Named Fiduciary. If this Plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA), SBC is the "named fiduciary" of the Plan. 15. Applicable Law. This Plan and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Texas to the extent such law is not preempted by ERISA. 16. Administration of the Plan. The Committee shall be the sole administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions in accordance with its terms. The Committee shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Committee shall be binding. 17. Relation to Prior Plans. This Plan supersedes and replaces prior Senior Management Survivor Benefit, Senior Management Supplementary Life Insurance, and Senior Management Alternate Death Benefit Life Insurance Plans as in effect prior to January 1, 1986, except such plans shall continue to apply to Eligible Employees who retired before January 1, 1986; provided, however, that with respect to those Eligible Employees who retired during calendar year 1986 by reason of the fact of attaining age 65, the Post-Retirement Benefit provided pursuant to the Senior Management Survivor Benefit Plan as in effect prior to January 1, 1986, shall continue to apply and the post-retirement benefit provided under the Basic Death Benefit portion hereof shall not apply. 18. Amendments and Termination. This Plan may be modified or terminated at any time in accordance with the provisions of SBC's Schedule of Authorizations. A modification or Plan termination may affect present and future Eligible Employees; provided, however, that no modification shall be made to this Plan with respect to an Eligible Employee who terminates employment for reason of disability or Retirement), nor shall a termination of the Plan operate so as to be applicable to such an individual, without the written consent of the Eligible Employee. EX-10 6 SUPPLEMENTAL RETIREMENT INCOME PLAN EXHIBIT 10d LOGO SBC Communications Inc. SUPPLEMENTAL RETIREMENT INCOME PLAN Effective: January 1, 1984 Revisions Effective: November 21, 1997 SUPPLEMENTAL RETIREMENT INCOME PLAN TABLE OF CONTENTS Section Subject Page 1. Purpose .................................................1 2. Definitions..............................................1-4 3. Plan ("SRIP") Benefits...................................4 3.1. Termination of Employment/Vesting.....................4&5 3.2. Disability............................................6 3.3. Benefit Payout Alternatives...........................6-8 3.4. Mid Career Hires......................................8 4. Death Benefits...........................................9 5. Payment..................................................10-12 6. Conditions Related to Benefits...........................12-14 7. Miscellaneous............................................14-16 Attachment (Agreement) SUPPLEMENTAL RETIREMENT INCOME PLAN 1. Purpose. The purpose of the Supplemental Retirement Income Plan ("Plan") is to provide Eligible Employees with retirement benefits to supplement benefits payable pursuant to SBC's qualified group pension plans. 2. Definitions. For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Administrative Committee. "Administrative Committee" means a Committee consisting of the Senior Vice President-Human Resources and two or more other members designated by the Senior Vice President-Human Resources who shall administer the Plan. Agreement. "Agreement" means the written agreement (substantially in the form attached to this Plan) that shall be entered into by SBC and a Participant to carry out the Plan with respect to such Participant. Entry into a new Agreement shall not be required upon amendment of the Plan or upon an increase in a Participant's Retirement Percent (which increase shall nevertheless be utilized to determine the Participant's benefits hereunder even though not reflected in the Participant's Agreement), except entry into a new Agreement shall be required in the case of an amendment which alters, to the detriment of a Participant, the benefits described in this Plan as applicable to such Participant (See Section 6.5). Such new Agreement shall operate as the written consent required by Section 6.5 of the Participant to such amendment. Beneficiary. "Beneficiary" shall mean any beneficiary or beneficiaries designated by the Eligible Employee pursuant to the SBC Rules for Employee Beneficiary Designations as may hereafter be amended from time-to-time ("Rules"). Chairman. "Chairman" shall mean the Chairman of the Board of SBC Communications Inc. Disability. "Disability" means any Termination of Employment prior to being Retirement Eligible that the Administrative Committee, in its complete and sole discretion, determines is by reason of a Participant's total and permanent disability. The Administrative Committee may require that the Participant submit to an examination by a competent physician or medical clinic selected by the Administrative Committee. On the basis of such medical evidence, the determination of the Administrative Committee as to whether or not a condition of total and permanent disability exists shall be conclusive. Earnings. "Earnings" means for a given calendar year the Participant's: (1) bonus made as a short term award during the calendar year but not exceeding 200% of the target amount of such bonus (or such other portion of the bonus as may be determined by the Human Resources Committee of the Board of SBC), plus (2) base salary before reduction due to any contribution pursuant to any deferred compensation plan or agreement provided by SBC, including but not limited to compensation deferred in accordance with Section 401(k) of the Internal Revenue Code. Eligible Employee. "Eligible Employee" means an Officer or a non-Officer employee of any SBC company who is designated by the Chairman as eligible to participate in the Plan. Effective on and after July 1, 1994, only an Officer may become an Eligible Employee. Final Average Earnings. "Final Average Earnings" means the average of the Participant's Monthly Earnings for the thirty-six (36) consecutive months out of the one hundred twenty (120) months next preceding the Participant's Termination of Employment which yields the highest average earnings. If the Participant has fewer than thirty-six (36) months of employment, the average shall be taken over his or her period of employment. Immediate Annuity Value. "Immediate Annuity Value" means the annual amount of annuity payments that would be paid out of a plan on a single life annuity basis if payment of the plan's benefit was commenced immediately upon Termination of Employment, notwithstanding the form of payment of the plan's benefit actually made to the Participant (i.e., joint and survivor annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such benefit. Monthly Earnings. "Monthly Earnings" means one-twelfth (1/12) of Earnings. Officer. "Officer" shall mean an individual who is designated by the Chairman as eligible to participate in the Plan who is an elected officer of SBC or of any SBC subsidiary (direct or indirect). Participant. A "Participant" means an Eligible Employee who has entered into an Agreement to Participate in the Plan. Retirement. "Retirement" shall mean the Termination of Employment of an Eligible Employee for reasons other than death, on or after the earlier of the following dates: (1) the date the Eligible Employee is Retirement Eligible or (2) the date the Eligible Employee has attained one of the following combinations of age and service at Termination of Employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 years or more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to an Eligible Employee who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program ("SBCPBP") upon Termination of Employment, the term "Retirement" shall include such Eligible Employee's Termination of Employment. Retirement Eligible. "Retirement Eligible" or "Retirement Eligibility" means that a Participant has attained age 55; provided, however, if (1) the Participant is, or has been within the one year period immediately preceding the relevant date, an Officer with 30 or more Years of Service and has not attained age 55, or 2) the Participant has 15 or more Years of Service and has not attained age 55 and is, or has been within the one year period immediately preceding the relevant date, the Chairman or a Direct Reporting Officer as such term is defined in SBC's Schedule of Authorizations, he shall nevertheless be deemed to be Retirement Eligible. Note: Any reference in any other SBC plan to a person being eligible to retire with an immediate pension pursuant to the SBC Supplemental Retirement Income Plan shall be interpreted as having the same meaning as the term Retirement Eligible. Retirement Percent. "Retirement Percent" means the percent specified in the Agreement with the Participant which establishes a Target Retirement Benefit (see Section 3.1) as a percentage of Final Average Earnings. SBC. "SBC" means SBC Communications Inc. Service Factor. "Service Factor" means, unless otherwise agreed in writing by the Participant and SBC, either (a) a deduction of one and forty-three hundredths percent (1.43%) multiplied by the number by which (i) thirty-five (or thirty in the case of an Officer) exceeds (ii) the number of Years of Service of the Participant, or (b) a credit of seventy-one hundredths percent (0.71%) multiplied by the number by which (i) the number of Years of Service of the Participant exceeds (ii) thirty-five (or thirty in the case of an Officer). For purposes of the above computation, a deduction shall result in the Service Factor being subtracted from the Retirement Percent whereas a credit shall result in the Service Factor being added to the Retirement Percent. Termination of Employment. "Termination of Employment" means the ceasing of the Participant's employment from the SBC controlled group of companies for any reason whatsoever, whether voluntarily or involuntarily. Year. A "Year" is a period of twelve (12) consecutive calendar months. Year of Service. "Year of Service" means each complete Year of continuous, full-time service as an employee beginning on the date when a Participant first began such continuous employment with any SBC company and on each anniversary of such date, including service prior to the adoption of this Plan. 3. Plan ("SRIP") Benefits 3.1. Termination of Employment/Vesting. With respect to (1) a person --------------------------------- who becomes a Participant prior to January 1, 1998, or (2) a person who prior to January 1, 1998 is an officer of a Pacific Telesis Group ("PTG") company and becomes a Participant after January 1, 1998, upon such a Participant's Termination of Employment, SBC shall pay to such Participant a monthly SRIP Benefit in accordance with Section 3.3. The amount of such monthly SRIP Benefit is calculated as follows: Final Average Earnings x Revised Retirement Percentage = Target Retirement Benefit - Immediate Annuity Value of any SBC/PTG Qualified Pensions - Immediate Annuity Value of any other SBC/PTG Non-Qualified Pensions other than SRIP = Target Benefit - Age Discount = SRIP Benefit immediately payable upon Termination of Employment With respect to a person who is appointed an Officer and becomes a Participant on or after January 1, 1998, upon such a Participant's Termination of Employment, SBC shall pay to such Participant a monthly SRIP Benefit in accordance with Section 3.3. The amount of such monthly SRIP Benefit is calculated as follows: Final Average Earnings x Revised Retirement Percentage = Target Retirement Benefit - Age Discount = Discounted Target Benefit - Immediate Annuity Value of any SBC/PTG Qualified Pensions - Immediate Annuity Value of any SBC/PTG Non-Qualified Pensions, other than SRIP = SRIP Benefit immediately payable upon Termination of Employment Where in both of the above cases the following apply: (a) Revised Retirement Percentage = Retirement Percent + Service Factor (b) For purposes of determining the Service Factor, the Participant's actual Years of Service as of the date of Termination of Employment, to the day, shall be used. (c) For purposes of determining the Final Average Earnings, the Participant's Earnings history as of the date of Termination of Employment shall be used. (d) Age Discount means the Participant's SRIP Benefit shall be decreased by five-tenths of one percent (.5%) for each month that the date of the commencement of payment precedes the date on which the Participant will attain age 60. Notwithstanding the foregoing, if at the time of Termination of Employment the Participant (1) is, or has been within the one year period immediately preceding Participant's Termination of Employment, an Officer with 30 or more years of Service or (2) has 15 or more Years of Service and is, or has been within the one year period immediately preceding Participant's Termination of Employment, the Chairman or a Direct Reporting Officer, such Participant's Age Discount shall be zero. Except to true up for an actual short term award paid following Termination of Employment, there shall be no recalculation of a Participant's monthly SRIP Benefit following Participant's Termination of Employment. If a Participant who has commenced payment of his or her SRIP Benefit dies, his or her Beneficiary shall be entitled to receive the remaining installments of such SRIP Benefit, if any, which are payable in accordance with Section 3.3. If a Participant dies while in active service, Section 4 shall apply. Notwithstanding any other provision of this Plan, upon any Termination of Employment of the Participant for a reason other than death or Disability, SBC shall have no obligation to the Participant under this Plan if the Participant has less than 5 Years of Service at the time of Termination of Employment. 3.2 Disability. Upon a Participant's Disability and application for benefits under the Social Security Act as now in effect or as hereinafter amended, the Participant will continue to accrue Years of Service during his or her Disability until the earliest of his or her: (a) Recovery from Disability, (b) Retirement, or (c) Death. Upon the occurrence of either (a) Participant's recovery from Disability prior to his or her Retirement Eligibility if Participant does not return to employment, or (b) Participant's Retirement, the Participant shall be entitled to receive a SRIP Benefit in accordance with Section 3.1. For purposes of calculating the foregoing benefit, the Participant's Final Average Earnings shall be determined using his or her Earnings history as of the date of his or her Disability. If a Participant who continues to have a Disability dies prior to his or her Retirement Eligibility, the Participant will be treated in the same manner as if he or she had died while in employment (See Section 4.1). 3.3 Benefit Payout Alternatives. The normal form of a Participant's benefits hereunder shall be a Life with 10-Year Certain Benefit as described in Section 3.3(a). However, a Participant may elect in his or her Agreement to convert his or her benefits hereunder, into one of the Alternative Benefits described in Section 3.3(b) and (c). (a) Life with a 10-Year Certain Benefit. An annuity payable ----------------------------------- during the longer of (i) the life of the Participant or (ii) the 10-year period commencing on the date of the first payment and ending on the day next preceding the tenth anniversary of such date (the "Life With 10-Year Certain Benefit"). If a Participant who is receiving a Life with 10-Year Certain Benefit dies prior to the expiration of the 10-year period described in this Section 3.3(a), the Participant's Beneficiary shall be entitled to receive the remaining Life With 10-Year Certain Benefit installments which would have been paid to the Participant had the Participant survived for the entire such 10-year period. (b) Joint and 100% Survivor Benefit. A joint and one hundred percent (100%) survivor annuity payable for life to the Participant and at his or her death to his or her Beneficiary, in an amount equal to one hundred percent (100%) of the amount payable during the Participant's life, for life (the "Joint and 100% Survivor Benefit"). (c) Joint and 50% Survivor Benefit. A joint and fifty percent (50%) survivor annuity payable for life to the Participant and at his or her death to his or her Beneficiary, in an amount equal to fifty percent (50%) of the amount payable during the Participant's life, for life (the "Joint and 50% Survivor Benefit"). The Benefit Payout Alternatives described in Section 3.3(b) and 3.3(c) shall be the actuarially determined equivalent (as determined by the Administrative Committee in its complete and sole discretion) of the Life With 10-Year Certain Benefit that is converted by such election. Any election made pursuant to this Section 3.3 shall be made in the Participant's Agreement and once made shall be irrevocable. Notwithstanding the foregoing, a Participant may elect in his or her Agreement to defer the time by which he or she is required to elect one of the foregoing forms of Benefit Payout Alternatives. Any such deferred election must be made by the Participant in writing to the Administrative Committee no later than the last day of the calendar year preceding the calendar year in which Participant's Retirement takes place or other benefit payment under this Plan commences. If a Participant's Agreement fails to show an election of a Benefit Payout Alternative, or if the Participant having chosen to defer his or her benefit election, fails to make a timely election of benefits, such Participant's form of benefit shall be the Life With 10-Year Certain Benefit which is described in Section 3.3(a). Notwithstanding the foregoing, in the event of the death of a designated annuitant during the life of the Participant, the Participant's election to have a Benefit Payout Alternative described in Section 3.3(b) or 3.3(c) shall be deemed to be revoked, in which event, subject to the conditions and limitations specified in the immediately preceding paragraph, or within the ninety-day period following the death of the annuitant if such period would end later than the time allowed for an election by the immediately preceding paragraph, the Participant may elect to have his or her benefit, or remaining benefit, under the Plan, as the case may be, paid in any of the forms described in this Section 3.3. In the event the Participant's designated annuitant predeceases the Participant and the Participant fails to make a timely election in accordance with the provisions of the immediately preceding sentence, the Participant's benefit, or remaining benefit, as the case may be, shall be paid or reinstated, as the case may be, in the form of a Life With 10-Year Certain Benefit as described in Section 3.3(a). Any conversion of benefit from one form to another pursuant to the provisions of this paragraph shall be subject to actuarial adjustment (as determined by the Administrative Committee in its complete and sole discretion) such that the Participant's new benefit is the actuarial equivalent of the Participant's remaining prior form of benefit. Payments pursuant to Participant's new form of benefit shall be effective commencing with the first monthly payment for the month following the death of the annuitant. Notwithstanding any other provision of this Plan to the contrary, payment in the form of a Benefit Payout Alternative described in Section 3.3(b) or 3.3(c), with a survivor annuity for the benefit of the Participant's spouse as Beneficiary, may be waived by the annuitant with the consent of the Participant in the event of the divorce (or legal separation) of said annuitant from said Participant. In such event, the Participant's benefit shall be reinstated to the remainder of the Life with 10-Year Certain Benefit as described in Section 3.3(a) (i.e., the 10-Year period as described in Section 3.3(a) shall be the same 10-year period as if such form of benefit was the form of benefit originally selected and the expiration date of such period shall not be extended beyond its original expiration date) effective commencing with the first monthly payment following receipt of the waiver and Participant consent in a form acceptable to the Administrative Committee. A waiver of the type described in this paragraph shall be irrevocable. 3.4. Mid-Career Hires. The modification of this Plan's benefit as applicable to a Participant who is deemed a Mid-Career Hire and the definition of a Mid-Career Hire shall be as defined in SBC's mid-career pension plan applicable to such Participant. 4. Death Benefits 4.1 Death. If a Participant dies prior to his or her Retirement, a pre-retirement death benefit will be calculated and paid as though the Participant had retired on the day prior to the date of death. Notwithstanding the provisions of Section 3.3, if a Participant's Agreement fails to show an election of a Benefit Payout Alternative, or if the Participant, having chosen to defer his benefit election, failed to make a timely election of benefits prior to his death, the form of the pre-retirement death benefit shall, at the option of the Participant's Beneficiary, be either the Life With 10-Year Certain Benefit form of the Participant's benefit or a Beneficiary Life Annuity (as such term is hereinafter described) based on the life expectancy of the Beneficiary. If paid as a Beneficiary Life Annuity based on the Life of the Beneficiary, such benefit shall be the actuarially determined equivalent (as determined by the Administrative Committee in its complete and sole discretion) of the Life With 10-Year Certain Benefit; provided, however, should the Beneficiary die prior to the payment to the Beneficiary of the total dollar amount of the Life with 10-Year Certain Benefit, the remaining dollar balance of such Life With 10-Year Certain Benefit shall be paid in accordance with the Participant's beneficiary designation and the Rules at the same monthly rate of payment as would have been the monthly payment pursuant to the 10-year payment schedule had the Life With 10-Year Certain Benefit been selected. 4.2 Disability. In the event that a Participant terminates employment prior to Retirement by reason of a Disability that entitles the Participant to continue to accrue Years of Service until Retirement Eligibility pursuant to Section 3.2 and thereafter dies after attaining Retirement Eligibility, the Employer shall pay to the Participant's Beneficiary the Death Benefit specified in Section 4.1 based on the Participant's Monthly Earnings for the twelve (12) months preceding his or her Disability. No death benefit shall be payable if the Participant dies prior to attaining Retirement Eligibility. 4.3 Termination of Employment. If a Participant terminates employment other than by reason of Disability prior to Retirement Eligibility, no death benefit shall be payable to the Participant's Beneficiary. 5. Payment. 5.1 Commencement of Payments. Commencement of payments under this Plan shall begin not later than sixty (60) days following the occurrence of an event with entitles a Participant (or a Beneficiary) to payments under this Plan. 5.2 Withholding; Unemployment Taxes. To the extent required by the law in effect at the time payments are made, any taxes required to be withheld by the Federal or any state or local government shall be withheld from payments made hereunder. 5.3 Recipients of Payments; Designation of Beneficiary. All payments to be made under the Plan shall be made to the Participant during his or her lifetime, provided that if the Participant dies prior to the completion of such payments, then all subsequent payments under the Plan shall be made to the Participant's Beneficiary or Beneficiaries. In the event of the death of a Participant, distributions/benefits under this Plan shall pass to the Beneficiary (ies) designated by the Participant in accordance with the Rules. 5.4 Additional Benefit. The reduction of any benefits payable under the SBC Pension Benefit Plan ("SBCPBP"), which results from participation in the SBC Senior Management Deferred Compensation Program of 1988, will be restored under this Plan. 5.5 No Other Benefits. No benefits shall be paid hereunder to the Participant or his or her Beneficiary except as specifically provided herein. 5.6 Small Benefit. Notwithstanding any election made by the Participant, the Administrative Committee in its sole discretion may pay any benefit in the form of a lump sum payment if the lump sum equivalent amount is or would be less than $10,000 when payment of such benefit would otherwise commence. 5.7 Special Increases. 5.7.1 1990 Special Increase. Notwithstanding any other provision of this Plan to the contrary: (a) Effective July 1, 1990, the monthly pension benefit amount then being paid hereunder to a retired Participant whose Plan payments began before January 1990 shall be increased by 1/30 of 5.0% for each month from and including January 1988 or the month in which said Participant's pension payments began, whichever is later, through and including June 1990, inclusive. (b) Effective July 1, 1990, the present and/or future monthly payment hereunder of a surviving annuitant of a Participant whose Plan payments began before January 1990 or of a Participant who died in active service before January 1990, shall be increased by the same percentage as the related pension was or would have been increased under the provisions of Paragraph (a) of this Section 5.7.1. 5.7.2 Enhanced Management Pension (EMP) Flow-Through For Participant Receiving Other Than an SBCPBP "Cash Balance" Benefit. Notwithstanding any other provision of this Plan to the contrary: (a) Effective December 30, 1991, a Participant who as of the date of his or her Retirement satisfies the requirements for a service pension under the terms of the SBCPBP as it existed prior to December 30, 1991, shall have his or her SRIP Benefit determined without subtracting any increase in his or her SBCPBP (or successor plan) pension amount attributable to the Enhanced Management Pension ("EMP") provisions thereof, i.e., EMP benefits will "flow-through" to the Participant; provided, however, such additional benefit amounts corresponding to term of employment extending beyond age 65 through application of the EMP provisions shall be subtracted. (b) EMP flow-through shall not apply in the case of any person who becomes an Eligible Employee after December 31, 1997. 5.7.3 1993 Special Increase and Subsequent Special Increases. Notwithstanding any other provisions of this Plan to the contrary: (a) Effective July 1, 1993, the monthly pension benefit amount then being paid hereunder to (1) all retired Participants whose Plan payments began before July 1, 1993, (2) then current and contingent annuitants of such retired Participants who elected one of the Plan's survivor annuities and (3) then current annuitants of employees who before July 1, 1993 died in active service shall be increased in the same percentages as the SBCPBP ad hoc pension increase percentages effective July 1, 1993. (b) Any time after July 1, 1993 that SBCPBP is amended to provide for an ad hoc pension increase for SBCPBP nonbargained participants, the same percentage increase shall apply to Plan benefit amounts. 6. Conditions Related to Benefits. 6.1 Administration of Plan. The Administrative Committee shall be the sole administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions in accordance with its terms. The Administrative Committee shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Administrative Committee shall be final and binding unless the Board of Directors should determine otherwise. 6.2 No Right to SBC Assets. Neither a Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of any SBC company whatsoever including, without limiting the generality of the foregoing, any specific funds or assets which SBC, in its sole discretion, may set aside in anticipation of a liability hereunder, nor in or to any policy or policies of insurance on the life of a Participant owned by SBC. No trust shall be created in connection with or by the execution or adoption of this Plan or any Agreement, and any benefits which become payable hereunder shall be paid from the general assets of SBC. A Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of SBC. 6.3 Trust Fund. SBC shall be responsible for the payment of all benefits provided under the Plan. At its discretion, SBC may establish one or more trusts, for the purpose of providing for the payment of such benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of SBC's creditors. To the extent any benefits provided under the Plan are actually paid from any such trust, SBC shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by SBC. 6.4 No Employment Rights. Nothing herein shall constitute a contract of continuing employment or in any manner obligate any SBC company to continue the service of a Participant, or obligate a Participant to continue in the service of any SBC company and nothing herein shall be construed as fixing or regulating the compensation paid to a Participant. 6.5 Modification or Termination of Plan. This Plan may be modified or terminated at any time in accordance with the provisions of SBC's Schedule of Authorizations. A modification may affect present and future Eligible Employees. SBC also reserves the sole right to terminate at any time any or all Agreements. In the event of termination of the Plan or of a Participant's Agreement, a Participant shall be entitled to benefits hereunder, if prior to the date of termination of the Plan or of his or her Agreement, such Participant has attained 5 Years of Service, in which case, regardless of the termination of the Plan/Participant's Agreement, such Participant shall be entitled to benefits at such time as provided in and as otherwise in accordance with the Plan and his or her Agreement, provided, however, Participant's benefit shall be computed as if Participant had terminated employment as of the date of termination of the Plan or of his or her Agreement; provided further, however, Participant's service subsequent to Plan/Agreement termination shall be recognized for purposes of reducing or eliminating the Age discount provided for by Section 3.1(d). No amendment, including an amendment to this Section 6.5, shall be effective, without the written consent of a Participant, to alter, to the detriment of such Participant, the benefits described in this Plan as applicable to such Participant as of the effective date of such amendment. For purposes of this Section 6.5, an alteration to the detriment of a Participant shall mean a reduction in the amount payable hereunder to a Participant to which such Participant would be entitled if such Participant terminated employment at such time, or any change in the form of benefit payable hereunder to a Participant to which such Participant would be entitled if such Participant terminated employment at such time. Any amendment which reduces Participant's benefit hereunder to adjust for a change in his or her pension benefit resulting from an amendment to any company-sponsored defined benefit pension plan which changes the pension benefits payable to all employees, shall not require the Participant's consent. Written notice of any amendment shall be given to each Participant. 6.6 Offset. If at the time payments or installments of payments are to be made hereunder, a Participant or his Beneficiary or both are indebted to any SBC company, then the payments remaining to be made to the Participant or his Beneficiary or both may, at the discretion of the Board of Directors, be reduced by the amount of such indebtedness; provided, however, that an election by the Board of Directors not to reduce any such payment or payments shall not constitute a waiver of such SBC company's claim for such indebtedness. 6.7 Change in Status. In the event of a change in the employment status of a Participant to a status in which he is no longer an Eligible Employee, the Participant shall immediately cease to be eligible for any benefits under this Plan except such benefits as had previously vested. Only Participant's Years of Service and Earnings history prior to the change in his employment status shall be taken into account for purposes of determining Participant's vested benefits hereunder. 7. Miscellaneous. 7.1 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt of the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 7.2 Non-Competition. Notwithstanding any other provision of this Plan, all benefits provided under the Plan with respect to a Participant shall be forfeited and canceled in their entirety if the Participant, without the consent of SBC and while employed by SBC or any subsidiary thereof or within three (3) years after termination of such employment, engages in competition with SBC or any subsidiary thereof or with any business with which SBC or a subsidiary or affiliated company has a substantial interest (collectively referred to herein as "Employer business") and fails to cease and desist from engaging in said competitive activity within 120 days following receipt of written notice from SBC to Participant demanding that Participant cease and desist from engaging in said competitive activity. For purposes of this Plan, engaging in competition with any Employer business shall mean engaging by the Participant in any business or activity in the same geographical market where the same or substantially similar business or activity is being carried on as an Employer business. Such term shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer business. However, engaging in competition with an Employer business shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer business or that takes a position adverse to any Employer business. Accordingly, benefits shall not be provided under this Plan if, within the time period and without the written consent specified, Participant either engages directly in competitive activity or in any capacity in any location becomes employed by, associated with, or renders service to any company, or parent or affiliate thereof, or any subsidiary of any of them, if any of them is engaged in competition with an Employer business, regardless of the position or duties the Participant takes and regardless of whether or not the employing company, or the company that Participant becomes associated with or renders service to, is itself engaged in direct competition with an Employer business. 7.3 Notice. Any notice required or permitted to be given to the Administrative Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by certified mail, to the principal office of SBC, directed to the attention of the Senior Vice President-Human Resources. Any notice required or permitted to be given to a Participant shall be sufficient if in writing and hand delivered, or sent by certified mail, to Participant at Participant's last known mailing address as reflected on the records of his or her employing company. Notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for certification. 7.4 Validity. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this plan. 7.5 Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of Texas to the extent not preempted by the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder ("ERISA"). 7.6 Plan Provisions in Effect Upon Termination of Employment. The Plan provisions in effect upon a Participant's termination of employment shall govern the provision of benefits to such Participant. Notwithstanding the foregoing sentence, the benefits of a Participant whose Retirement occurred prior to February 1, 1989, shall be subject to the provisions of Section 3.3 hereof. SUPPLEMENTAL RETIREMENT INCOME PLAN AGREEMENT THIS AGREEMENT is made and entered into at San Antonio, Texas as of this _____ day of _______________, by and between SBC Communications Inc. ("SBC") and __________ (" Participant"). WHEREAS, SBC has adopted a Supplemental Retirement Income Plan (the "Plan"); and WHEREAS, the Participant has been determined to be eligible to participate in the Plan; and WHEREAS, the Plan requires that an agreement be entered into between SBC and Participant setting out certain terms and benefits of the Plan as they apply to the Participant; NOW, THEREFORE, SBC and the Participant hereby agree as follows: 1. The Plan is hereby incorporated into and made a part of this Agreement as though set forth in full herein. The parties shall be bound by, and have the benefit of, each and every provision of the Plan as set forth in the Plan. 2. The Participant was born on ___________, and his or her present employment began on _____________, 3. The Participant's "Retirement Percent" which is described in the Plan shall be ________ percent (__%) 4. Election as to Form of Benefits. The Participant elects the Benefit Payout Alternative listed below next to which the Participant has subscribed his or her initials. If no option is initialed, the Participant's form of benefit under the Plan shall be the Life With 10-Year Certain Benefit, which is listed under a. below: ____ a. Life with 10-Year Certain Benefit described in Section 3.3(a) of the Plan. ____ b. Joint and 100% Survivor Benefit described in Section 3.3(b) of the Plan. ____ c. Joint and 50% Survivor Benefit described in Section 3.3(c) of the Plan. ____ d. The Participant elects to defer making an election as to the form of benefit until no later than the last day of the calendar year preceding the calendar year in which the Participant's Retirement takes place or SRIP benefit commences. This Agreement supersedes all prior Supplemental Retirement Income Plan Agreements between SBC and Participant, and any amendments thereto, and shall inure to the benefit of, and be binding upon, SBC, its successors and assigns, and the Participant and his or her Beneficiaries. IN WITNESS WHEREOF, the parties hereto have signed and entered into this Agreement on and as of the date first above written. SBC: By ___________________________ Senior Vice President- Human Resources PARTICIPANT: By ___________________________ EX-10 7 SALARY AND INCENTIVE AWARD DEFERRAL PLAN EXHIBIT 10h LOGO SBC Communications Inc. SALARY AND INCENTIVE AWARD DEFERRAL PLAN Effective: January 1, 1984 Revisions Effective: November 21, 1997 SALARY AND INCENTIVE AWARD DEFERRAL PLAN TABLE OF CONTENTS Section Subject Page 1. Purpose.................................. 1 2. Definitions.............................. 1 3. Eligibility.............................. 1 4. Participation............................ 1&2 5. Deferred Accounts........................ 2&3 6. Distribution............................. 3-6 7. Amendment and Termination................ 6 8. Miscellaneous............................ 6 SBC SALARY AND INCENTIVE AWARD DEFERRAL PLAN 1. Purpose. The purpose of the Salary and Incentive Award Deferral Plan (the "Plan") is to provide Eligible Employees with a means for deferring the receipt of income. 2. Definitions. For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Base Salary. "Base Salary" or "Salary" shall mean the Eligible Employee's annual base salary, excluding commissions, lump-sum merit payments in lieu of salary, and TEAM Awards, and before reduction due to any contribution pursuant to this Plan or reduction pursuant to any other deferral plan of SBC. Chairman. "Chairman" shall mean the Chairman of the Board of SBC Communications Inc. Committee. "Committee" shall mean the Human Resources Committee of the Board of SBC Communications Inc. Eligible Employee. "Eligible Employee" shall mean an Officer or a non-Officer employee of any SBC company who is designated by the Chairman as eligible to participate in the Plan. Officer. "Officer" shall mean an individual who is designated by the Chairman as eligible to participate in the Plan who is an elected officer of SBC or of any SBC subsidiary (direct or indirect). SBC. "SBC" shall mean SBC Communications Inc. SBC Shares. "SBC Shares" shall mean shares of SBC common stock. 3. Eligibility. Each Eligible Employee shall be eligible to participate in the Salary and Incentive Award Deferral Plan (the "Plan"). 4. Participation. (a) Prior to the beginning of any calendar year, an Eligible Employee may elect to participate in the Plan by directing that up to 50% of his or her Base Salary and/or all or part of his or her short-term and/or long-term awards under the Short Term Incentive Plan and/or under the Senior Management Long Term Incentive Plan and/or its successor plan, the 1996 Stock and Incentive Plan, which would otherwise be paid currently to the employee in such calendar year, shall be credited to a deferred account subject to the terms of the Plan. In no event, however, shall the part of Salary or of any award credited to the Plan during any calendar year be less than $1,000 (which in the case of an award shall be based on valuation at the time the award would otherwise be paid). Any Base Salary deferral hereunder is conditioned upon a 30% Base Salary deferral election in the Stock Savings Plan. (b) Such an election to participate in the Plan shall be in the form of a document executed by the employee and filed with SBC. An election related to Salary or awards otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year. A new election to participate in the Plan shall be made annually. 5. Deferred Accounts. (a) Deferred amounts related to Salary or awards which would otherwise have been distributed to the Eligible Employee in cash shall be credited to the employee's account and shall bear interest at the applicable Declared Rate on the balance from month-to-month in such account. The interest will be credited monthly to the account at one-twelfth of the annual Declared Rate for that calendar year compounded quarterly. The Declared Rate for each calendar year will be determined by the Senior Vice President-Human Resources, with the concurrence of the Senior Vice President, Treasurer and Chief Financial Officer, and will be announced on or before January 1 of the applicable calendar year. However, in no event will the Declared Rate for any calendar year be less than the Moody's Corporate Bond Yield Average-Monthly Average Corporates as published by Moody's Investor's Service, Inc. (or any successor thereto for the month of September before the calendar year in question, or, if such yield is no longer published, a substantially similar average selected by the Senior Vice President-Human Resources). In addition, if the employee's account under the Bell System Senior Management Incentive Award Deferral Plan ("Predecessor Plan") was transferred to an account under this Plan as of January 1, 1984, the effective date of this Plan, then the employee's account under this Plan shall be credited as of such date with the amount credited to the employee's account under the Predecessor Plan as of December 31, 1983, and such amount shall bear interest in accordance with the terms of this Plan. (b) Deferred amounts related to awards which would otherwise have been distributed in SBC hares shall be credited to the employee's account as deferred SBC Shares. The employee's account shall also be credited on each dividend payment date for SBC Shares with an amount equivalent to the dividend payable on the number of SBC Shares equal to the number of deferred SBC Shares in the employee's account on the record date for such dividend. Such amount shall then be converted to a number of additional deferred SBC shares determined by dividing such amount by the price of SBC Shares, as determined in the following sentence. The price of SBC Shares related to any dividend payment date shall be the average of the closing prices of SBC Shares on the New York Stock Exchange ("NYSE") for the period of five trading days ending on such dividend payment date, or the period of five trading days immediately preceding such dividend payment date if the NYSE is closed on the dividend payment date. (c) In the event of any SBC common stock dividend or split occurring after January 1, 1987, employees' accounts will automatically be credited with additional SBC Shares necessary to reflect such stock dividend or split. In the event of any other change in outstanding SBC common stock by reason of any recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the Board of Directors shall make such adjustments, if any, that it deems appropriate in the number of deferred SBC Shares then credited to employees' accounts. Any and all such adjustments shall be conclusive and binding upon all parties concerned. 6. Distribution. (a) At the time an Eligible Employee makes an election to participate in the Plan, the employee shall also make an election with respect to the distribution (during the employee's lifetime or in the event of the employee's death) of the amounts to be credited to the employee's deferred account during the upcoming calendar year. Such an election related to awards otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year. Amounts credited as cash plus accumulated interest shall be distributed in cash; amounts credited as deferred SBC Shares shall be distributed in the form of an equal number of SBC Shares; provided, however, any fractional shares shall be credited as federal tax withholding. (b) An employee may elect to receive the amounts credited to the employee's account with respect to Salary or with respect to each award to be paid in the upcoming calendar year in one payment or in some other number of approximately equal annual installments (not exceeding 15). The first installment (or the single payment if the employee has so elected) shall be paid within 60 days following the date specified in such election. (c) Notwithstanding an election pursuant to Paragraph (b) of this Section 6, all amounts then credited to the employee's accounts shall be paid immediately in a single payment if an employee is discharged for cause by his or her employing company, or if an employee otherwise ceases to be employed by his or her employing company and engages in competition with SBC or any direct or indirect subsidiary thereof or with any business with which a subsidiary of SBC or an affiliated company has a substantial interest (collectively referred to herein as an "Employer Business"), or becomes employed by a governmental agency having jurisdiction over the activities of SBC or any of its subsidiaries. For purposes hereof, engaging in competition with any Employer business shall mean engaging by the employee in any business or activity in the same geographical market where the same or substantially similar business or activity is being carried on as an Employer business. Such term shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer business. However, engaging in competition with an Employer business shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer business or that takes a position adverse to any Employer business. Further, engaging in competition with an Employer business would result if the employee either engages directly in competitive activity or in any capacity in any location becomes employed by, associated with, or renders service to any company, or parent or affiliate thereof, or any subsidiary of any of them, if any of them is engaged in competition with an Employer business, regardless of the position or duties the employee takes and regardless of whether or not the employing company, or the company that the employee becomes associated with or renders service to, is itself engaged in direct competition with an Employer business. (d) An employee may designate pursuant to the SBC Rules for Employee Beneficiary Designations as may hereafter be amended from time to time ("Rules") that, in the event the employee should die before full payment of all amounts credited to the employee's accounts, the balance of all deferred amounts shall be distributed in one payment or in some other number of approximately equal annual installments (not exceeding 5) to the beneficiary or beneficiaries designated in writing by the employee. If no designation has been made or if all designated beneficiaries predecease the employee or die prior to complete distribution of all of the employee's amounts hereunder, then the balance of such amounts be shall be distributed according to the Rules. The first installment (or single payment if the employee has so elected) shall be paid within 60 days following the month of death. (e) Installments subsequent to the first installment to the employee, or to a beneficiary, shall be paid on the date established in 6(b) or 6(d) in each succeeding calendar year until the entire amount credited to the employee's deferred account shall have been paid. Deferred amounts held pending distribution shall continue to be credited with interest or additional deferred SBC Shares, as applicable, determined in accordance with Section 5(a) or 5(b). (f) The obligation to make distribution of deferred amounts credited to an employee's account during any calendar year, plus the additional amounts credited on such deferred amounts pursuant to Section 5(a) or 5(b), shall be borne by SBC or the applicable employing company which otherwise would have paid the related award currently. However, the obligation to make distributions with respect to deferred amounts which are related to amounts credited to an employee's account as of the effective date of the Plan pursuant to Section 5(a), and with respect to which no SBC company would otherwise have paid the related award currently, shall be borne by the company which employed the employee on the effective date of the Plan. (g) For the purpose of this Section 6, an election described in Paragraph (a) or a beneficiary designation described in Paragraph (d) made under the comparable provisions of the Predecessor Plan shall be considered as an election or beneficiary designation, respectively, made under this Section 6. (h) Notwithstanding the previous provisions of this Section 6, at any time during the calendar year prior to the calendar year during which an award deferred under the provisions of the Plan is scheduled for distribution, a participant my change his or her previous election(s) applicable to such award to further defer the commencement of distribution of such award to a subsequent calendar year, and in such case to also change the number of installments applicable to the distribution of the award. Amounts with respect to which the participant's election(s) are modified in accordance with the provisions of this Section 6(h) shall continue to be subject to all provisions of this Plan including further distribution modifications in accordance with the provisions of this Section 6(h). 7. Amendment and Termination. This Plan may be modified or terminated at any time in accordance with the provision of SBC's Schedule of Authorizations, but such changes or termination shall not adversely affect the rights of any Eligible Employee, without his or her consent, to any benefit under the Plan to which such employee may have previously become entitled prior to the effective date of such change or termination. 8. Miscellaneous. (a) Unsecured General Creditor. The amounts deferred hereunder shall be held in the general funds of SBC. SBC shall not be required to reserve, or otherwise set aside, funds for the payment of such amounts. (b) Non-Assignability. The rights of an employee to any deferred amounts plus the additional amounts credited pursuant to Section 5(a), 5(b) and 5(c) shall not be subject to assignment by the employee. (c) Administration. The Committee shall be the sole administrator of -------------- the Plan and will administer the Plan, interpret, construe and apply its provisions in accordance with its terms. The Committee shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Committee shall be binding unless the Board of Directors should determine otherwise. EX-10 8 FINANCIAL COUNSELING PROGRAM EXHIBIT 10i LOGO SBC Communications Inc. FINANCIAL COUNSELING PROGRAM Effective: January 1, 1984 Revisions Effective: November 21, 1997 FINANCIAL COUNSELING PROGRAM TABLE OF CONTENTS Section Subject Page 1. Purpose.........................................1 2. Definitions.....................................1 3. Eligibility.....................................2 4. Services........................................2 5. Conditions....................................2&3 6. Enrollment and Billing........................3&4 7. Non-competition.................................4 8. Amendment and Termination.......................4 FINANCIAL COUNSELING PROGRAM 1. Purpose. The purpose of this Program is to provide Eligible Employees with financial counseling services (including tax preparation and estate planning services). 2. Definitions. For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Chairman. "Chairman" shall mean the Chairman of the Board of SBC Communications Inc. Eligible Employee. "Eligible Employee" shall mean an Officer or a non-Officer employee of any SBC company who is designated by the Chairman as eligible to participate in the Plan. Officer. "Officer" shall mean an individual who is designated by the Chairman as eligible to participate in the Plan who is an elected officer of SBC or of any SBC subsidiary (direct or indirect). Retirement. "Retirement" shall mean the termination of an Eligible Employee's employment with SBC or any of its subsidiaries, for reasons other than death, on or after the earlier of the following dates: (1) the date the Eligible Employee is Retirement Eligible as such term is defined in the Supplemental Retirement Income Plan ("SRIP"); or (2) the date the Eligible Employee has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 years or more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to an Eligible Employee who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program ("SBCPBP") upon termination of Employment, the term "Retirement" shall include such Eligible Employee's termination of employment. SBC. "SBC" shall mean SBC Communications Inc. 3. Eligibility. Each Eligible Employee shall be eligible to participate in the Financial Counseling Program (the "Program"). 4. Services. This Program provides the following (within such expense limitations as shall be established by the Senior Vice President-Human Resources ("SVP-HR"): Financial Counseling (a) A personal in-depth discussion (including spouse) with a counselor to review personal financial data to explore personal short-term and long-range goals. (b) Preparation of a written personal financial summary which includes analysis and recommendations related to such things as retirement, disability, income taxes, cash flow, debt, investment, life insurance, estate planning and survivor's financial security. (c) Additional planning meetings with the counselor to discuss recommendations and to establish an implementation strategy. (d) Annual written financial summary update with special emphasis on income taxes, cash flow and investment and investment forecasts and recommendations. Tax Return Preparation Preparation of federal, state, local income/gift tax returns. Estate Documentation Preparation of a will/trust/health care declaration/durable power of attorney/other estate planning instruments for each Eligible Employee and his/her spouse. Any expenses exceeding the limitations established by the SVP-HR shall be the responsibility of and shall be paid by the Eligible Employee incurring such expenses. 5. Conditions. The following shall apply with respect to the services provided under this Program: (a) The Program shall not pay for any services that are attributable to the existence of any outside business in which either the Eligible Employee or his or her spouse has an active financial interest or management interest. (b) Financial counseling service will be provided until one year after the Retirement or death of an active non-Officer Eligible Employee, whichever occurs earlier. An Eligible Employee retiring on or before December 31, 1998 as an Officer will receive this service until one year following his or her death. An Eligible Employee retiring after December 31, 1998 as an Officer will receive this service until five years following Retirement or one year after death, whichever occurs earlier. The Chairman, any Officer who is a Direct Reporting Officer as defined in SBC's Schedule of Authorizations, as well as any other Officer who is designated by the Chairman, will receive this service until one year following his or her death. (c) If an Eligible Employee desires specific portfolio management, a private arrangement must be established at the Eligible Employee's own expense. (d) Financial counseling services, tax return preparation and estate documentation services will be considered compensation. SBC will compute a tax "gross up" which will be paid to offset income tax liabilities incurred as a result of receiving compensation under this Program. (e) Any Eligible Employee may at any time drop out of the financial counseling services by writing the Senior Vice President-Human Resources. NOTE: Information furnished by the participant to the counselor will be completely confidential. Counselor will not furnish SBC nor anyone else (other than those employed or retained by the counselor to perform its duties) with any information as to personal financial affairs, objectives or private opinions of the participant. 6. Enrollment and Billing. Financial Counseling To receive financial counseling services, the Eligible Employee must select his or her chosen financial counselor from a list of financial counselors as approved by the SVP-HR. Financial Counselors will bill SBC directly for services rendered to Eligible Employees. Tax Return Preparation Eligible Employees may select any tax return preparer. An Eligible Employee who selects a different tax return preparer than his or her financial counselor will be billed directly by such tax return preparer for services rendered. Such Eligible Employees should initial bills received as correct and forward them to the Executive Compensation Group for payment up to the prescribed limit. Estate Documentation Eligible Employees in selected geographical localities with significant numbers of Eligible Employees (e.g., San Antonio, Dallas, San Francisco) must use a provider from a list of providers approved by the SBC Legal Department and maintained by the Executive Compensation Group. Eligible Employees in other areas may select an attorney of their choosing. The SBC Legal Department and the Executive Compensation Group will help identify an attorney if the Eligible Employee requests assistance. Eligible Employees will be billed by the provider for services rendered to them. Eligible Employees should initial bills received as correct and forward them to the Executive Compensation Group for payment up to the prescribed limit. 7. Non-competition. Notwithstanding any other provision of this Program, no services shall be provided under this Program with respect to any Eligible Employee who shall, without the written consent of SBC, and while employed by SBC or any subsidiary thereof, or within three (3) years after termination of employment from SBC or any subsidiary thereof, engage in competition with SBC or any subsidiary thereof or with any business with which a subsidiary of SBC or an affiliated company has a substantial interest (collectively referred to herein as "Employer business"). For purposes of this Program, engaging in competition with any Employer business shall mean engaging by Eligible Employee in any business or activity in the same geographical market where the same or substantially similar business or activity is being carried on as an Employer business. Such term shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer business. However, engaging in competition with an Employer business shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer business or that takes a position adverse to any Employer business. Accordingly, services shall not be provided under this Program if, within the time period and without the written consent specified, Eligible Employee either engages directly in competitive activity or in any capacity in any location becomes employed by, associated with, or renders service to any company, or parent or affiliate thereof, or any subsidiary of any of them, if any of them is engaged in competition with an Employer business, regardless of the position or duties the Eligible Employee takes and regardless of whether or not the employing company, or SBC that Eligible Employee becomes associated with or renders service to, is itself engaged in direct competition with an Employer business. 8. Amendments and Termination. This Program may be modified or terminated at any time in accordance with the provisions of SBC's Schedule of Authorizations. EX-10 9 SUPPLEMENTAL HEALTH PLAN EXHIBIT 10j LOGO SBC Communications Inc. SUPPLEMENTAL HEALTH PLAN Effective: January 1, 1987 Revisions Effective: November 21, 1997 SUPPLEMENTAL HEALTH PLAN TABLE OF CONTENTS Section Subject Page 1. Purpose ........................................ 1 2. Definitions..................................... 1 3. Eligibility .................................... 2 4. Coverage........................................2&3 5. Costs........................................... 3 6. Non-Competition ................................3&4 7. Administration.................................. 4 8. Amendments and Termination ..................... 4 SUPPLEMENTAL HEALTH PLAN 1. Purpose. The Supplemental Health Plan ("Plan") provides Eligible Employees and their eligible dependents with supplemental medical, dental and vision benefits. 2. Definitions. For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Chairman. "Chairman" shall mean the Chairman of the Board of SBC Communications Inc. Committee. "Committee" shall mean the Human Resources Committee of the Board of SBC Communications Inc. Eligible Employee. "Eligible Employee" shall mean an Officer. Officer. "Officer" shall mean an individual who is designated by the Chairman as eligible to participate in the Plan who is an elected officer of SBC or of any SBC subsidiary (direct or indirect). Retirement. "Retirement" shall mean the termination of an Eligible Employee's employment with SBC or any of its subsidiaries, for reasons other than death, on or after the earlier of the following dates: (1) the date the Eligible Employee is Retirement Eligible as such term is defined in the SBC Supplemental Retirement Income Plan ("SRIP"); or (2) the date the Eligible Employee has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 years or more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to an Eligible Employee who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program ("SBCPBP") upon termination of Employment, the term "Retirement" shall include such Eligible Employee's termination of employment. SBC. "SBC" shall mean SBC Communications Inc. 3. Eligibility. Each Eligible Employee shall be eligible to participate in this Plan along with his or her eligible dependents. Eligible dependents are those covered under the Eligible Employee's SBC company's basic managed care medical, dental, and vision care plans ("Basic Plans"). Provisions of this Plan will continue in effect during Retirement for each Eligible Employee who became an Eligible Employee on or after January 1, 1987 but before January 1, 1999. Dependent coverage will also continue during the Retirement period for an Eligible Employee who became an Eligible Employee on or after January 1, 1987 but before January 1, 1999. An Eligible Employee who becomes an Eligible Employee after December 31, 1998 shall not be eligible hereunder for coverage during Retirement. Eligible Employees as of October 1, 1998 must elect to continue coverage effective January 1, 1999 by December 31, 1998. An Eligible Employee who becomes an Eligible Employee after October 1, 1998 shall have 90 days after becoming an Eligible Employee to elect coverage under this Plan. Coverage will remain in effect as long as the applicable contribution is paid by the Eligible Employee. However, once an Eligible Employee terminates coverage he or she may not reinstate such coverage. 4. Coverage. Subject to the limitations in this Section, this Plan provides 100% coverage of all medical, dental and vision expenses not covered by the Eligible Employee's Basic Plans provided such expenses would qualify as deductible medical expenses for federal income tax purposes, whether deducted or not. Notwithstanding any other provision of the Plan to the contrary, an employee who first becomes an Eligible Employee mid-year and who is enrolled in SBC sponsored medical plans other than his or her company's Basic Plans (e.g., HMO) will be allowed to participate in the Plan for the remainder of the calendar year along with his or her dependents who are enrolled in such other SBC sponsored Plans, as if he or she was participating in his or her company's Basic Plans. Thereafter, to participate in the Plan, the Eligible Employee, as well as his or her dependents for whom coverage is desired under this Plan, must be enrolled in the Basic Plans to have coverage hereunder. Expenses incurred by any Eligible Employee or any of his or her eligible dependents under this Plan shall not exceed $50,000 per year per individual. Effective January 1, 1998, expenses incurred by any Eligible Employee and his or her eligible dependents under this Plan shall not exceed $100,000 total per Plan year (i.e., January 1 through December 31). Expenses covered by the Basic Plans will not be included in these limits. Claims will be applied against the various health plans in the following order: (1) Medicare if participant is eligible for same, (2) Group Health Plans, (3) CarePlus if elected and applicable, (4) Long Term Care Plan if elected and applicable, (5) this Plan. 5. Costs. Except as provided below in this Section, costs and expenses incurred in the operation and administration of this Plan will be borne by SBC; and each subsidiary will be required to reimburse SBC for applicable costs and expenses attributable to Eligible Employees employed by it: Effective January 1, 1999, an Eligible Employee electing coverage under the Plan will pay for coverage under the Plan while in active service. Such Eligible Employee's annual contribution amount will be equal to 10% of SBC's actual costs per Eligible Employee for the prior Plan year. Effective with respect to a retirement occurring on or after January 1, 1999, an Eligible Employee who became an Eligible Employee before January 1, 1999 and who elects retirement coverage under the Plan will pay for coverage under the Plan during retirement. Such Eligible Employee's annual contribution amount during retirement will be equal to the following percentage of SBC's actual costs per Eligible Employee for the prior Plan year: Age of Retiree as of Annual Contribution December 31, 1997 Percentage if age 55 or older 10% if age 50 or older but less than 55 25% if less than age 50 50% Coverage will remain in effect as long as the applicable contribution is paid by the Retiree. However, once a Retiree terminates coverage he or she may not reinstate such coverage. 6. Non-Competition. Notwithstanding any other provision of this Plan, no coverage shall be provided under this Plan with respect to any Eligible Employee who shall, without the written consent of SBC, and while employed by SBC or any subsidiary thereof, or within three (3) years after termination of employment from SBC or any subsidiary thereof, engage in competition with SBC or any subsidiary thereof or with any business with which a subsidiary of SBC or an affiliated company has a substantial interest (collectively referred to herein as "Employer business"). For purposes of this Plan, engaging in competition with any Employer business shall mean engaging by Eligible Employee in any business or activity in the same geographical market where the same or substantially similar business or activity is being carried on as an Employer business. Such term shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer business. However, engaging in competition with an Employer business shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer business or that takes a position adverse to any Employer business. Accordingly, coverage shall not be provided under this Plan if, within the time period and without the written consent specified, Eligible Employee either engages directly in competitive activity or in any capacity in any location becomes employed by, associated with, or renders service to any company, or parent or affiliate thereof, or any subsidiary of any of them, if any of them is engaged in competition with an Employer business, regardless of the position or duties the Eligible Employee takes and regardless of whether or not the employing company, or the company that Eligible Employee becomes associated with or renders service to, is itself engaged in direct competition with an Employer business. 7. Administration. Subject to the terms of the Plan, the Chairman shall establish such rules as are deemed necessary for the proper administration of the Plan. SBC will compute a "gross-up" allowance which will be paid to an Eligible Employee to offset income tax liabilities incurred as a result of receiving benefits under this Plan. 8. Amendments and Termination. This Plan may be modified or terminated at any time in accordance with the provisions of SBC's Schedule of Authorizations. SUPPLEMENTAL HEALTH PLAN ADMINISTRATIVE GUIDELINES TABLE OF CONTENTS Section Subject Page 1. General...............................................1 2. Coverage Considerations...............................1&2 3. Enrollment............................................2 4. Eligible Charges......................................2&3 5. Annual Limits.........................................3 6. Claims Processing.....................................3&4 7. I. D. Cards...........................................4 8. Prescriptions.........................................5 9. Billing...............................................5 10. Reports................................................5 11. Accruals...............................................5 12. Taxes..................................................5 ...... Approved: - ---------------------------------- -------------- Chairman & Chief Executive Officer Date ...... SUPPLEMENTAL HEALTH PLAN ADMINISTRATIVE GUIDELINES 1. General. The purpose of these guidelines is to list the procedures to be followed in administering the Supplemental Health Plan ("SHP"). The Senior Vice President - Human Resources will establish internal procedures and group insurance policies with health carrier(s) as appropriate to carry out the provisions of the Plan. 2. Coverage Considerations. Eligible Employees: Coverage is provided only for an Eligible Employee covered by a subsidiary's basic medical plan ("basic plan"), except as otherwise provided for in Section 4 of the Plan. Coverage continues during periods of disability and during retirement in certain circumstances as described in the Plan. Coverage during such periods shall be the same as provided to active Eligible Employees. Coverage for a new Eligible Employee is effective the first day of the month in which the employee is declared to be eligible to participate in the Plan by the Chairman. Coverage will cease on the last day of the month in which one of the following conditions exist: (a) Eligible Employee is no longer a participant in the Basic Plan (b) termination of Eligible Employee from active service for reasons other than disability or the retirement of an Eligible Employee who became an Eligible Employee before January 1, 1999 (c) death of Eligible Employee (unless surviving dependents continue coverage under basic plan) (d) demotion of Eligible Employee so as to no longer be eligible to participate in the Plan (e) transfer to a subsidiary that will not bear expenses for the Eligible Employee to participate in the Plan (f) Eligible Employee engages in competitive activity (g) discontinuance of the Plan by SBC or a subsidiary Dependents: Coverage is provided for dependents of a covered Eligible Employee if the dependents are covered by the basic plan. If coverage for a dependent ceases under the basic plan, coverage under this Plan will cease with the same effective date. If coverage for the Eligible Employee under this Plan ceases for any reason, dependent coverage will cease with the same effective date except where employee coverage ceases due to death of the Eligible Employee, the Plan will continue in effect for surviving dependents as long as the dependents are covered under the basic plan (through automatic coverage or through payment of basic premiums) and are paying any applicable premiums under this Plan. 3. Enrollment. Upon approval as an Eligible Employee, enrollment in the basic plan and payment of any applicable premium under this Plan, the Eligible Employee and current dependents shall be covered under the Plan. The Executive Compensation Administration (ECA) contact will forward a portfolio to the Eligible Employee including the following: _ Blank claim forms (5 to 10 copies) _ Blue return envelopes (5 to 10 ) _ Filing instructions _ I. D. Cards with Eligible Employee's name imprinted (for use for Eligible Employee, spouse, and eligible dependents) As a matter of convenience for the Eligible Employee, the ECA contact will advise the appropriate payroll office regarding withholding of basic coverage premiums for class II or sponsored dependents not already enrolled in the basic plan. The premium paid for dependents is at the rate specified for basic coverage only. There is no additional premium to be paid for SHP coverage for the dependent. Withholding of dependent basic premiums for retired Eligible Employees, where applicable, shall be handled in the same manner as other withholding arrangements for retired executives. Each month, the ECA contact will provide the SHP carrier and subsidiary benefit administration groups with a list of Eligible Employees currently enrolled in the Plan. The ECA contact will provide updated dependent information to the carrier whenever new or revised Dependent Enrollment Forms are received from Eligible Employees. 4. Eligible Charges. Charges for medical care will be eligible under this Plan if they are also eligible medical expenses as defined in the Internal Revenue Code. In general, medical expenses are defined to include any amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body, and transportation for and essential to medical care. Amounts paid for illegal operations or treatments are not eligible medical expenses. In addition, expenses incurred which are merely beneficial to the general health of an individual are also not considered eligible medical expenses unless they are for the primary purpose of curing a particular disease or ailment and prescribed by a doctor. Eligible Employees are encouraged to use basic plan cost management features, including pre-certification, continued stay, second surgical opinion and designation of Primary Care Physician. Use of these features is optional for Eligible Employees. 5. Annual Limits. The annual limits for charges which will be paid under the Plan are specified in the Plan. Expenses incurred under provisions of basic medical, dental and vision plans are not counted against the Plan's limits. The Plan's limits apply to the following eligible charges: a) Medical expenses not paid under a basic medical expense plan (deductibles, co-pay amounts, excluded charges, etc., but not premiums to enroll dependents in the basic plan); plus b) Dental expenses not paid under basic dental plan (deductibles, co-pay amounts, excluded charges etc., but not premiums to enroll dependents in the basic plan); plus c) All vision expenses not covered by basic vision plan, but not premiums to enroll dependents in the basic plan When an Eligible Employee or dependent or the Eligible Employee's family exhausts annual coverage, the Eligible Employee will be notified by the carrier. 6. Claims Processing. Eligible Employees or their Providers (Doctors, Hospitals, etc.) should submit all basic medical, dental and vision plan and SHP claims to the SHP carrier (Prudential). In no case should claims be submitted for processing under the procedures of the basic medical, dental and vision plans. Prudential will coordinate processing for both basic and SHP claims to reduce administrative efforts for Eligible Employees. Retired Eligible Employees who are eligible for coverage under the Plan and who are eligible for Medicare should file with Medicare first. See Medicare Section below. To submit a claim, Eligible Employees or their Providers should use a claim form (see Attachment 1) and one of the blue envelopes provided in the enrollment portfolio. Documentation of service provided should be attached to the claim form. Additional forms and envelopes are available from the carrier. The carrier will receive completed forms, verify participation and make payment to the Eligible Employee or to the Provider as appropriate. The Explanation of Benefits statement will be forwarded to the Eligible Employee when payments are made. Medical and Dental Claims. The carrier will allocate claim charges to either basic medical or dental plan coverage, SHP coverage or non-covered charges. The Eligible Employee or the Eligible Employee's Provider will be reimbursed for all charges except those not eligible under either a basic medical or dental plan or SHP. The carrier will use the separation of charges between plans to produce reports and to track against annual limits. Vision Claims. The carrier will allocate claim charges to either basic vision plan coverage, SHP coverage or non-covered charges. The Eligible Employee or the Eligible Employee's Provider will be reimbursed for all charges except those not eligible under either a basic vision plan or SHP. The carrier will use the separation of charges between plans to produce reports and to track against annual limits. Eligible Employees should not submit vision claims to carriers other than the SHP carrier. Medicare. Any retired Eligible Employee eligible for coverage under the Plan or his or her dependents any of whom are eligible for Medicare shall file claims with Medicare first. Expenses not reimbursed by Medicare should then be filed with Prudential using the Supplemental Health Plan Claim Form. Coordination by Administrators. The ECA contact will instruct claims administrators for basic plans (vision, dental, medical) to forward all Eligible Employee claims to the SHP carrier for processing. Release of Information. If requested by a Provider, it will be necessary for the Eligible Employee to sign a form to authorize the carrier to obtain additional information from a Provider. In those cases, the carrier will forward an information release form directly to the Eligible Employee. 7. I. D. Cards. Each enrollment portfolio includes I.D. cards which should be signed on the back by the Eligible Employee except for the Eligible Employee's spouse's card which should be signed by the spouse. The dependent's name will be shown on the dependent's card. Blank cards can be obtained from the carrier and imprinted locally by the ECA Group. Each card will contain a carrier telephone number dedicated to the SHP. This number is also on the claim forms. 8. Prescriptions. Participants in the SHP should use the Mail Service Prescription Drug Program or purchase prescriptions from a pharmacy, as appropriate. The Eligible Employee should attach his/her receipt for any amount not covered by the basic Plan to a claim form, and forward to the carrier for full reimbursement. Only prescription medicines are eligible for reimbursement. Over-the-counter medicines (cold tablets, aspirin, etc.) and hygienic supplies (contact lens solution, eye drops, etc.) are not covered under the plan. 9. Billing. The carrier will issue insurance premium bills at the beginning of each quarter to the following SBC entities: _ SBC ECA Group (for corporate staff Eligible Employees) _ Each subsidiary's Human Resources/Personal Administration Group (for subsidiary Eligible Employees). Quarterly payments are due to the carrier by the end of the first month in the quarter. Bills will provide sufficient detail to show the following: _ Amounts above that allocated to basic medical, dental and vision plans _ SHP premiums _ Other SHP charges/credits _ SBC code _ State code _ Individual bills for each Eligible Employee as requested by the employing subsidiary 10. Reports. The carrier will issue quarterly reports to the SBC ECA contact. These will include claim-to-premium reconciliation data for use in forecasting end-of-year true-ups and determining whether or not accruals will be required. 11. Accruals. If claim-to premium reconciliation data indicates claims are significantly exceeding premiums during a quarter, accruals should be considered during the year. At the end of the year, an accrual is generally required unless a year-end true-up bill is not expected. 12. Taxes. If receipt of coverage/benefits under this Plan results in taxable income, an Eligible Employee's income will be grossed-up. EX-10 10 RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS Exhibit 10-k SBC Communications Inc. Retirement Plan for Non-Employee Directors Effective February 1, 1986 Preamble The Retirement Plan for Non-Employee Directors (the "Retirement Plan") provides retirement benefits to certain Directors of SBC Communications Inc. (the "Corporation") whose right to payment hereunder is not guaranteed. All rights, hereunder shall be governed by and construed in accordance with the laws of Missouri. Administration The Retirement Plan shall be administered by the Officer of the Corporation ("Plan Administrator") as may be designated by the Chief Executive Officer. The Plan Administrator may delegate any or all duties hereunder to other individuals. The Plan Administrator's decisions regarding the interpretation and application of the Retirement Plan shall be binding on all parties. Eligibility An individual who has never been employed by the Corporation or any of its subsidiaries, who began service as a Director of the Corporation on or before November 21, 1997, who terminates service as a Director of the Corporation on or after February 1, 1986, and who served as a Director of the Corporation ("Board Service") for five years or more shall be eligible to receive benefits under the Retirement Plan (a "Participant"). For the purpose of determining eligibility hereunder, service as a Director of Southwestern Bell Telephone Company prior to January 1, 1984, shall be considered Board Service hereunder. Directors of companies acquired by the Corporation, directly or indirectly, pursuant to a merger, consolidation, acquisition or otherwise who are appointed to the Corporation's Board pursuant to the agreement providing for such transaction, or any amendments thereof, or any related agreements, shall not be eligible to participate in the Retirement Plan, unless otherwise provided by the Human Resources Committee of the Board. Benefit Amount Participants shall receive an annual benefit equal to 10% of the annual retainer for Board Service (exclusive of retainers for Board committees or meeting fees) in effect upon termination of Board Service for each complete year of Board Service, with a maximum annual benefit of 100% of the applicable annual retainer. Unless a Participant terminates Board Service at or after age 70, benefits under the Retirement Plan shall be actuarially reduced for each month the initial payment date precedes the Participant's attaining age 70; provided, however, that there shall be no reduction in benefits if payments commence prior to age 70 if a Participant terminated Board Service (a) on account of a permanent and total disability in accordance with the definition of Section 22(e)(3) of the Internal Revenue Code or any successor provision, or (b) upon the expiration of the final term of Board Service for which the Participant was of age to stand for election. Manner and Term of Payments Benefit payments shall commence on the first day of the first calendar quarter following a Participant's termination of Board Service and shall be paid quarterly thereafter for the longer of the life of the Participant or the 10-year period commencing on the date of the first payment and ending on the day next preceding the tenth anniversary of such date (Life with 10-Year Certain Benefit). If a Participant who is receiving a Life with 10-Year Certain Benefit dies prior to the expiration of the 10-year period described above, the Participant's Beneficiary shall be entitled to receive the remaining Life with 10-Year Certain Benefit installments which would have been paid to the Participant had the Participant survived for the entire 10-year period. Each benefit payment shall be one-quarter of the Participant's annual benefit net of applicable withholding taxes if any. If an individual with five years or more of Board Service dies while still serving as a Director, a pre-retirement death benefit will be calculated and paid as though the individual had retired on the date of death, except that no actuarial reduction shall apply if the individual dies before attaining age 70. No right or interest in the Retirement Plan or to Retirement Plan benefits shall be assignable or transferable or shall be subject to any lien, obligation or liability of any Participant. Term of Retirement Plan The Retirement Plan shall remain in effect until terminated by the SBC Communications Inc. Board of Directors, which may amend the Retirement Plan from time to time. Revised: November 21, 1997 EX-10 11 CHANGE IN CONTROL Exhibit 10-n March , 1998 Private and Confidential Officer Name Officer Title Company Street Address City, State, Zip Code Re: Severance Benefits-Change in Control Dear Officer: SBC (the "Corporation") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel of the Corporation and its subsidiaries. In this connection, the Board of Directors of the Corporation (the "Board") has recognized that, as is the case with many publicly held corporations, a change in control is a possibility and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of senior management personnel to the detriment of the Corporation and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of senior management (hereinafter referred to as "Officers"), including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Corporation, although no such change is now apparent or contemplated. In order to induce you to remain in the employ of the Corporation or one of its subsidiaries, as the case may be, and in consideration of your agreement set forth in Section 2.2 hereof, the Corporation agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with the Corporation's family of companies (i.e., the tax controlled group of corporations of which the Corporation is a member) is terminated subsequent to a "change in control of the Corporation" (as defined in Section 2 hereof) under the circumstances described herein. Page Two 1. Term of Agreement. This Agreement shall commence on, and the date of this Agreement shall be, the date it is agreed to by you as shown above your signature, and this Agreement shall continue in effect through December 31, 1998; provided, however, that commencing on January 1, 1999 and each January 1 thereafter the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Corporation shall have given notice that it does not wish to extend this Agreement; provided further however that if a change in control of the Corporation shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the month in which such change in control occurred; provided further however that the term of this Agreement shall expire if your employing subsidiary is sold or otherwise disposed of prior to a change in control of the Corporation unless you continue in employment with the Corporation's tax controlled group after such sale or other disposition (if your employing subsidiary is sold or disposed of following a change in control of the Corporation this Agreement shall continue through its original term or any extended term, thus, requiring payment by the Corporation hereunder if the purchaser were to actually or constructively terminate you during such term). 2. Change in Control. 2.1 No benefits shall be payable hereunder unless there shall have been a change in control of the Corporation, as defined below. For purposes of this Agreement, a "change in control of the Corporation" shall be deemed to have occurred if (A) any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Securities Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Act), directly or indirectly, of more than 20% of the then outstanding voting stock of the Corporation; or (B) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board (and any new director whose election by the Board or whose nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority thereof; or (C) the stockholders of the Corporation approve a merger or consolidation Page Three of the Corporation with any other corporation, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 65% of the combined voting power of the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. 2.2 For purposes of this Agreement a "potential change in control of the Corporation" shall be deemed to have occurred if (A) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Corporation; (B) any person (including the Corporation) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Corporation; or (C) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Corporation has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Corporation, you will remain in the employ of the Corporation's family of companies until the earliest of (A) a date which is six (6) months after the occurrence of such potential change in control of the Corporation, (B) the termination by you of your employment by reason of Disability or Retirement as defined in Section 3.1, (C) the occurrence of a change in control of the Corporation, or (D) the expiration of the term of this Agreement. 3. Termination Following Change in Control. If any of the events described in Section 2.1 hereof constituting a change in control of the Corporation shall have occurred you shall be entitled to the benefits provided in Section 4.3 hereof upon the subsequent termination of your employment with the Corporation's family of companies during the term of this Agreement unless such termination is (A) because of your death Disability (as defined in Section 3.1) or Retirement (as defined in Section 3.1), (B) by the Corporation or subsidiary thereof, as the case may be, for Cause (as defined in Section 3.2) or (C) by you other than for Good Reason (as defined in Section 3.3). Page Four 3.1 Disability; Retirement. If, as a result of your incapacity due to physical or mental impairment, you shall have been absent from the full-time performance of your duties with the Corporation or subsidiary thereof, as the case may be, for twelve (12) consecutive months, and within thirty (30) days after written notice of termination is given (which notice may be given before the expiration of such twelve (12) month period) you shall not have returned to the full-time performance of your duties immediately preceding the onset of the physical or mental impairment, a similar position, or any appropriate position which you would otherwise be capable of performing by reason of your background and experience your employment may be terminated for "Disability". Termination by the Corporation or subsidiary thereof, as the case may be, or by you of your employment based on "Retirement" shall mean termination in accordance with the Corporation's mandatory retirement age policy for Officers or in accordance with any retirement arrangement established with your consent with respect to you provided that termination of your employment by you for "Good Reason" as hereinafter defined shall not under any circumstances constitute Retirement for purposes of this Agreement. 3.2 Cause. For purposes of this Agreement, termination by the Corporation or subsidiary thereof, as the case may be, of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with such company (other than any such failure resulting from your incapacity due to physical or mental impairment, or any such actual or anticipated failure after the issuance of a Notice of Termination by you for Good Reason, as such terms are defined in Sections 3.4 and 3.3, respectively) after a written demand for substantial performance is delivered to you by the Corporation which demand specifically identifies the manner in which the Corporation believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Corporation or any subsidiary thereof, monetarily or otherwise. For purposes of this Section, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Corporation and its subsidiaries. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in clauses (A) or (B) of the first sentence of this Section 3.2 and specifying the particulars thereof in detail. Page Five 3.3 Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence after a change in control of the Corporation, of any of the following circumstances unless, in the case of Sections 3.3.1, 3.3.4, 3.3.5, 3.3.6 or 3.3.7, such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as such terms are defined in Sections 3.5 and 3.4, respectively, given in respect thereof: 3.3.1 The assignment to you of any duties inconsistent with your status as an Officer within the Corporation's family of companies or a substantial adverse alteration in the nature or status of your responsibilities from those in effect immediately prior to the change in control of the Corporation; 3.3.2 A reduction by the Corporation or subsidiary thereof, as the case may be, in your annual base salary as in effect on the date hereof or as the same may be increased from time to time, except for across-the-board salary reductions similarly affecting all Officers within the Corporation's family of companies and all managers in equivalent positions of any person in control of the Corporation; 3.3.3 The failure by the Corporation or subsidiary thereof, as the case may be, without your consent, to pay to you any portion of your current compensation, or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Corporation, within seven (7) days of the date such compensation is due; 3.3.4 The failure by the Corporation to continue in effect after the change in control, each and every of the following SBC Communications Inc. benefit plans in which you participate immediately prior to the change in control: Short Term Incentive Plan Supplemental Life Insurance Plan Supplemental Retirement Income Plan Senior Management Deferred Compensation Plan Page Six Senior Management Deferred Compensation Plan of 1988 Senior Management Long Term Disability Plan Supplemental Health Plan 1996 Stock & Incentive Plan or any substitute plans adopted prior to the change in control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan; or the failure by the Corporation or subsidiary thereof, as the case may be, to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; 3.3.5 The failure by the Corporation to continue to provide you with benefits substantially similar to those enjoyed by you under the Corporation's pension, life insurance, medical health and accident, and disability plans in which you were participating at the time of the change in control of the Corporation; the taking of any action by the Corporation which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Corporation; or the failure by the Corporation to provide you with the number of paid vacation days to which you are entitled on the basis of your duration of service with the Corporation or subsidiary thereof, as the case may be, in accordance with such company's normal vacation policy in effect at the time of the change in control of the Corporation; 3.3.6 The failure of the Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or 3.3.7 Any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3.4 below (and if, applicable, the requirements of Section 3.2 above); for purposes of this Agreement, no such purported termination shall be effective. Page Seven Your right to terminate your employment for Good Reason shall not be affected by your incapacity due to physical or mental impairment. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. 3.4 Notice of Termination. Any purported termination of your employment by the Corporation or subsidiary thereof, as the case may be, or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. 3.5 Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), or (B) if your employment is terminated pursuant to Section 3.2 or 3.3 above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Section 3.2 above shall not be less than thirty (30) days, and in the case of a termination pursuant to Section 3.3 above shall not be less than fifteen (15) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. During the pendency of any such dispute, the Corporation or subsidiary thereof, as the case may be, will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given Page Eight (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section. Amounts paid under this Section are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 4. Compensation Upon Termination. Following a change in control of the Corporation, as defined by Section 2.1, your compensation and entitlement to benefits under this Agreement upon your inability or failure to perform your duties and/or your termination shall be as follows: 4.1 During any period that you fail to perform your full-time duties with the Corporation or subsidiary thereof, as the case may be, as a result of incapacity due to physical or mental impairment, or in the event your employment shall be terminated by the Corporation or subsidiary thereof, as the case may be, or by you for Retirement, or by reason of your death, your benefits shall be determined under the Corporation's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, and the Corporation and its subsidiaries shall have no further obligations to you under this Agreement. 4.2 If your employment shall be terminated by the Corporation or subsidiary thereof, as the case may be, for Cause or by you other than for Good Reason, Disability, death or Retirement, the Corporation or subsidiary thereof, as the case may be, shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Corporation or subsidiary thereof, as the case may be, at the time such payments are due, and the Corporation and its subsidiaries shall have no further obligations to you under this Agreement. 4.3 If your employment by the Corporation or subsidiary thereof, as the case may be, shall be terminated (A) by the Corporation or subsidiary thereof, as the case may be, other than for Cause, Retirement or Disability or (B) by you for Good Reason, then you shall be entitled to the benefits provided below: Page Nine 4.3.1 The Corporation shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Corporation or subsidiary thereof, as the case may be, in effect immediately prior to the change in control of the Corporation, at the time such payments are due. For purposes of determining the amount to which you are entitled under the Financial Counseling Program, you shall be regarded as having retired with entitlement to an immediate service pension under the Pension Benefit Plan as of your Date of Termination. 4.3.2 In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Corporation shall pay as severance pay to you a lump sum severance payment ("Severance Payment") equal to three times [or two times, as the original agreement requires] the sum of the following amounts prior to any deferral thereof: (a) your annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination given in respect thereof, (b) the amount paid to you pursuant to the Short Term Incentive Plan or as a Key Executive Officer Short Term Award in the year in which the Date of Termination occurs (or if no amount has been paid to you pursuant to such Plan in the year in which the Date of Termination occurs, the amount paid to you pursuant to such Plan in the year preceding that in which the Date of Termination occurs), and (c) the cash value of your target award of performance shares granted under the 1996 Stock and Incentive Plan (used as the basis for determining the number of performance shares), as approved by the Board of Directors, for the performance cycle under such Plan that on the Date of Termination has the most recent commencement date. 4.3.3 In the event you are required to pay excise tax under Section 4999 of the Internal Revenue Code as a result of payments under such Severance Agreement or awards under the 1996 Stock and Incentive Plan, then the Corporation shall pay you an amount equal to the excise tax and all Federal and applicable state taxes resulting from payment of the excise tax, and all resulting taxes upon taxes. Page Ten 4.3.4 The payment provided for in Section 4.3.2, above, shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amount of such payment cannot be finally determined on or before such day, the Corporation shall pay to you on such day an estimate, as determined in good faith by the Corporation of the minimum amount of such payment and shall pay the remainder of such payment (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination In the event that the amount of the estimated payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Corporation to you, payable on the fifth day after demand by the Corporation (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). 4.3.5 The Corporation also shall pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder). Such payments shall be made no later than the thirtieth day after the Date of Termination, or within thirty (30) days after your request for payment accompanied with such evidence of fees and expenses incurred as the Corporation reasonably may require. 4.3.6 You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Corporation or any subsidiary thereof, or otherwise. Page Eleven 4.3.7 If you are not otherwise entitled to such benefits at no cost to you pursuant to the terms of such plans, for a thirty-six month period from your Date of Termination or until December 31 of the year in which you reach age sixty-five (65), whichever is the shorter period, the Corporation shall arrange to provide you with life health and dental benefits (including dependent coverage) substantially similar to those that you were receiving immediately prior to your Date of Termination, including Supplemental Health Plan benefits. Such benefits shall be provided at no cost to you. Notwithstanding the foregoing, the Company shall not provide any benefit to you pursuant to this Section 4.3.7 if an equivalent benefit is actually received by you during the thirty-six month period following your Date of Termination and any such benefit actually received by you shall be reported by you to the Corporation. 4.3.8 This Agreement does not abrogate any of the usual entitlements which you have or will have, first, while a regular employee, and subsequently, after termination, and thus you shall be entitled to receive all benefits payable to you under each and every qualified plan, welfare plan and any other plan or program relating to benefits and deriving from your employment with the Corporation's family of companies, but solely in accordance with the terms and provisions thereof as in effect immediately prior to the change in control of the Corporation. 5. Successors; Binding Agreement. 5.1 The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Corporation in the same amount and on the same terms as you would be entitled to hereunder if you terminate your employment for Good Reason following a change in control of the Corporation, except that for purposes of implementing the foregoing, the date on which any succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Page Twelve 5.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee, or if there is no such designee, to your estate. 6. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto any time of any breach by the other party hereto, of or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Securities Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Corporation under Section 4 shall survive the expiration of the term of this Agreement. 8. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Page Thirteen 9. Non-Assignability. Neither you nor any other person shall have any right to commute sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate, or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, 5 expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by you or any other person, nor be transferable by operation of law in the event of your or any other person's bankruptcy or insolvency. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter sets forth our agreement on the subject matter hereof kindly sign and return to the Corporation the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, SBC Communications Inc. By:_____________________________________ Senior Vice President-Human Resources Agreed to as of the _____day of __________________1998 - ------------------------------- Officer Typed Name Officer Address: Dear Officer: You previously entered into a change-in-control/severance agreement with SBC Communications Inc. ("SBC" or the "Corporation") pursuant to resolutions to the Board of Directors of SBC, adopted on January 27, 1989 (the "Severance Agreement"). Subsequently, on March 28, 1997, the Human Resources Committee adopted the enclosed resolution to the effect that new benefit plans adopted by the Corporation would be considered replacements for certain plans described in the Severance Agreement. The Board of Directors has authorized the amendment of the Severance Agreement to make certain updating amendments described below. The Severance Agreement, as amended by this letter, would constitute the entire agreement between you and the Corporation. The changes to the Severance Agreement are: 1. Any references to Southwestern Bell Corporation would now be to SBC Communications Inc. Any references to the Corporation as your sole employer [certain agreements only], would now refer to the Corporation or one of its subsidiaries as your employer. 2. The reference in Section 3.3.4 to the Southwestern Bell Corporation Senior Management Long Term Incentive Plan would be replaced by the 1996 Stock and Incentive Plan. The references in the Severance Agreement to: (a) Southwestern Bell Corporation Senior Management Supplemental Retirement Income Plan, (b) Southwestern Bell Corporation Senior Management Long Term Disability Plan, (c) Southwestern Bell Corporation Senior Management Deferred Compensation Plan, (d) Southwestern Bell Corporation Senior Management Deferred Compensation Plan of 1988, (e) Southwestern Bell Corporation Senior Management Executive Health Plan, (f) Southwestern Bell Corporation Senior Management Financial Counseling Program, and (g) Southwestern Bell Corporation Management Pension Plan shall refer to the following plans of SBC, respectively: (a) Supplemental Retirement Income Plan, (b) Senior Management Long Term Disability Plan, (c) Senior Management Deferred Compensation Plan, (d) Senior Management Deferred Compensation Plan of 1988, (e) Supplemental Health Plan, (f) Financial Counseling Program, and (g) Pension Benefit Plan. 3. The last provision of Section 1, referring to the Severance Agreement not extending beyond the last day of the month you attain age 65, is deleted. 4. Section 4.3.2 is amended in its entirety to read as follows: In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Corporation shall pay as severance pay to you a lump sum severance payment ("Severance Payment") equal to three times [or two times, as the original agreement requires] the sum of the following amounts prior to any deferral thereof: (a) your annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination given in respect thereof, (b) the amount paid to you pursuant to the Short Term Incentive Plan or as a Key Executive Officer Short Term Award in the year in which the Date of Termination occurs (or if no amount has been paid to you pursuant to such Plan in the year in which the Date of Termination occurs, the amount paid to you pursuant to such Plan in the year preceding that in which the Date of Termination occurs), and (c) the cash value of your target award of performance shares granted under the 1996 Stock and Incentive Plan (used as the basis for determining the number of performance shares), as approved by the Board of Directors, for the performance cycle under such Plan that on the Date of Termination has the most recent commencement date. 5. The first sentence of Section 3.3 [only for those agreements that originally had a reference to a ninety (90) day period for the officer to determine in "good faith" if he could effectively discharge his duties] shall be amended to read as follows: For purposes of this Agreement, "Good Reason" shall mean, during the ninety (90) day period following a change-in-control of the Corporation (unless the Change-in-Control is the result of the stockholders of the Corporation approving a merger or consolidation of the Corporation under Section 2.1 (C), in which case the ninety (90) day period will run from the closing of such merger or consolidation), a good faith determination by you that, as a result of such change-in-control, you are not able to discharge your duties effectively. 6. The reference in Section 2.1 (C) to "at least 80% of the combined voting power" shall be change to "at least 65% of the combined voting power." 7. Section 4.3.3 is amended in its entirety to read as follows: In the event you are required to pay excise tax under Section 4999 of the Internal Revenue Code as a result of payments under such Severance Agreement or awards under the 1996 Stock and Incentive Plan, then the Corporation shall pay you an amount equal to the excise tax and all Federal and applicable state taxes resulting from payment of the excise tax, and all resulting taxes upon taxes. If you elect to agree to these amendments, please indicate your agreement by executing the enclosed copy of this letter and returning it to me. Upon my receipt of your executed copy of this amendment, it will become effective. Sincerely, Accepted and Agreed to: -------------------------- --------------------- Name Date Proposed Resolution Directors, November 21, 1997 Whereas, on January 27, 1989, the Board of Directors of SBC Communications Inc. ("SBC" or "Corporation") approved change-in-control severance agreements (the "Severance Agreements") to be offered to certain employees of the Corporation and its subsidiaries (an "Employee"); Whereas, the Severance Agreements provide that upon termination of employment following a change-in-control, SBC will pay the Employee certain amounts based, among other things, upon the Corporation's Short Term Incentive Plan ("STIP") and the Corporation's Long Term Incentive Plan ("LTIP"); Whereas, on March 28, 1997, the Human Resources Committee passed a resolution that the Corporation would interpret the Severance Agreements so that performance shares granted under the 1996 Stock and Incentive Plan ("1996 SIP") would replace LTIP awards and that, for certain persons, performance units granted under the 1996 SIP would replace STIP awards; and Whereas, the Board of Directors of the Corporation has reviewed proposed updating amendments to the Change-in-Control Agreements and finds that with such amendments the Severance Agreements continue to represent reasonable severance compensation to the Employees in the event of termination following a change-in- control; Therefore, be it: RESOLVED, that the Chairman and Chief Executive Officer of the Corporation is authorized to enter into agreements with officers of the Corporation and its subsidiaries for the amendment of the Severance Agreements and to enter into new agreements with such other officers, as the Chairman and Chief Executive Officer chooses in his sole discretion, on substantially the terms presented to this meeting, including the right to designate the level of benefits pertaining to each officer up to the maximum authorized and with such modifications of a non-material nature as he may deem appropriate or convenient; such modifications and new Severance Agreements may be executed by the Chairman and Chief Executive Officer or by the Senior Vice President-Human Resources; and RESOLVED FURTHER, that the appropriate officers of the Corporation are authorized, at their discretion, to do or cause to be done any and all such acts and things, and to execute and deliver any and all documents and papers that they may deem necessary, proper or advisable to carry out the foregoing resolution. EX-10 12 STOCK SAVINGS PLAN Exhibit 10o SBC COMMUNICATIONS INC. STOCK SAVINGS PLAN Effective: January 1, 1991 As amended through November 21, 1997 INDEX Section 1 - Statement of Purpose 1 Section 2 - Definitions 1 Section 3 - Administration of the Plan 5 Section 4 - Participation 5 4.1 Election to Commence a Savings Unit 5 4.2 Termination of Election 6 Section 5 - Pre-Tax Contributions/After-Tax Contributions/Company Match 6 5.1 After-Tax and/or Pre-Tax Account(s) 6 5.2 Company Matching Account 6 5.3 Dividends 7 5.4 Vesting of Matching Account 7 5.5 Statement of Accounts 7 Section 6 - Retirement Alternative 7 6.1 Retirement Distribution 7 6.2 Termination Distribution 8 6.2(a) Termination of Employment Before Retirement 8 6.2(b) Termination of a Savings Unit 9 6.2(c) Loss of Eligibility 9 6.3 Disability 9 6.4 Survivor Distribution 10 Section 7 - Specified Date Alternative 11 7.1 Specified Date Distribution 11 7.2 Termination Distribution 11 7.2(a) Termination of Employment Prior to Specified Date 11 7.2(b) Termination of a Savings Unit 12 7.2(c) Loss of Eligibility 12 7.3 Disability 12 7.4 Survivor Distribution 12 Section 8 - Beneficiary Designation 12 Section 9 - Options 13 9.1 Grants 13 9.2 Term of Options 13 9.3 Exercise Price 13 9.4 Issuance of Options 14 9.5 Exercise and Payment of Options 15 9.6 Restrictions on Exercise and Transfer 16 9.7 Termination by Death 16 9.8 Termination by Disability 16 9.9 Retirement or Other Termination of Employment 17 Section 10 - Discontinuation, Termination, Amendment 17 10.1 Company's Right to Discontinue Offering Savings Units 17 10.2 Company's Right to Terminate Plan 17 10.3 Amendment 17 Section 11 - Miscellaneous 18 11.1 Additional Benefit 18 11.2 Small Distribution 18 11.3 Emergency Distribution 18 11.4 Commencement of Payments 19 11.5 Tax Withholding 19 11.6 Reserved 19 11.7 Transfer to a RWAC 19 11.8 Leave of Absence 19 11.9 Ineligible Participant 20 11.10 Unsecured General Creditor 20 11.11 Offset 20 11.12 Non-Assignability 21 11.13 Employment Not Guaranteed 21 11.14 Gender, Singular and Plural 21 11.15 Captions 21 11.16 Applicable Law 21 11.17 Validity 21 11.18 Notice 21 11.19 Successors and Assigns 21 11.20 Limitations and Adjustments 22 11.21 Distribution Alternative 22 Section 12 - Participation in Other Plan(s) 23 12.1 Participation in Predecessor Plans 23 12.2 Pacific Telesis Group 1996 Executive Deferred Compensation Plan or the Pacific Telesis Group Non-Qualified Savings Plan 23 STOCK SAVINGS PLAN Section 1 - Statement of Purpose The purpose of the Stock Savings Plan ("Plan") is to increase employee stock ownership and to provide retirement and short-term savings distributions to a select group of management employees consisting of Eligible Employees of SBC Communications Inc. (the "Company") and its Subsidiaries ("Participating Companies"). Section 2 - Definitions For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: After-Tax Account. "After-Tax Account" means the account maintained on an after-tax basis on the books of account of the Company for each Participant for each Savings Unit to which After-Tax Amounts are credited. After-Tax Accounts are available only for Savings Units commenced prior to January 1, 1995. After-Tax Amount. "After-Tax Amount" means contributions made on an After-Tax basis with respect to a Savings Unit commenced prior to January 1, 1995 under this Plan. Agreement. "Agreement" means the written agreement entitled "Stock Savings Plan Enrollment Form" and/or, effective on or after January 1, 1995, the written agreement entitled "Short Term Contribution Form" that shall be entered into by the Company and a Participant to carry out the Plan with respect to such Participant. The Company may adopt any form for such use or modify any such form. Base Salary. "Base Salary" means, as determined by the Company, the Participant's annual base salary (excluding zone allowances or any other geographical differential), commissions and Team Awards before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of Employer, including but not limited to a plan that includes a qualified cash or deferred arrangement under Section 401(k) of the Internal Revenue Code ("Code"). Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Section 8 of this Plan. Chairman. "Chairman" means the Chairman of the Board of SBC Communications Inc. Company Match Rate Expressed as a Percent. "Company Match Rate Expressed as a Percent" means eighty percent (80%), or such higher percentage as may be determined by the HRC, in its sole discretion, at any time, or such lower percentage as may be determined by the HRC, in its sole discretion, and announced to affected Eligible Employees prior to the Unit Start Date with respect to a Savings Unit. Disability. "Disability" means inability to work due to being physically disabled. Eligible Employee. "Eligible Employee" means an Employee of Employer who (a) is in active service, (b) is, as determined by the Company, a member of Employer's "select group of management or highly compensated employees" within the meaning of the Employment Retirement Income Security Act of 1974, as amended, and regulations thereunder ("ERISA"), (c) (i) has an annual base salary of $75,000 or more (which may be increased or decreased from time to time for certain groups of, or all, Employees by the HRC or the Chairman) and satisfies any employment status required by the HRC or the Chairman or (ii) has an employment status which has been approved by the Chairman to be eligible to participate in this Plan, and (d) continuously maintains the employment status upon which eligibility to participate in this Plan was based; provided, however, the HRC or the Chairman may, from time to time, exclude any Employee or group of Employees from being deemed an "Eligible Employee" under this Plan. In addition, any Employee that holds options to acquire shares of AirTouch Communications, Inc., under the Pacific Telesis Group Stock Option and Stock Appreciation Rights Plan or any other stock option plan of Employer as of December 16 of a particular year shall not be eligible to participate in this Plan for the following calendar year, and any previously executed Agreement shall be voided. Employee. "Employee" means any person employed by Employer on a regular full-time salaried basis, excluding Employees hired for a fixed maximum term and excluding Employees who are neither citizens nor permanent residents of the United States, all as determined by the Company. Employer. "Employer" means SBC Communications Inc. or any of its Subsidiaries. Fair Market Value or FMV. "Fair Market Value" or "FMV" means, with respect to Stock, the closing price of the Stock on the relevant date as reported in the consolidated reporting system, or if on such date the Stock is not traded on the New York Stock Exchange ("NYSE"), then the closing price on the immediately preceding date such Stock is traded. HRC. "HRC" means the Human Resources Committee of the Board of Directors of SBC. Options. "Options" shall mean the options to purchase Stock which shall be issued to a Participant pursuant to Section 9. Participant. "Participant" means an Employee or former Employee participating in the Plan. Plan Year. "Plan Year" means the calendar year. Pre-Tax Account. "Pre-Tax Account" means the account maintained on a pre-tax basis on the books of account of the Company for each Participant for each Savings Unit to which Pre-Tax Amounts are credited. Pre-Tax Amount. "Pre-Tax Amount" means the contributions made by a Participant on a pre-tax basis with respect to a Savings Unit under this Plan. Retirement. "Retirement" means the termination of a Participant's employment with Employer, for reasons other than death, on or after the earlier of the following dates: (1) the date Participant is eligible to retire with an immediate pension pursuant to the SBC Supplemental Retirement Income Plan ("SRIP"); or (2) the date the Participant has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 years or more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to a Participant who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program upon termination of Employment, the term "Retirement" shall include such Participant's termination of employment. Retirement Alternative. "Retirement Alternative" means, with respect to any Savings Unit, the distributions described in Section 6 that the Plan provides based upon a selection of such alternative. Retirement Distribution. "Retirement Distribution" means the distribution described in Section 6.1. Rotational Work Assignment Company. "RWAC" shall mean any entity with which SBC Communications Inc. or any of its Subsidiaries may have an agreement to provide an employee for a rotational work assignment. Savings Unit. "Savings Unit" means the Participant's Pre-Tax Amount and/or After-Tax Amount, and associated Company matching contributions, which provide stated distributions pursuant to Section 6 or Section 7 of this Plan in accordance with the Participant's Agreement for such Savings Unit. Shares. "Shares" means an accounting entry representing a number of equivalent shares of Stock Short Term Incentive Award. An award paid under the Short Term Incentive Plan or an award under a similar plan intended by the Committee to be in lieu of an award under such Short Term Incentive Plan, including (a) the Key Executive Officer Short Term Award paid under the 1996 Stock and Incentive Plan and (b) payments made in 1998 under the Pacific Telesis Group Short Term Incentive Plan ("PTGSTIP") to persons identified as "Officer level employees" by the HRC for purposes of this Plan. Specified Date. "Specified Date" means, with respect to any Savings Unit for which the Participant elects the Specified Date Alternative, the fixed date specified in the Agreement on which the Specified Date Distribution will commence. Specified Date Alternative. "Specified Date Alternative" means, with respect to any Savings Unit, the distributions described in Section 7 that the Plan provides based upon a selection of such alternative. Specified Date Distribution. "Specified Date Distribution" means the distribution described in Section 7.1. Stock. "Stock" means the common stock of SBC Communications Inc. Subsidiary. A "Subsidiary" of the Company is any corporation, partnership, venture or other entity in which the Company has at least a 50% ownership interest. The HRC may at its sole discretion designate any other corporation, partnership, venture or other entity a Subsidiary for the purpose of participating in this Plan. Team Award. The annual award identified as a "Team Award" by the Company (or any comparable award identified by the Company as a replacement therefor), excluding any individual award made in connection therewith. Payments under the PTGSTIP made during 1998 to persons who are not identified as "Officer level employees" by the HRC for purposes of this Plan shall be deemed Team Awards under this Plan. Unit Period. "Unit Period" means the calendar year with respect to which the Participant elects to participate in the Plan on a pre-tax basis and/or an after-tax basis. The Unit Period for a Savings Unit will commence on the Unit Start Date and end upon the earliest to occur of the following: (i) the last day of the calendar year which includes the Unit Start Date, (ii) when the Participant terminates employment or ceases to be an Eligible Employee, or (iii) upon termination of the Savings Unit. Unit Start Date. "Unit Start Date" means the date for commencement of a given Savings Unit. The Unit Start Date will be January 1, and for a Savings Unit comprised of all or a portion of a Participant's Short Term Incentive Award, the Unit Start Date shall be the day the Award would otherwise have been paid. Section 3 - Administration of the Plan The HRC shall be the sole administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions in accordance with its terms. The HRC shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the HRC shall be final and binding. Section 4 - Participation 4.1 Election to Commence a Savings Unit. Any Eligible Employee may elect to commence a Savings Unit on a pre-tax basis by filing a completed Agreement with the Company prior to the Unit Start Date. Pursuant to said Agreement, the Eligible Employee shall elect the percentage of Base Salary that shall comprise Participant's Pre-Tax Amount. Such percentage shall remain in effect for the duration of the Unit Period even if Base Salary should change. Such Agreement shall continue to be regarded as, and shall apply as, the Eligible Employee's election to commence each successive Savings Unit until the Company is advised in writing in accordance with the aforesaid time requirements by the Eligible Employee to the contrary. In the Agreement, the Participant shall also elect either the Retirement Alternative or the Specified Date Alternative and the timing of distribution of Stock. The Participant's percentage of Base Salary applicable to a Savings Unit shall be a whole percentage and must be at least six percent (6%) and not more than thirty percent (30%). A Participant shall be permitted to contribute all or a portion of his Short Term Incentive Award as follows. A Participant's election to contribute all or a portion of his Short Term Incentive Award which may be paid to a Participant by an Employer, shall be filed with the Company (on a form to be provided by the Company for such purpose) prior to the beginning of the calendar year during which such Award is earned (for Savings Units with Unit Start Date of January 1, 1998, or later, and for PTGSTIP payments that constitute Short Term Incentive Awards, the election must be filed prior to the beginning of the calendar year during which such Award is paid), or such earlier time as may be established by the Chairman. The contribution shall be deemed to have taken place on the day the Award would otherwise have been paid. In the Agreement relating to the Award, the Participant shall also elect either the Retirement Alternative or the Specified Date Alternative and the timing of distribution of Stock. This election is independent of the election for distribution of contributions associated with deferrals of Base Salary. Such contribution of all or a portion of Participant's Short Term Incentive Award shall comprise a separate Savings Unit. Notwithstanding the foregoing, Short Term Incentive Awards or any portion thereof contributed to the Plan prior to January 1, 1995, shall be credited into a 1994 or prior Savings Unit(s) as specified by the Participant. 4.2 Termination of Election. A Participant's election to participate in the Plan for the duration of the Unit Period is irrevocable upon the filing of his Agreement with the Company; provided, however, such election may be terminated with respect to Base Salary not yet paid by mutual agreement in writing between the Participant and the Company. Such termination if approved shall be effective beginning the first day of the month following the execution of such mutual agreement. Section 5 - Pre-Tax Contributions/After-Tax Contributions/Company Match 5.1 After-Tax and/or Pre-Tax Account(s). The Company shall establish and maintain a separate After-Tax Account (for contributions pursuant to Savings Units commenced prior to January 1, 1995 only) and/or Pre-Tax Account for each Participant for each Savings Unit. On the first business day of each month, the Company shall credit each Participant's Pre-Tax Account with the number of Shares found by dividing the Participant's Pre-Tax Amount for the previous month by the FMV on the last day of such previous month. Annual base salary shall be deemed contributed when earned; all other amounts shall be deemed contributed when paid. Shares credited to Participant's Pre-Tax Account and/or After-Tax Account are 100% vested at all times. Such Pre-Tax Account and/or After-Tax Account, as applicable, shall be reduced by the number of Shares corresponding to the number of shares of Stock distributed by the Company to the Participant or the Participant's Beneficiary with respect to such Savings Unit pursuant to this Plan. 5.2 Company Matching Account. The Company shall also establish and maintain a separate Matching Account for each Participant. The Matching Account will hold the Company's matching contribution to the Plan. Immediately following the computation of the Shares to be added to each Participant's Pre-Tax Account each month, the Company shall credit each Participant's Matching Account with the number of Shares found by taking the Company Match Rate Expressed as a Percent times the Participant's Pre-Tax Amount for the previous month, and dividing the resulting figure by the FMV of the Stock on the last day of such previous month; provided, however, if the Participant is concurrently participating in this Plan and (a) the match eligible (basic) portion of the SBC Savings Plan or (b) the match eligible portion of any other qualified plan of Employer, the matching contribution shall be credited, pursuant to this Plan, with respect to no more than six percent (6%) of the Participant's monthly Base Salary less the basic (match eligible) election percentage in such plan; and provided further, however, Company matching contributions shall be paid, pursuant to this Plan and all plans of Employer combined, with respect to no more than six percent (6%) of Participant's monthly Base Salary. Company Match shall only be paid on Base Salary. 5.3 Dividends. Additional Shares shall be credited to each Participant's Pre-Tax Account, After-Tax Account, and Matching Account, respectively, for dividends on Stock, on the basis of the number of Shares credited to each such Account on the record date for such dividend. The number of additional Shares to be credited to each Account for any dividend payment date shall be determined by dividing the total dividends which would have otherwise been payable on the number of Shares recorded in each Account, by the FMV on the last day of the month containing the dividend record date. The additional Shares shall be credited to each Account, as appropriate, on the last day of the month containing the dividend record date. 5.4 Vesting of Matching Account. A Participant's interest in his Matching Account shall vest at such time as Participant shall have five (5) years of service as reflected on the records of Employer; provided, however, the Matching Account of any Participant who was employed by Employer on December 31, 1988 shall be 100% vested at all times. Shares in the Matching Account relating to a Savings Unit shall not be available for distribution to the Participant until vested and: (i) for ten (10) years after the Unit Period for such Savings Unit has ended and until the Participant is at least fifty-five (55) years of age, or (ii) until Participant's Retirement or other termination of employment (including death). Upon termination of employment, all unvested Shares shall be forfeited. 5.5 Statement of Accounts. Each Participant will receive annual statements in such form as the Company deems desirable setting forth the balance of Shares standing to the credit of each of the Participant's Pre-Tax, After-Tax and Matching Accounts. Section 6 - Retirement Alternative Section 6 shall apply to the portions of all Savings Units for which the Retirement Alternative is elected. (Section 7 shall have no application to such portions of such Savings Units.) The distributions specified in this Section 6 shall be provided under the Retirement Alternative. 6.1 Retirement Distribution. Upon Retirement or, effective for Savings Units commenced on or after January 1, 1995, the calendar year following Retirement if so elected by the Participant, with respect to a Savings Unit, the Company shall distribute to the Participant each year for up to fifteen (15) years, the number of years to be selected by Participant in his Agreement, beginning on the first day of the month next following the date of Retirement or during February of the year following Retirement if the calendar year following Retirement is elected for commencing distribution of Savings Units commenced on or after January 1, 1995, and annually on such date thereafter, from Participant's Pre-Tax Account, After-Tax Account, and Matching Account, shares of Stock corresponding to the number of Shares in each such Account on such date divided by the number of distributions to be made immediately prior to each such distribution. During the payout period, each such Account shall be credited with dividends in accordance with Section 5.3. The Participant shall elect the number of years of distribution of a Retirement Distribution no later than the end of the calendar year immediately preceding the first distribution. If a Participant's Agreement fails to show an election as to the number of years of distribution of a Retirement Distribution, and an election is not made no later than the end of the calendar year immediately preceding the first distribution, such Participant will receive distribution in two annual installments beginning on the first of the month next following the date of Retirement or during February of the year following Retirement, whichever commencement date was previously elected by the Participant. In the event that a final determination shall be made by the Internal Revenue Service or any court of competent jurisdiction that, by reason of Retirement, a Participant has recognized gross income for Federal income tax purposes in excess of the Retirement Distribution installment actually distributed by the Company to which such gross income is attributable, the Company shall make a lump sum distribution to the Participant of shares of Stock corresponding to the remaining Shares of his Pre-Tax, After-Tax and Matching Accounts for any affected Savings Units. If a distribution is made to a Participant pursuant to this paragraph for any Savings Unit, no other distributions shall thereafter be made under this Plan with respect to such Savings Unit. Notwithstanding any election made by the Participant, the Company will distribute the Participant's Retirement Distribution in the form of a lump sum distribution if the FMV of his Pre-Tax plus After-Tax plus Matching Accounts for a Savings Unit is less than $10,000 when distribution of the Retirement Distribution for such Savings Unit would otherwise commence. 6.2 Termination Distribution. 6.2(a) Termination of Employment Before Retirement. Upon any termination of employment of the Participant for reasons other than death or Disability or Retirement, the Company shall distribute to the Participant, with respect to a Savings Unit, in a lump sum, shares of Stock corresponding to the vested portion of the Shares standing credited to his Pre-Tax, After-Tax and Matching Accounts for such Savings Unit determined as of the date of such termination of service ("Termination Distribution"). 6.2(b) Termination of a Savings Unit. A Participant shall terminate a Savings Unit if he terminates his election to participate in the Plan with respect to a Savings Unit pursuant to Section 4.2. Notwithstanding any other provision of the Plan, upon such discontinuance, the Participant shall immediately cease to be eligible for any distribution other than his Termination Distribution with respect to that Savings Unit (which shall be distributed upon his severance of employment) except as provided under Section 11.1. The Participant shall continue to be credited with dividends on the Shares standing credited to his Pre-Tax, After-Tax and Matching Accounts as provided under Section 5.3 and to vest in Shares as provided under Section 5.4 while he remains in employment with the Employer until payment of his Termination Distribution. However, no further Participant pre-tax or after-tax or Company contributions to this Plan shall be made pursuant to Sections 5.1 or 5.2 with respect to a Savings Unit after a Participant terminates such Savings Unit. 6.2(c) Loss of Eligibility. In the event that the Participant ceases to be an Eligible Employee by reason of a change to an employment status which is not eligible to participate in this Plan, the Participant shall nevertheless continue participation in this Plan while he remains in employment with Employer; however, no further Participant pre-tax contributions or after-tax contributions, or Company matching contributions shall be made to this Plan pursuant to Sections 5.1 or 5.2 subsequent to the date of such loss of eligibility. 6.3 Disability. In the event that a Participant suffers a Disability, pre-tax contributions and/or after-tax contributions and Company matching contributions that otherwise would have been credited to Participant's Pre-Tax Account, After-Tax and Matching Accounts, as applicable, in accordance with Sections 5.1 and 5.2 will continue to be credited to such Accounts out of his disability payments (as used in this Plan, disability payments and disability benefits shall refer to only to Employer payments) at the same time and in the same amounts as they would have been credited if the Participant had not suffered a Disability for as long as he is eligible to receive monthly disability benefits equal to 100 percent of his monthly base salary at the time of his Disability. At such time as the Participant is not eligible to receive monthly disability benefits equal to 100 percent of his monthly Base Salary at the time of his Disability, Participant pre-tax contributions and/or after-tax contributions and Company matching contributions that otherwise would have been credited to the Accounts of the Participant in accordance with Section 5.1 and 5.2 shall cease. If the Participant recovers from his Disability and returns within sixty (60) days thereafter to employment with Employer in an employment status which would make him eligible to participate in this Plan and prior to the end of the original Unit Period, the Participant shall continue or resume making pre-tax contributions and/or after-tax contributions, as the case may be, in accordance with Section 5.1 and the Company shall continue or resume making matching contributions, as the case may be, in accordance with Section 5.2 until the end of the original Unit Period. If the Participant recovers from his Disability, the Participant shall be treated as terminating service with Employer on the date of his recovery, unless within sixty (60) days thereafter he returns to employment with Employer in an employment status which makes him eligible to participate in this Plan. If a Participant's Disability terminates by reason of his death, the rights of his Beneficiary shall be determined pursuant to Section 6.4 as if the Participant had not been disabled but rather had been in service on the date of his death and died on such date. If a Participant's Disability terminates by reason of attainment of age 65, the Participant shall upon the attainment of age 65 be entitled to a Retirement Distribution determined pursuant to Section 6.1. If a Participant's Disability terminates by reason of Retirement, the Participant shall be treated as having a Retirement on the date elected by the Participant and shall be entitled to a Retirement Distribution determined pursuant to Section 6.1. 6.4 Survivor Distribution. 6.4(a) If a Participant dies while in service with Employer (or while suffering from a Disability) prior to eligibility for Retirement with respect to a Savings Unit, upon the Participant's death the Company will distribute to the Participant's Beneficiary with respect to such Savings Unit, shares of Stock corresponding to all of the Shares in Participant's Pre-Tax, After-Tax and Matching Accounts. Distribution shall occur in the month following the date of death. 6.4(b) If a Participant dies while in service after eligibility for Retirement with respect to a Savings Unit, but prior to commencement of distribution of a Retirement Distribution with respect to such Savings Unit, the Company will distribute to the Participant's Beneficiary the Stock that such Participant's Beneficiary would have received with respect to such Savings Unit had the Participant retired and commenced to receive a Retirement Distribution on the day prior to such Participant's death. Such distributions shall be made in accordance with the number of installments which the Participant had elected for distribution of his Retirement Distribution. 6.4(c) If a Participant dies after Retirement but before commencement of distribution of a Retirement Distribution with respect to a Savings Unit, the Company will distribute to the Participant's Beneficiary the installments that Participant would have received with respect to such Savings Unit had the Participant survived. Payments will commence effective with the Participant's death. Such distributions shall be made in accordance with the method of distribution which the Participant had elected for distribution of his Retirement Distribution. 6.4(d) If a Participant dies after the commencement of payment of a Retirement Distribution with respect to a Savings Unit, the Company will distribute to the Participant's Beneficiary the remaining installments that would have been distributed to the Participant had the Participant survived. Section 7 - Specified Date Alternative Section 7 shall apply to the portions of all Savings Units for which the Specified Date Alternative is elected. (Section 6 shall have no application to such portions of such Savings Units.) The distributions specified in this Section 7 shall be provided under the Specified Date Alternative. 7.1 Specified Date Distribution. If a Participant elects the Specified Date Alternative with respect to a Savings Unit, the Company shall distribute to the Participant each year for up to four (4) years, the number of years to be selected by Participant in his Agreement, beginning on the first day of the month selected in his Agreement for commencement of distributions, and annually on such date thereafter, from Participant's Pre-Tax Account, After-Tax Account, and Matching Account (to the extent available for distribution), shares of Stock corresponding to the number of Shares in each such Account on such date divided by the number of distributions to be made immediately prior to each such distribution. During the payout period, each such Account shall be credited with dividends in accordance with Section 5.3. Shares of Stock corresponding to Shares in the Matching Account which are not immediately available for distribution shall be distributed to the Participant in a lump sum distribution as soon as practicable after such Shares become available for distribution. While such Shares remain in the Matching Account, such Account shall be credited with dividends on such Shares in accordance with Section 5.3. A Participant may elect, as the Specified Date for a Savings Unit, the first day of any month after the January following the calendar year during which the Savings Unit commences. If the Participant elects an annual distribution, the Savings Unit shall be paid out in February following the end of the Unit Period or as soon thereafter as is practicable. Notwithstanding any election made by the Participant, the Company will distribute the Participant's Specified Date Distribution in the form of a lump sum distribution if the FMV of his Pre-Tax plus After-Tax plus Matching Accounts for a Savings Unit is less than $10,000 when distribution of a Specified Date Distribution for such Savings Unit would otherwise commence. 7.2 Termination Distribution. 7.2(a) Termination of Employment Prior to Specified Date. Upon any termination of employment of the Participant for reasons other than death or Disability or Retirement before the Specified Date selected for a Savings Unit, the Company shall distribute to the Participant, with respect to such Savings Unit, in a lump sum, shares of Stock corresponding to the vested portion of the Shares standing credited to his Pre-Tax, After-Tax and Matching Accounts for such Savings Unit determined as of the date of such termination of service ("Termination Distribution"). 7.2(b) Termination of a Savings Unit. The provisions of Section 6.2(b) shall apply with respect to the termination of any Savings Unit for which the Specified Date Alternative is selected. 7.2(c) Loss of Eligibility. The provisions of Section 6.2(c) shall apply with respect to the loss of eligibility under any Savings Unit for which the Specified Date Alternative is selected. 7.3 Disability. In the event that a Participant suffers a Disability, the provisions of Section 6.3 shall apply except that the provisions of the following paragraphs shall govern. If a Participant's Disability terminates by reason of his death prior to the Specified Date, the rights of his Beneficiary shall be determined pursuant to Section 7.4 as if the Participant had not been disabled but rather had been in service on the date of his death and died on such date. If a Participant suffering from a Disability attains the Specified Date for a Savings Unit, the Participant shall be entitled to the Specified Date Distribution determined pursuant to Section 7.1. 7.4 Survivor Distribution. 7.4(a) If a Participant dies prior to the commencement of distribution of the Specified Date Distribution with respect to a Savings Unit, upon the Participant's death the Company will distribute to the Participant's Beneficiary with respect to such Savings Unit, shares of Stock corresponding to all of the Shares in Participant's Pre-Tax, After-Tax and Matching Accounts. Distribution shall occur in the month following the date of death. 7.4(b) If a Participant dies after the commencement of payment of an Specified Date Distribution with respect to a Savings Unit, the Company will distribute to the Participant's Beneficiary the remaining installments of any such distribution that would have been distributed to the Participant had the Participant survived. Section 8 - Beneficiary Designation Each Participant shall have the right, at any time, to designate pursuant to the SBC Rules for Employee Beneficiary Designations as may hereafter be amended from time to time ("Rules"), which Rules shall apply hereunder and are incorporated herein by this Reference, any person or persons as his Beneficiary or Beneficiaries (both primary as well as contingent) to whom distributions of Stock under this Plan shall be made in the event of his death prior to complete distribution to Participant of the distributions due him under the Plan. Each Beneficiary designation shall become effective only when filed in writing with the Company during the Participant's lifetime on a form prescribed by the Company with written acknowledgment of receipt. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of Beneficiary or Beneficiaries other than the spouse. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's distributions, then the Company shall direct the distribution of such distributions according to the Rules. Section 9 - Options 9.1 Grants. The HRC shall determine at its discretion whether the Options issued pursuant to this Plan shall be non-qualified stock Options or incentive stock Options within the meaning of Section 422 of the Code. Any Options issued hereunder shall be non-qualified Options unless the HRC specifies prior to the Unit Start Date that they shall be incentive stock Options. Notwithstanding any other provision of the Plan, any incentive stock Options issued under this Plan shall be issued and exercised in accordance with Section 422 of the Code. The Options may be issued in definitive form or recorded on the books and records of the Company for the account of the Participant, at the discretion of the Company. If the Company elects not to issue the Options in definitive form, they shall be deemed issued, and the Participants shall have all rights incident thereto as if they were issued on the dates provided herein, without further action on the part of the Company or the Participant. In addition to the terms herein, all Options shall be subject to such additional provisions and limitations as provided in any Administrative Procedures adopted by the HRC prior to the issuance of such Options. The number of Options issued to a Participant shall be reflected on the Participant's annual statement of account. 9.2 Term of Options. The Options may only be exercised: (a) after the earlier of (i) the expiration of one year from date of issue or (ii) the Participant's termination of employment (only for Options issued on or after August 1, 1998), and (b) no later than the tenth anniversary of their issue, and shall be subject to earlier termination as provided herein. 9.3 Exercise Price. The price per share of Stock purchasable under an Option shall be the Fair Market Value of the Stock on the date of issuance of the Options. 9.4 Issuance of Options. February 1 and August 1 of each year shall each be an Option issuance date, unless Stock is not traded on the NYSE on such day in which event the immediate following day in which Stock is so traded shall be the Option issuance date. On each Option issuance date, each Participant shall receive two Options, or such higher number as may be determined by the HRC, in its sole discretion, at any time, or such lower number as may be determined by the HRC, in its sole discretion, and announced to Participants prior to the Unit Start Date with respect to a Savings Unit, for each Share credited to the Participant's Pre-Tax Account during the preceding six month periods. The number of Options to be received shall be determined by multiplying the number of Shares by the number of Options to be received for each Share and rounding up to the next whole number; provided, however, that no more than 200,000 Options shall be issued to any individual during the calendar year. No Share may be counted more than once for the issuance of Options and Options shall only be issued for Shares credited to a Savings Unit with respect to its Unit Period. In addition to the foregoing, the HRC may, at any time and in any manner, limit the number of Options which may be acquired as a result of the Short Term Incentive Award being contributed to the Plan. Further, except as otherwise provided by the HRC, in determining the number of Options to be issued to a Participant with respect to a Participant's contribution of a Short Term Incentive Award to the Plan and subsequent crediting of Shares, Options may be issued only with respect to an amount which does not exceed the target amount of such award (or such other portion of the award as may be determined by the HRC). Accordingly, the following rules shall apply: Options To Be Issued With Respect To A Short Term Incentive Award Contributed To The Plan. A Participant shall be permitted to contribute his Short Term Incentive Award, although paid after Retirement, into the Stock Savings Plan; and, subject to application of the rule in the following sub paragraph, Options may be issued thereon and on the dividends that would accumulate thereon applicable to the calendar year when the Short Term Award was placed into the Plan. Participants Who Retire, Terminate Employment Or Terminate A Savings Unit. Options are calculated on August 1 and February 1, in each case for the preceding six month periods based on the Shares posted to the Participant's accounts. The August 1 options are for January through June contributions plus 1st quarter and 2nd quarter dividend equivalents. The February 1 options are for July through December contributions plus the 3rd quarter and 4th quarter dividend equivalents. If a Participant retires, terminates employment or terminates a Savings Unit during an ongoing savings period, since the Unit Period ends upon Retirement, termination, etc., a dividend equivalent shall be treated as being paid with respect to a Unit Period (i.e., for purposes of receiving Options on such dividend equivalent) only if the Participant is employed on any day of the last month of the quarter preceding payment of the dividend, e.g., one must be employed at least one day in December in order to receive Options on the fourth quarter dividend equivalent paid the following February 1. A retiree shall thus receive Options on dividends issued with respect to his/her last quarter if he or she worked at any time during the last month of such quarter. The same shall apply if a Savings Unit is terminated. However, if a Participant terminates employment other than as a result of Retirement or for any reason other than death or Disability, no further options shall be issued to the Participant on or after the last day of employment. 9.5 Exercise and Payment of Options. Options shall be exercised by providing notice to the designated agent selected by the Company (if no such agent has been designated, then to the Company), in the manner and form determined by the Company, which notice shall be irrevocable, setting forth the exact number of shares of Stock with respect to which the Option is being exercised and including with such notice payment of the Exercise Price. When Options have been transferred, the Company or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option. No Option may be exercised with respect to a fraction of a share of Stock. The Exercise Price shall be paid in full at the time of exercise. No Stock shall be issued or transferred until full payment has been received therefor. Payment may be made: (a) in cash, or (b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as the Committee or the Company may impose from time to time, and further subject to suspension or termination of this provision by the Committee or the Company at any time, by: (i) delivery of Stock owned by the Participant in partial (if in partial payment, then together with cash) or full payment; provided, however, as a condition to paying any part of the Exercise Price in Stock, at the time of exercise of the Option, the Participant must establish to the satisfaction of the Company that the Stock tendered to the Company must have been held by the Participant for a minimum of six (6) months preceding the tender; or (ii) if the Company has designated a stockbroker to act as the Company's agent to process Option exercises, issuance of an exercise notice to such stockbroker together with instructions irrevocably instructing the stockbroker: (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a limit order) a sufficient portion of the Stock to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to the Company. In the event the stockbroker sells any Stock on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and the Company disclaims any responsibility for the actions of the stockbroker in making any such sales. No Stock shall be issued until the settlement date and until the proceeds (equal to the Exercise Price and tax withholding) are paid to the Company. If payment is made by the delivery of Stock, the value of the Stock delivered shall be equal to the Fair Market Value of the Stock on the day preceding the date of exercise of the Option. Restricted Stock may not be used to pay the Option exercise price. 9.6 Restrictions on Exercise and Transfer. During the optionee's lifetime (for purposes of Paragraphs 9.6 through 9.9, "optionee" shall only refer to the original recipient of an Option), the optionee's Options shall be exercisable only by the optionee or by the optionee's guardian or legal representative. After the death of the optionee, except as otherwise provided by the Company's Rules for Employee Beneficiary Designations, an Option shall only be exercised by the holder thereof (including, but not limited to, an executor or administrator of a decedent's estate) or his or her guardian or legal representative. No Option shall be transferable except: (a) upon the death of the optionee in accordance with the Company's Rules for Employee Beneficiary Designations; and (b) in the case of any holder after the optionee's death, only by will or by the laws of descent and distribution. 9.7 Termination by Death. If an optionee's employment with Employer terminates by reason of death, the Option may thereafter be exercised, to the extent then exercisable, for a period of three (3) years from the date of such death or until the expiration of the stated term of such Option, whichever period is shorter. 9.8 Termination by Disability. If an optionee's employment with Employer terminates by reason of Disability, any Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of such termination (or on such accelerated basis as the HRC shall determine at the time of grant), for a period of three (3) years from the date of such termination of employment or the expiration of the stated term of such Option, whichever period is shorter. 9.9 Retirement or Other Termination of Employment. Except as otherwise provided in this paragraph, if an optionee's employment with Employer terminates as a result of Retirement or for any reason other than death or Disability, the Option may be exercised until the earlier of three months (one year for options granted on or after August 1, 1998) from the date of termination or three years (five years for options granted on or after August 1, 1998) from the date of Retirement, as applicable, or the expiration of the term of such Option; provided, however, that a transfer to a RWAC shall not be considered a termination of employment to the extent the term of employment at a RWAC is equal to or less than five years. Section 10 - Discontinuation, Termination, Amendment 10.1 Company's Right to Discontinue Offering Savings Units. The HRC or the Chairman may at any time discontinue offerings of additional Savings Units with respect to any or all future Plan Years. Any such discontinuance shall have no effect upon the pre-tax contributions or after-tax contributions or the terms or provisions of this Plan as applicable to any then previously existing Savings Units. 10.2 Company's Right to Terminate Plan. No Savings Unit may be commenced after December 31, 2004. The HRC may terminate the Plan at any earlier time. Termination of the Plan shall mean that (1) there shall be no further offerings of additional Savings Units with respect to any future Plan Year; (2) pre-tax contributions and after-tax contributions shall prospectively cease with respect to all Savings Units for the then Plan Year and thereafter; and (3) all then currently existing Savings Units shall be treated as follows: The Participant's Matching Accounts shall be 100% vested. The Participant shall receive or continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of his Agreement(s) and as described in this Plan; provided, however, any distributions under a Savings Unit that is not completed due to a termination of the Plan under this Section 10.2 shall be based upon only the actual pre-tax contributions plus after-tax contributions plus Company contributions made with respect to such Savings Unit prior to such termination, and dividends on same thereafter. 10.3 Amendment. The HRC may at any time amend the Plan in whole or in part including, but not limited to, changing the formulas for determining the amount of Company contributions under Section 5 or the number of Options to be issued under Section 9; provided, however, that no amendment, including an amendment to this Section 10, shall be effective, without the written consent of a Participant, to alter, to the detriment of such Participant, the distributions described in this Plan as applicable to a Savings Unit of the Participant or to decrease the number of Shares standing credited to such Participant's Pre-Tax, After-Tax and Matching Accounts under the Plan. For purposes of this Section 10.3, an alteration to the detriment of a Participant shall mean a reduction in the period of time over which stock is distributable under a Participant's Agreement, or any reduction in the number of Options, increase in Exercise Price or decrease in the term of an Option. Written notice of any amendment shall be given to each Participant. Notwithstanding anything to the contrary contained in this section of the Plan, the HRC may modify this Plan with respect to any person subject to the provisions of Section 16 of the Securities Exchange Act of 1934 as amended ("Exchange Act") to place additional restrictions on the exercise of any Option or the transfer of any Stock not yet issued under the Plan. Section 11 - Miscellaneous. 11.1 Additional Benefit. The reduction of any benefit payable under the SBC Pension Benefit Plan (or comparable plan identified by the Company as a replacement therefore), which results from participation in this Plan, will be restored as an additional benefit ("make-up piece") under this Plan. The Participant shall elect prior to commencement of payment of the make-up piece whether to receive such benefit in cash in a lump sum (consisting of the present value equivalent of the pension retirement benefit (life annuity) make-up piece) or such benefit in an annuity form of payment. Notwithstanding the proceeding provisions of this Section 11.1, if all or a portion of the make-up piece is paid pursuant to SRIP or another non-qualified plan, then such amount shall not be payable pursuant to this Plan. 11.2 Small Distribution. Notwithstanding any election made by the Participant, the Company will distribute any shares of Stock corresponding to Shares in the form of a lump sum distribution if the Shares in Participant's Pre-Tax Account plus After-Tax Account plus Matching Account have a FMV of less than $10,000 when such distribution would otherwise commence. 11.3 Emergency Distribution. In the event that the HRC, upon written petition of the Participant, determines in its sole discretion, that the Participant has suffered an unforeseeable financial emergency, the Company shall distribute to the Participant, as soon as practicable following such determination, Stock corresponding to the number of Shares ordered by the HRC from his Pre-Tax, After-Tax and Matching Accounts for one or more Savings Units as necessary to meet the emergency (the "Emergency Distribution"). For purposes of this Plan, an unforeseeable financial emergency is an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence. Cash needs arising from foreseeable events such as the purchase of a house or education expenses for children shall not be considered to be the result of an unforeseeable financial emergency. Upon receipt of an Emergency Benefit, a Participant shall not be permitted to commence a new Savings Unit until the next enrollment after one whole year has elapsed. 11.4 Commencement of Payments. Except as otherwise provided in this Plan, commencement of a distribution under this Plan shall begin sixty (60) days following the event which entitles a Participant (or a Beneficiary) to such distribution, or at such earlier date as may be determined by the HRC. 11.5 Tax Withholding. Upon distribution of Stock, including but not limited to, shares of Stock issued upon the exercise of an Option, the Company shall withhold sufficient shares of Stock having a Fair Market Value on the date the taxes are determined necessary to satisfy the minimum amount of Federal, state, and local taxes required by law to be withheld as a result of such distribution. Any fractional share of Stock payable to a Participant shall be withheld as additional Federal withholding, or, at the option of the Company, paid in cash to the Participant. Unless otherwise determined by the Committee, when the method of payment for the Exercise Price is from the sale by a stockbroker pursuant to Section 9.5(b)(ii), hereof, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds. For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the Fair Market Value of the Stock. 11.6 Reserved 11.7 Transfer to a RWAC. If a Participant transfers to a RWAC, all of the Participant's Savings Units shall be frozen upon transfer, unless otherwise determined by the Company. No further Participant pre-tax contributions, after-tax contributions or Company contributions shall be made subsequent to the transfer. During the period of employment at a RWAC (for a period not to exceed five (5) years), the Participant shall continue to be credited with dividends on his Pre-Tax, After-Tax and Matching Accounts, as applicable, as provided under Section 5.3 and to vest in such amounts as provided under Section 5.4, and all distributions shall continue to be payable to the Participant and his Beneficiaries in accordance with Section 6 and/or Section 7 hereof, as applicable. If the Participant has not resumed employment with Employer in an employment status which makes him eligible to participate in this Plan within five (5) years from the date of transfer, a Termination Distribution based on the amounts credited to the Participant's Pre-Tax, After-Tax and Matching Accounts, as applicable, shall be paid upon termination of employment with a RWAC or the expiration of such five (5) year period, whichever is earlier. 11.8 Leave of Absence. If a Participant absents himself from employment on a formally granted leave of absence (i.e., the absence is with formal permission in order to prevent a break in the continuity of the Employee's term of employment, which permission is granted in conformity with the rules of the Employer which employs the individual, as adopted from time to time), all of the Participant's Savings Units shall automatically be frozen upon such leave of absence, unless otherwise determined by the HRC. No Participant pre-tax contributions or after-tax contributions or Company contributions shall be made during the leave of absence. However, during the leave of absence, the Participant shall continue to be credited with dividends on his Pre-Tax, After-Tax and Matching Accounts, as applicable, as provided under Section 5.3 and to vest in such amounts as provided under Section 5.4, and all distributions shall continue to be payable to the Participant and his Beneficiaries in accordance with Section 6 and/or Section 7 hereof, as applicable. If the Participant returns to employment with Employer in an employment status which makes him eligible to participate in this Plan before completion of or immediately upon the expiration of the leave of absence, Participant pre-tax contributions and Company matching contributions will resume until the end of the original Unit Period. If the Participant has not resumed employment with Employer in an employment status which makes him eligible to participate in this Plan before completion of or immediately upon the expiration of the leave of absence, a Termination Distribution based on the amounts credited to the Participant's Pre-Tax, After-Tax and Matching Accounts shall be paid to the Participant. This Section 11.8 shall not apply with respect to any period during which a Participant is suffering from a Disability, and such period of Disability shall not be included under this Section 11.8 as a portion of a period of leave of absence. 11.9 Ineligible Participant. Notwithstanding any other provisions of this Plan to the contrary, if any Participant is determined not to be a "management or highly compensated employee" within the meaning of ERISA, such Participant will not be eligible to participate in this Plan and shall receive an immediate lump sum distribution of shares of Stock corresponding to the vested portion of the Shares standing credited to his Pre-Tax plus After-Tax plus Matching Accounts. Upon such payment no other distribution shall thereafter be payable under this Plan either to the Participant or any Beneficiary of the Participant, except as provided under Section 11.1. 11.10 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interest, or claims in any property or assets of Employer. No assets of Employer shall be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of Employer under this Plan. Any and all of the Employer's assets shall be, and remain, the general, unpledged, unrestricted assets of Employer. The only obligation of Employer under the Plan shall be merely that of an unfunded and unsecured promise of the Company to distribute shares of Stock corresponding to Shares, and Options, under the Plan in the future. 11.11 Offset. If a Participant becomes entitled to a distribution of Stock under the Plan, the Company may offset against the amount of Stock otherwise distributable, any claims to reimbursement for intentional wrongdoing by the Participant against the Employer or an affiliate as well as any overpayment made under this Plan. Such determination shall be made by the Company. 11.12 Non-Assignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, shares of Stock corresponding to Shares under the Plan, if any, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the Stock distributable shall, prior to actual distribution, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 11.13 Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Employee any right to be retained in the employ of Employer or to serve as a director. 11.14 Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine or feminine, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 11.15 Captions. The captions of the articles, sections, and paragraphs of this Plan are for convenience only and shall not control nor affect the meaning or construction of any of its provisions. 11.16 Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of Texas, to the extent not preempted by ERISA. Any action seeking to enforce an Employee's or Beneficiary's rights under this Plan, including but not limited to the terms of any Agreement or Option issued hereunder, may only be brought in Bexar County, Texas. 11.17 Validity. In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. 11.18 Notice. Any notice or filing required or permitted to be given to the Company under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Vice President-Human Resources of the Company. Such notice shall be deemed given on the date of delivery or, if delivery is made by mail, on the date shown on the postmark on the receipt for registration or certification. 11.19 Successors and Assigns. This Plan shall be binding upon the Company and its successors and assigns. 11.20 Limitations and Adjustments. The number of shares of Stock which may be distributed pursuant to the Plan, exclusive of Section 9, is 6,500,000. The number of stock Options and shares of Stock which may be issued pursuant to Section 9 of the Plan is 10,500,000 each. Of the foregoing stock options, the number of incentive stock Options which may be issued pursuant to the Plan is 10,500,000. In the event of a merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, share combination, or other change in the corporate structure of the Company affecting the shares of Stock, such adjustment shall be made in the number and class of shares of Stock which may be delivered under the Plan, and in the number and class of and/or price of shares of Stock subject to outstanding Options granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights. 11.21 Distribution Alternative. Effective November 17, 1995, notwithstanding the provisions of Section 6 and of Section 7, at any time during the calendar year prior to the calendar year during which a distribution(s) pursuant to a Savings Unit is scheduled to commence, a Participant may change his or her previous election(s) applicable to such Savings Unit to further defer the commencement of the distribution(s) pursuant to such Savings Unit to a subsequent calendar year, and in such case to also change the number of installments applicable to the distribution of the Savings Unit as follows: (a) the new election(s) applicable to such Savings Unit must conform with either Section 6, if the Retirement Alternative is the new selection for such Savings Unit, or Section 7, if the Specified Date Alternative is the new selection for such Savings Unit; (b) either the Retirement Alternative or the Specified Date Alternative may be selected for the new election(s) for a Savings Unit irrespective of the Alternative originally selected for such Savings Unit; (c) the commencement date for payments pursuant to such Savings Unit may be delayed to any point in time in a subsequent calendar year - the commencement date for payments may not be advanced to an earlier point in time; and (d) any number of installments may be selected pursuant to the new election(s) for a Savings Unit irrespective of the number of installments originally selected for such Savings Unit. Provided, however, in the event a Participant is involuntarily terminated from employment (which shall be deemed to include termination by reason of death), and such termination is for a reason other than for cause (i.e., willful and gross misconduct on the part of the Participant that is materially and demonstrably detrimental to the Company or any subsidiary thereof), and such termination is a Retirement (or in the case of Participant's death, Participant was Retirement eligible), then Participant (or Participant's Beneficiary(ies)) may make the change(s) to Participant's previous election(s) pursuant to this Section 11.21 at the time of Participant's termination of employment. Amounts with respect to which the Participant's election(s) are modified in accordance with the provisions of this Section 11.21 shall continue to be subject to all provisions of this Plan including further distribution modifications in accordance with the provisions of the Section 11.21. Section 12 - Participation in Other Plan(s) 12.1 Participation in Predecessor Plans. Effective November 21, 1997, the plans of the Stock Savings Program shall be merged into the Stock Savings Plan. All Savings Units under the Stock Based Savings Plan or the Management Stock Savings Plan shall be transferred to this Plan as of that date and shall be governed by the terms of this Plan. 12.2 Pacific Telesis Group 1996 Executive Deferred Compensation Plan or the Pacific Telesis Group Non-Qualified Savings Plan. If an Eligible Employee elects to participate in this Plan with respect to contributions during 1998, the Employee may not defer, under the Pacific Telesis Group 1996 Executive Deferred Compensation Plan or the Pacific Telesis Group Non-Qualified Savings Plan, any compensation otherwise payable in 1998, and such election under this Plan shall operate as a termination of participation in such Pacific Telesis Group plans to the extent it relates to any deferrals of compensation otherwise payable in 1998. EX-10 13 1992 STOCK OPTION PLAN EXHIBIT 10p LOGO SBC Communications Inc. 1992 STOCK OPTION PLAN Plan Effective: January 1, 1996 As amended through: November 21, 1997 TABLE OF CONTENTS 1.1 Purpose..........................................................1 1.2 Additional Definitions...........................................1 1.3 Effective Date...................................................2 2.1 The Committee....................................................2 2.2 Authority of the Committee.......................................3 3.1 Number of Shares.................................................3 3.2 Lapsed Options...................................................3 3.3 Adjustments in Authorized Shares.................................3 4.1 Grant of Options.................................................4 4.2 Form of Issuance.................................................4 4.3 Option Price.....................................................4 4.4 Duration of Option...............................................4 4.5 Vesting of Options...............................................4 4.6 Exercise of Options..............................................4 4.7 Payment:.........................................................5 4.8 Termination of Employment........................................6 4.9 Transfers........................................................6 4.10 Restrictions on Exercise and Transfer of Options.................7 4.11 Change in Control................................................7 5.1 Amendment, Modification, and Termination.........................8 5.2 Awards Previously Granted........................................8 6.1 Tax Withholding..................................................8 7.1 Employment.......................................................8 7.2 Participation....................................................8 7.3 Successors.......................................................8 7.4 Governing Law....................................................9 SBC COMMUNICATIONS INC. 1992 STOCK OPTION PLAN ARTICLE 1. PURPOSE, DEFINITIONS AND EFFECTIVE DATE 1.1 Purpose. The purpose of the SBC Communications Inc. 1992 Stock Option Plan ("Plan") is to promote the success and enhance the value of SBC Communications Inc. (the "Company") by linking the personal interests of the Employees of the Company and its Subsidiaries to the interests of the Company's shareowners, and by providing Employees with an additional incentive for outstanding performance. To achieve this purpose, Options to purchase common stock of the Company may be granted to Employees of the Company and its Subsidiaries pursuant to the Plan. 1.2 Additional Definitions. In addition to definitions set forth elsewhere in the Plan, for purposes of the Plan: (a) "Cause" shall mean willful and gross misconduct on the part of a Participant that is materially and demonstrably detrimental to the Company or any Subsidiary as determined by the Committee in its sole discretion. (b) "Employee" shall mean any management employee of the Company or of one of its subsidiaries in the third (3rd) level of management or above. Directors who are not otherwise employed by the Company or any of its subsidiaries shall not be considered Employees under the Plan. (c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor Act thereto. (d) "Fair Market Value" shall mean the closing price of Shares on the relevant date, or on the next preceding trading day if such date was not a trading day, all as reported on the New York Stock Exchange Composite Trading listings, or a similar report selected by the Committee. (e) "Option" shall mean the right to purchase one or more shares of the common stock of SBC Communications Inc. on the terms and conditions contained in this Plan, the rules of the Committee, and the terms of the Option. (f) "Retirement" shall mean the termination of a Participant's employment with the Company or one of its Subsidiaries, for reasons other than death, disability (as that term is used in the SBC Senior Management Long Term Disability Plan) or for Cause, on or after the earlier of the following dates: (1) the date the Participant is eligible to retire with an immediate pension pursuant to the SBC Supplemental Retirement Income Plan; or (2) the date the Participant has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 years of more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to a Participant who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program upon termination of employment, the term "Retirement" shall include such Participant's termination of employment. (g) "Rotational Work Assignment Company" or "RWAC" shall mean Bell Communications Research, Inc. formerly the Central Services Organization, Inc., and/or any other entity with which SBC Communications Inc. or any of its subsidiaries may enter into an agreement to provide an employee for a rotational work assignment. (h) "Shares" or "Stock" or "Shares of Stock" shall mean the common stock of SBC Communications Inc.. (i) "Subsidiary" shall mean any corporation in which the Company owns directly, or indirectly through subsidiaries, more than fifty percent (50%) of the total combined voting power of all classes of Stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns more than fifty percent (50%) of the combined equity thereof. 1.3 Effective Date. The Plan shall be effective on the date it is approved by the Company's shareowners. ARTICLE 2. ADMINISTRATION 2.1 The Committee. The Plan shall be administered by a Committee (the "Committee") which shall be the Human Resources Committee or any other Committee appointed by the Board of Directors (the "Board") consisting of two or more Directors, each of whom is a disinterested administrator, i.e., a Director who was not, during the one year prior to service as an administrator of the Plan, or during such service, granted or awarded equity securities as defined in Rule 16a-1(d) of the Exchange Act) pursuant to this Plan or any other plan of the Company, except as otherwise provided in Rule 16b-3(c)(2)(I)(A) through (D) promulgated under the Exchange Act. 2.2 Authority of the Committee. The Committee shall have full power, except as limited by law or by the Articles of Incorporation or Bylaws of the Company, and subject to the provisions of this Plan, to select the recipients of ("Participants"); determine the sizes of grants of Options under the Plan; determine the exercise price, duration, vesting requirements, and period of exercisability of each Option; determine the terms and conditions of such Option grants in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend, or waive rules and regulations for the Plan's administration; and, subject to the provisions of Article 5 - Amendment, Modification, and Termination, herein, amend the terms and conditions of any outstanding Option to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. All determinations and decisions made by the Committee pursuant to the provisions of the Plan, and all related orders and resolutions of the Board shall be final, conclusive, and binding on all persons, including the Company, its shareowners, Employees, participants, and their estates and beneficiaries. ARTICLE 3. SHARES SUBJECT TO THE PLAN 3.1 Number of Shares. Subject to adjustment as provided in Section 3.3 Adjustments in Authorized Shares, herein, the total number of Shares of Stock for which Options may be granted under the Plan may not exceed 9,000,000 Shares. These Shares may be either authorized but unissued or reacquired Shares. NOTE: The number of Shares for which Options may be granted under the Plan effectively doubled to 18,000,000 to reflect the May, 1993 two-for-one stock dividend/split. 3.2 Lapsed Options. If any Option granted under the Plan is canceled, terminates, expires, or lapses for any reason, any Shares subject to such Option again shall be available for the grant of an Option under the Plan. 3.3 Adjustments in Authorized Shares. In the event of a merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, share combination, or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number and class of Shares which may be delivered under the plan, and in the number and class of and/or price of Shares subject to outstanding Options granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of Shares subject to any Option shall always be a whole number. ARTICLE 4. STOCK OPTIONS 4.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to such Employees, at such times and on such terms and conditions, as shall be determined by the Committee; provided, however, no Options may be granted after the 10th anniversary of the effective date of the Plan. The Committee shall have discretion in determining the number of Options and the number of Shares subject to each Option granted to each participant. Without limiting the generality of the foregoing, the Committee shall have the authority to establish guidelines setting forth anticipated grant levels which correspond to various salary grades or the equivalent thereof. 4.2 Form of Issuance. Options may be issued in the form of a certificate or may be recorded on the books and records of the Company for the account of the Participant. If an Option is not issued in the form of a certificate, then the Option shall be deemed granted upon issuance of a notice of the grant addressed to the recipient. The terms and conditions of an Option shall be set forth in the certificate, in the notice of the issuance of the grant, or in such other documents as the Committee shall determine. The Committee may require a Participant to enter into a written agreement containing terms and conditions relating to the Option and its exercise. 4.3 Option Price. The Option Price for each grant of an Option shall be determined by the Committee; provided, however, that the minimum Option Price shall be one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. 4.4 Duration of Option. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 4.5 Vesting of Options. Options shall vest at such times and under such terms and conditions as determined by the Committee. The Committee shall have the authority to accelerate the vesting of any Option; provided, however, that the Senior Executive Vice President - Human Resources, or his successor, or such other person designated by the Committee, shall have the authority to accelerate the vesting of Options for any Participant who is in the fifth level of management or below and who is not a Director or an officer (as that term is defined in Section 16 of the Exchange Act). 4.6 Exercise of Options. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. However, in no event may any Option granted under this Plan become exercisable prior to the first anniversary of the date of its grant, except as provided in Section 4.11 Change in Control. Options shall be exercised by providing notice to the designated agent selected by the Company (if no such agent has been designated, then to the Company), in the manner and form determined by the Company, which notice shall be irrevocable, setting forth the exact number of Shares with respect to which the Option is being exercised and including with such notice payment of the Option Price. When Options have been transferred, the Company or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option. No Option may be exercised with respect to a fraction of a Share. 4.7 Payment. The Option Price shall be paid in full at the time of exercise. No Shares shall be issued or transferred until full payment has been received therefor. Payment may be made: (a) in cash, or (b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as the Committee or the Company may impose from time to time, and further subject to suspension or termination off this provision by the Committee or the Company at any time, by: (i) delivery of Shares of Stock owned by the Participant in partial (if in partial payment, then together with cash) or full payment; provided, however, as a condition to paying any part of the Option Price in Stock, at the time of exercise of the Option, the Participant must establish to the satisfaction of the Company that the Stock tendered to the Company must have been held by the Participant for a minimum of six (6) months preceding the tender; or (ii) if the Company has designated a stockbroker to act as the Company's agent to process Option exercises, issuance of an exercise notice to such stockbroker together with instructions irrevocably instructing the stockbroker: (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a limit order) a sufficient portion of the Shares to pay the Option Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Option Price and tax withholding to the Company. In the event the stockbroker sells any Shares on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and the Company disclaims any responsibility for the actions of the stockbroker in making any such sales. No Stock shall be issued until the settlement date and until the proceeds (equal to the Option Price and tax withholding) are paid to the Company. If payment is made by the delivery of Shares of Stock, the value of the Shares delivered shall be equal to the Fair Market Value of the Shares on the day preceding the date of exercise of the Option Restricted Stock may not be used to pay the Option Price. 4.8 Termination of Employment. (a) Termination by Reason of Death or Disability. In the event the employment of Participant is terminated by reason of death or disability (as that term is used in the SBC Communications Inc. Senior Management Long Term Disability Plan), any outstanding Options granted to the Participant shall vest as of the date of termination of Employment and may be exercised, if at all, no more than one (1) year following termination of employment, unless the Options, by their terms, expire earlier. (b) Termination by Retirement. In the event the Employment of a Participant is terminated by reason of Retirement, any outstanding Options granted to the Participant which are vested as of the date of termination of Employment may be exercised, if at all, no more than three (3) years following termination of Employment, unless the Options, by their terms, expire earlier. (c) Termination of Employment for Other Reasons. If the Employment of a Participant shall terminate for any reason other than the reasons set forth in (a) or (b), above, and other than for Cause, all outstanding Options granted to the Participant which are vested as of the date of termination of Employment may be exercised by the Participant within the period beginning on the effective date of termination of Employment and ending three (3) months after such date, unless the Options, by their terms, expire earlier. (d) Termination for Cause. If the Employment of a Participant shall terminate for Cause, all outstanding Options held by the Participant shall immediately terminate and be forfeited to the Company, and no additional exercise period shall be allowed. (e) Options not Vested at Termination. Any outstanding Options not vested as of the effective date of termination of employment shall expire immediately and shall be forfeited to the Company. 4.9 Transfers. For purposes of the Plan, transfer of Employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) or between the Company or a subsidiary and an RWAC, to the extent the term of Employment an RWAC is equal to or less than five years shall not be deemed a termination of Employment. 4.10 Restrictions on Exercise and Transfer of Options. During the Participant's lifetime, the Participants Options shall be exercisable only by the Participant or by the Participants guardian or legal representative. After the death of the Participant, except as otherwise provided by the Company's Rules for Employee Beneficiary Designations, an Option shall only be exercised by the holder thereof (including, but not limited to, an executor or administrator of a decedent's estate) or his or her guardian or legal representative. No Option shall be transferable except: (a) in the case of the Participant, only upon the Participant's death and in accordance with the Company's Rules for Employee Beneficiary Designations; and (b) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution. 4.11 Change in Control. Upon the occurrence of a Change in Control all Options held by Participant s hereunder shall immediately become vested and exercisable, notwithstanding the provisions of Section 4.6 Exercise of Options to the contrary. A "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or corporation owned directly or indirectly by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, or securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities, or (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new Director whose election by the Board of Directors or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareowners of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least eighty percent (80%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale of disposition by the Company of all or substantially all the Company's assets. ARTICLE 5. AMENDMENT, MODIFICATION, AND TERMINATION 5.1 Amendment, Modification, and Termination. The Board or the Committee may at any time and from time to time, terminate, amend, or modify the Plan. However, no such amendment, modification, or termination of the Plan may be made without the approval of the shareowners of the Company, if such approval is required by the Internal Revenue Code, by the insider trading rules of Section 16 of the Exchange Act, by any national securities exchange or system on which the Shares are then listed or reported, or by a regulatory body having jurisdiction with respect hereto. 5.2 Awards Previously Granted. No termination, amendment, or modification of the Plan shall in any material manner adversely affect any Option previously granted under the Plan, without the written consent of the Participant holding such Option. ARTICLE 6. WITHOLDING 6.1 Tax Withholding. Upon exercise of an Option, the Company shall withhold sufficient Shares having a Fair Market Value on the date the taxes are determined in an amount necessary to satisfy the minimum amount of Federal, state, and local taxes required by law to be withheld as a result of such exercise. Any fractional share of Stock payable to a Participant shall be withheld as additional Federal withholding, or, at the option of the Company, paid in cash to the Participant. Unless otherwise determined by the Committee, when the method of payment for the Option Price is from the sale by a stockbroker pursuant to Section 4.7(b)(ii), hereof, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds. For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the Fair Market Value of the Stock. ARTICLE 7. MISCELLANEOUS 7.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any subsidiary thereof to terminate any Participant's Employment at any time, nor confer upon any Participant any right to continue in the Employment of the Company or any Subsidiary thereof. 7.2 Participation. No employee shall have the right to be selected to receive an Option under the Plan, or having been so selected, to be selected to receive a future Option. 7.3 Successors. All obligations of the Company under the Plan shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 7.4 Governing Law. The Plan, and any and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Missouri. EX-10 14 OFFICER RETIREMENT SAVINGS PLAN Exhibit 10-q SBC COMMUNICATIONS INC. OFFICER RETIREMENT SAVINGS PLAN Effective: November 1, 1993 As amended through May 1, 1997 TABLE OF CONTENTS Section 1 Statement of Purpose..............................................1 Section 2 Definitions.......................................................1 Section 3 Administration of the Plan........................................3 Section 4 Participation.....................................................4 4.1 Commencement of a Savings Unit....................................4 4.2 Termination of Participation......................................4 Section 5 Participant Account(s)............................................4 5.1 Participant.......................................................4 5.2 Statement of Account(s)...........................................5 Section 6 Benefits..........................................................5 6.1 Retirement Distribution...........................................5 6.2 Termination Distribution..........................................6 6.3 Disability........................................................6 6.4 Survivor Distribution.............................................7 Section 7 Beneficiary Designation...........................................7 Section 8 Discontinuation, Termination, Amendment...........................8 8.1 Company's Right to Discontinue Offering Savings Units.............8 8.2 Company's Right to Terminate Plan.................................8 8.3 Amendment.........................................................8 Section 9 Miscellaneous.....................................................9 9.1 Additional Benefit................................................9 9.2 Small Distribution................................................9 9.3 Emergency Distribution............................................9 9.4 Commencement of Payments..........................................9 9.5 Withholding......................................................10 9.6 Transfer to Bellcore.............................................10 9.7 Leave of Absence.................................................10 9.8 Ineligible Participant...........................................10 9.9 Unsecured General Creditor.......................................11 9.10 Offset...........................................................11 9.11 Non-Assignability................................................11 9.12 Employment Not Guaranteed........................................11 9.13 Gender, Singular and Plural......................................11 9.14 Captions.........................................................11 9.15 Applicable Law...................................................11 9.16 Validity.........................................................12 9.17 Notice...........................................................12 9.18 Successors and Assigns...........................................12 9.19 Trust Fund.......................................................12 SBC COMMUNICATIONS INC. OFFICER RETIREMENT SAVINGS PLAN Section 1 Statement of Purpose. The purpose of the Officer Retirement Savings Plan ("Plan") is to provide a means for elective retirement savings for a select group of management employees consisting of Eligible Employees of SBC Communications Inc. (the "Company") and its subsidiaries ("Participating Companies"). Section 2 Definitions. For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Administrative Committee. "Administrative Committee" means a committee of three or more members, at least one of whom is a Senior Manager, who shall be designated by the Senior Executive Vice President-Human Resources, or successor position, to administer the Plan. Agreement. "Agreement" means the written agreement entitled "OFFICER RETIREMENT SAVINGS PLAN ("PLAN") ENROLLMENT FORM" (substantially in the form attached hereto as Exhibit (1)) that shall be entered into by the Employer and a Participant to carry out the Plan with respect to such Participant. Base Salary. "Base Salary" means the Participant's base salary before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of the Employer, including but not limited to a plan that includes a qualified cash or deferred arrangement under Section 401(k) of the Internal Revenue Code ("Code"). Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Section 7 of this Plan. Board. "Board" means the Board of Directors of SBC Communications Inc. Chairman. "Chairman" means the Chairman of the Board of SBC Communications Inc. ("Chairman"). Declared Rate. "Declared Rate" means with respect to any Plan Year the interest rate which will be credited during such Plan Year on a Participant's Pre-Tax Account for any Savings Unit which has not yet commenced benefit payments. The Declared Rate for each Plan Year will be announced on/or before the beginning of the applicable Plan Year. The Declared Rate for any Plan Year shall be the Moody's Corporate Bond Yield Average-Monthly Average Corporates a published by Moody's Investor's Service, Inc. (or any successor thereto) for the month of September before the Plan Year in question and rounded to the next higher tenth of one percent, or, if such yield is no longer published, a substantially similar average selected by the Administrative Committee. Disability. "Disability" means inability to work due to being physically disabled. Eligible Employee. "Eligible Employee" means an Employee of the Employer who (a) is in active service, (b) is an Officer or has an employment status which has been approved by the Board or the HRC to be eligible to participate in this Plan, (c) has an annual Base Salary exceeding S250,000 and (d) who continuously maintains the employment status upon which eligibility to participate in this Plan was based. Employee. "Employee" means any person employed by the Employer on a regular full-time salaried basis. Employer. "Employer" means SBC Communications Inc. or any of its subsidiaries. HRC. "HRC" means the Human Resources Committee of the Board. Officer. "Officer" means an individual employed by Employer who has been elected an officer of the Company by the Board and whose title is Vice President or higher or an individual at an equivalent level in a Subsidiary. Participant. "Participant" means an Employee participating in the Plan. Plan Year. "Plan Year" means the calendar year except the 1993 Plan Year shall mean November 1, 1993 through the end of the 1993 calendar year. Pre-Tax Account. "Pre-Tax Account" means the account maintained on a pre-tax basis on the books of account of the Employer for each Participant for each Savings Unit to which Pre-Tax Amounts are credited. Pre-Tax Amount. "Pre-Tax Amount" means an amount of Base Salary contributed by Participant on a pre-tax basis with respect to a Savings Unit under this Plan. Retirement. "Retirement" means the termination of a Participant's employment with Employer, for reasons other than death, on or after the earlier of the following dates: (1) the date the Participant is eligible to retire with an immediate pension pursuant to the SBC Senior Management Supplemental Retirement Income Plan ("SRIP"); or (2) the date the Participant has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credit Service Age 10 years of more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to a Participant who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program upon termination of employment, the term "Retirement" shall include such Participant's termination of employment. Retirement Distribution. "Retirement Distribution" means the distribution described in Section 6.1. Savings Unit. "Savings Unit" means the Participant's Pre-Tax Amount which provides stated distributions pursuant to Section 6 of this Plan in accordance with the Participant's Agreement for such Savings Unit. Subsidiary. A "Subsidiary" of the Company is any corporation, partnership, venture or other entity in which the Company has at least a 50% ownership interest. Unit Period.. "Unit Period" means the calendar year with respect to which the Participant participates in the Plan. The Unit Period for a Savings Unit will commence on the Unit Start Date and end upon the earliest to occur of the following: (i) the last day of the calendar year which includes the Unit Start Date, or (ii) when the Participant terminates employment, terminates the Savings Unit or ceases to be an Eligible Employee. Unit Start Date. "Unit Start Date" means the date for commencement of a given Savings Unit. The Unit Start Date will be January 1, except (1) a new Participant shall be permitted to elect a Unit Start Date within thirty (30) days after such Participant first becomes an Eligible Employee and (2) with respect to a 1993 Savings Unit, the Unit Start Date shall be November 1, 1993. Section 3 Administration of the Plan. The Administrative Committee shall -------------------------- be the sole administrator of the Plan and will interpret, construe and apply Plan provisions in accordance with the terms of the Plan. The Administrative Committee shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Administrative Committee shall be final and binding. Section 4 Participation. 4.1 Commencement of a Savings Unit. Any Eligible Employee may commence a Savings Unit by filing a completed Agreement with the Administrative Committee prior to the Unit Start Date. With respect to the 1993 Plan Year, any Eligible Employee may commence a 1993 Savings Unit by filing a completed Agreement with the Administrative Committee prior to December 1, 1993. Pursuant to any such Agreement, the Eligible Employee shall elect the percentage of monthly Base Salary that shall comprise Participant's Pre-Tax Amount. Such percentage shall remain in effect for the duration of the Unit Period even if Base Salary should change. In the Agreement, the Participant shall also elect the timing of distribution of benefits pursuant to this Plan. Only annual Base Salary amounts expected to exceed $250,000 per Plan Year shall be eligible to be contributed under this Plan. 4.2 Termination of Participation. A Participant's participation in the Plan for the duration of the Unit Period is irrevocable upon the filing of his Agreement with the Administrative Committee; provided however, such participation may be terminated by mutual agreement in writing between the Participant and the Administrative Committee. Such termination, if approved, shall be effective beginning the first day of the month following the execution of such mutual agreement. Section 5 Participant Account(s). 5.1 Participant Deferrals. The percentage of monthly Base Salary that shall comprise Participant's Pre-Tax Amount shall be deferred each month or as otherwise may be permitted by the HRC. The Administrative Committee shall establish and maintain a separate Pre-Tax Account for each Participant for each Savings Unit. The amount by which a Participant's Base Salary is reduced each month shall be credited by the Employer to the Participant's Pre-Tax Account for such Savings Unit no later than the first day of the following month, and such Pre-Tax Account shall be debited by the amount of any payments made by the Employer to the Participant or the Participant's Beneficiary with respect to such Savings Unit pursuant to this Plan. With respect to each Savings Unit, the Pre-Tax Account of a Participant shall be deemed to bear interest from the date such Pre-Tax Account was established through the date of commencement of benefit payments at a rate equal to the applicable Declared Rate for the particular Plan Year on the balance from month-to-month in such Pre-Tax Account. Interest will be credited monthly to the Pre-Tax Account at one-twelfth of the annual Declared Rate, compounded annually. Following the commencement of benefit payments with respect to a Savings Unit, a Participant's Pre-Tax Account shall be deemed to bear interest on the balance in such Pre-Tax Account from month-to-month at a rate equal to one-twelfth of the average of the annual Declared Rates for the five (5) Plan Years ending prior to commencement of benefit payments (or, if the Plan has been in operation for less than five (5) Plan Years, the average of the Declared Rates for all Plan Years ending prior to commencement of benefit payments). A Participant's interest in his Pre-Tax Account(s) shall be 100% vested at all times. 5.2 Statement of Account(s). Each Participant will receive annual statements in such form as the Administrative Committee deems desirable setting forth the balance of the Participant's Pre-Tax Account(s). Section 6 Benefits. 6.1 Retirement Distribution. Upon Retirement, with respect to a Savings Unit, the Employer shall pay to the Participant an equal amount each month for one hundred eighty (180) months, beginning in January of the year next following the date of Retirement, which will amortize over such one hundred eighty (180) equal monthly payments the sum of (a) the value of the Pre-Tax Account for such Savings Unit as of the date of commencement of payments, plus (b) the interest that will accrue on the unpaid balance in such Pre-Tax Account during such one hundred eighty (180) month period pursuant to Section 5.1 ("Standard Retirement Benefit"). Alternatively, a Participant may elect in the Agreement for any Savings Unit to receive an alternative retirement benefit in lieu of the Standard Retirement Benefit ("Alternative Retirement Benefit") for such Savings Unit either in a lump sum payment or in sixty (60) or one hundred twenty (120) equal monthly payments, with the amount of each monthly payment to be calculated in accordance with the principle stated in the preceding sentence. If a Participant fails to submit an election as to the number of months of distribution for Participant's Retirement Benefit prior to January 1 of the year next following the date of Retirement, such Participant will receive distribution in the form of a Standard Retirement Benefit. In the event that a final determination shall be made by the Internal Revenue Service or any court of competent jurisdiction that, by reason of Retirement, a Participant has recognized gross income for Federal income tax purposes in excess of the Retirement Distribution installment actually distributed by the Employer to which such gross income is attributable, the Employer shall make a lump sum distribution to the Participant of his Pre-Tax Account for any affected Savings Unit. If a distribution is made to a Participant pursuant to this paragraph for any Savings Unit, no other distributions shall thereafter be made under this Plan with respect to such Savings Unit. Notwithstanding any election made by the Participant, the Administrative Committee will distribute the Participant's Retirement Distribution in the form of a lump sum distribution if the value of a Savings Unit is less than $10,000 when distribution of the Retirement Distribution for such Savings Unit would otherwise commence. In the event that the HRC shall determine that it is in the best interest of a Participant and the Company, the HRC may, with the Participant's consent, in its complete and sole discretion, distribute the Participant's Retirement Distribution prior to the Participant's Retirement at such date determined by the HRC. 6.2 Termination Distribution. (a) Termination of Employment Before Retirement. Termination of employment of the Participant for reasons other than death or Retirement shall not affect any distribution elections previously made by the Participant with respect to a Savings Unit. The termination shall be considered a Retirement under provisions of the Plan. (b) Termination of a Savings Unit. A Participant shall ----------------------------- terminate a Savings Unit if he terminates his participation in the Plan with respect to a Savings Unit as permitted pursuant to Section 4.2. The Participant shall continue to be credited with interest on his Pre-Tax Account applicable to such Savings Unit as provided under Section 5.1 while he remains in employment with the Employer. However, no further Participant contributions to this Plan shall be made pursuant to Section 5.1 with respect to the Savings Unit after a Participant terminates such Savings Unit. (c) Loss of Eligibility. Subject to Section 9.8, in the event ------------------- that the Participant ceases to be an Eligible Employee by reason of a change to an employment status which is not eligible to participate in this Plan, the Participant shall nevertheless continue participation in this Plan while he remains in employment with the Employer; however, no further Participant contributions shall be made to this Plan pursuant to Section 5.1. 6.3 Disability. In the event that a Participant incurs a Disability, contributions that otherwise would have been credited to Participant's Pre-Tax Account in accordance with Section 5.1 will continue to be credited to such Account out of his disability payments at the same time and in the same amounts as they would have been credited if the Participant had not suffered a Disability for as long as he is eligible to receive monthly disability benefits equal to 100 percent of his monthly base salary at the time of his Disability. At such time as the Participant is not eligible to receive monthly disability benefits equal to 100 percent of his monthly Base Salary at the time of his Disability, Participant contributions that otherwise would have been credited to the Pre-Tax Account of the Participant in accordance with Section 5.1 shall cease. If the Participant's Disability ceases and Participant returns within sixty (60) days thereafter to employment with the Employer in an employment status which would make him eligible to participate in this Plan and prior to the end of the original Unit Period, the Participant shall continue or resume making contributions in accordance with Section 5.1 until the end of the original Unit Period. If the Participant's Disability ceases, the Participant shall be treated as terminating service with the Employer on the date his Disability ceases, unless within sixty (60) days thereafter he returns to employment with Employer in an employment status which makes him eligible to participate in this Plan. If a Participant's Disability terminates by reason of his death, the rights of his Beneficiary shall be determined pursuant to Section 6.4 as if the Participant had not been disabled but rather had been in service on the date of his death and died on such date. If a Participant's Disability terminates by reason of attainment of age 65, the Participant shall upon the attainment of age 65 be entitled to a Retirement Distribution determined pursuant to Section 6.1. If a Participant's Disability terminates by reason of Retirement, the Participant shall be treated as having a Retirement on the date elected by the Participant and shall be entitled to a Retirement Distribution determined pursuant to Section 6.1. 6.4 Survivor Distribution. (a) If a Participant dies while in service with the Employer (or while absent because of Disability) or after Retirement (or after a termination which is considered a Retirement pursuant to Section 6.2(a)) but before commencement of distribution of a Retirement Distribution with respect to a Savings Unit, the Employer will distribute to the Participant's Beneficiary such Participant's Retirement Distribution with respect to such Savings Unit determined as if the Participant had retired on the day of such Participant's death. Such distribution shall be made in accordance with the number of installments which the Participant's Beneficiary elects for distribution of Participant's Retirement Distribution. Such election shall be irrevocable and shall be made prior to January 1 of the year next following the date of death. (b) If a Participant dies after the commencement of payment of a Retirement Distribution with respect to a Savings Unit, the Employer will distribute to the Participant's Beneficiary the remaining installments that would have been distributed to the Participant had the Participant survived. Section 7 Beneficiary Designation. Each Participant shall have the right, ----------------------- at any time, to designate any person or persons as his Beneficiary or Beneficiaries (both primary as well as contingent) to whom distributions under this Plan shall be made in the event of his death prior to complete distribution to Participant of the distributions due him under the Plan. Each Beneficiary designation shall become effective only when filed in writing with the Administrative Committee during the Participant's lifetime on a form prescribed by the Administrative Committee with written acknowledgment of receipt. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of Beneficiary or Beneficiaries other than the spouse. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's distributions, then the Administrative Committee shall direct the distribution of such distributions in accordance with the SBC Rules for Employee Beneficiary Designations. Section 8 Discontinuation, Termination, Amendment. 8.1 Company's Right to Discontinue Offering Savings Units. The HRC may at any time discontinue offerings of additional Savings Units with respect to any or all future Plan Years. Any such discontinuance shall have no effect upon the contributions or the terms or provisions of this Plan as applicable to any then existing Savings Units. 8.2 Company's Right to Terminate Plan. No Savings Unit may be commenced after December 31, 2003. The HRC may terminate the Plan at any earlier time. Termination of the Plan shall mean that (1) there shall be no further offerings of additional Savings Units with respect to any future Plan Year: (2) contributions shall prospectively cease with respect to all Savings Units for the then Plan Year and thereafter; and (3) all then existing Savings Unit shall be treated as follows: The Participant shall receive or continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of his Agreement(s) and as described in this Plan; provided, however, any distributions under a Savings Unit that is not completed due to a termination of the Plan under this Section 8.2 shall be based upon only the actual contributions made with respect to such Savings Unit prior to such termination, and interest on same thereafter. 8.3 Amendment. The Chairman may make non-material changes to the Plan and/or changes required or made desirable by law. The HRC may at any time amend the Plan in whole or in part provided, however, that no amendment, including an amendment to this Section 8, altering to the detriment of such Participant the distributions described in this Plan as applicable to a Savings Unit of the Participant, or decreasing the balance credited to such Participant's Pre-Tax Account under the Plan, shall be effective without the written consent of a Participant. For purposes of this Section 8, an alteration to the detriment of a Participant shall mean a reduction in the period of time over which payments are distributable under a Participant's Agreement, or any reduction in the value of a Pre-Tax Account. Written notice of any amendment shall be given to each Participant. Section 9 Miscellaneous. 9.1 Additional Benefit. The reduction of any benefit payable under the SBC Communications Inc. Pension Benefit Plan, which results from participation in this Plan, will be restored as an additional benefit ("make-up piece") under this Plan or under any other comparable non-qualified savings plan. The Administrative Committee shall have the option to distribute, in a lump sum, the present value equivalent of the pension retirement benefit (life annuity) make-up piece. Notwithstanding the preceding provisions of this Section 9.1, if all or a portion of the make-up piece is paid pursuant to SRIP or another non-qualified plan, then such amount shall not be payable pursuant to this Plan. 9.2 Small Distribution. Notwithstanding any election made by the Participant, the Administrative Committee will distribute any Pre-Tax Account in the form of a lump sum distribution if the Participant's Pre-Tax Account has a value less than $10,000 when such distribution would otherwise commence. 9.3 Emergency Distribution. In the event that the Administrative Committee, upon written petition of the Participant, determines in its sole discretion that the Participant has suffered an unforeseeable financial emergency, the Employer shall distribute to the Participant, as soon as practicable following such determination, a payment from his Pre-Tax Account for one or more Savings Units as necessary to meet the emergency (the "Emergency Distribution"). For purposes of this Plan, an unforeseeable financial emergency is an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence. Cash needs arising from foreseeable events such as the purchase of a house or education expenses for children shall not be considered to be the result of an unforeseeable financial emergency. Upon receipt of an Emergency Benefit, except for mandatory savings as required pursuant to Section 4.1, a Participant shall not be permitted to commence a new Savings Unit until one whole calendar year has elapsed. 9.4 Commencement of Payments. Except as otherwise provided in this Plan, commencement of a distribution under this Plan shall begin sixty (60) days following the event which entitles a Participant (or a Beneficiary) to such distribution, or at such earlier date as may be determined by the Administrative Committee or the HRC. 9.5 Withholding. Upon any distribution hereunder, payment shall be reduced by the minimum amount necessary to satisfy Federal, state or local taxes required by law to be withheld with respect to such distribution. 9.6 Transfer to Bellcore. If a Participant transfers to Bellcore, all of the Participant's Savings Units shall automatically be frozen upon such transfer, unless otherwise determined by the Administrative Committee. No further Participant contributions shall be made subsequent to the transfer. During the period of employment at Bellcore (for a period not to exceed five (5) years), the Participant shall continue to be credited with interest on his Pre-Tax Accounts as provided under Section 5.1 and all distributions shall continue to be payable to the Participant or the Participant's Beneficiaries in accordance with Section 6 hereof. If the Participant has not resumed employment with the Employer in an employment status which makes him eligible to participate in this Plan within five (5) years from date of transfer, a Termination Distribution based on the amounts credited to the Participant's Pre-Tax Accounts shall be paid upon termination of employment with Bellcore or the expiration of such five (5) year period, whichever is earlier. 9.7 Leave of Absence. If a Participant absents himself from employment on a formally granted leave of absence (i.e., the absence is with formal permission in order to prevent a break in the continuity of the Employee's term of employment, which permission is granted in conformity with the rules of the Employer which employs the individual), all of the Participant's Savings Units shall automatically be frozen upon such leave of absence, unless otherwise determined by the Administrative Committee. No Participant contributions shall be made during the leave of absence. However, during the leave of absence, the Participant shall continue to be credited with interest on his Pre-Tax Accounts, as provided under Section 5.1 and all distributions shall continue to be payable to the Participant and his Beneficiaries in accordance with Section 6 hereof. If the participant returns to employment with the Employer in an employment status which makes him eligible to participate in this Plan before completion of or immediately upon the expiration of the leave of absence, Participant contributions will resume until the end of the original Unit Period. If the Participant has not resumed employment with the Employer in an employment status which makes him eligible to participate in this Plan before completion of or immediately upon the expiration of the leave of absence, a Termination Distribution based on the amounts credited to the Participant's Pre-Tax Accounts shall be paid to the Participant. This Section 9.7 shall not apply with respect to any period during which a Participant is suffering from a Disability, and such period of Disability shall not be included under this Section 9.7 as a portion of a period of leave of absence. 9.8 Ineligible Participant. Notwithstanding any other provisions of this Plan to the contrary, if any Participant is determined not to be a "management or highly compensated employee" within the meaning of the Employee Retirement Income Security Act of 1974, as amended (ERISA) or Regulations thereunder, such Participant will not be eligible to participate in this Plan and shall receive an immediate lump sum distribution of his Pre-Tax Accounts. Upon such payment no other distribution shall thereafter be payable under this Plan either to the Participant or any Beneficiary of the Participant, except as provided under Section 9.1. 9.9 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interest, or claims in any property or assets of Employer. No assets of Employer shall be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of Employer under this Plan. Any and all of the Employer's assets shall be, and remain, the general, unpledged, unrestricted assets of Employer. Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise of Employer to pay money under the Plan in the future. 9.10 Offset. If a Participant becomes entitled to a distribution under the Plan, the Employer may offset against the amount otherwise distributable, any claims to reimbursement for intentional wrongdoing by the Participant against the Employer or an affiliate. Such determination shall be made by the Administrative Committee in its sole discretion. 9.11 Non-Assignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual distribution, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 9.12 Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Employee any right to be retained in the employ of the Employer or to serve as a director. 9.13 Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine or feminine, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 9.14 Captions. The captions of the articles, sections, and paragraphs of this Plan are for convenience only and shall not control nor affect the meaning or construction of any of its provisions. 9.15 Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of Texas. 9.16 Validity. In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. 9.17 Notice. Any notice or filing required or permitted to be given to the Administrative Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Employer, directed to the attention of the Senior Executive Vice President-Human Resources of the Employer. Such notice shall be deemed given on the date of delivery or, if delivery is made by mail, on the date shown on the postmark on the receipt for registration or certification. 9.18 Successors and Assigns. This Plan shall be binding upon the Company and its successors and assigns. 9.19 Trust Fund. The Employer shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Company may establish one or more trusts, for the purpose of providing for the payment of such benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Employer's creditors. To the extent any benefits provided under the Plan are actually paid from any such trust, the Employer shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Employer. EXHIBIT (1) SBC OFFICER RETIREMENT SAVINGS PLAN ("PLAN") ENROLLMENT FORM 1994 ENROLLMENT FORM DUE DATE: 12/15/93 Return of this Form is Required. Name __________________________________ Social Security Number - ----------------- Please Print Officer hereby agrees to contribute a portion of his/her monthly Base Salary, effective January 1, 1994, as shown below, the terms of the Plan to govern and control (all elections are irrevocable): Pre-Tax Amount (deferral percentage) = __________% (Note 1 & 2) The distribution of this Unit including my contributions and interest thereon shall be as follows (Note 3): ______ I elect to defer making my choice as to the number of payments for my Retirement Distribution which shall commence in January of the year following my Retirement until no later than the last day of the calendar year in which my Retirement takes place. ______ I elect to receive my Retirement Distribution commencing in January of the year following my Retirement in (specify number 1,60,120, or 180) monthly installments. Note 1: This is your pre-tax deferral percentage for this Plan only. This does not affect deferrals related to your deferred compensation plans' Units or your Stock Savings Plan Units. The percentage will apply to your full Base Salary before deferrals to other plans. Note 2: Only Base Salary above $250,000 can be deferred. Note 3: Withholding on all distributions will be at the minimum rate prescribed by law. ACCEPTED AND AGREED: BY THE COMPANY: BY OFFICER: By__________________________________ ____________________ ___________ Its Senior Executive Vice President- Signature Date Human Resources EX-10 15 1996 STOCK AND INCENTIVE PLAN EXHIBIT 10r LOGO SBC Communications Inc. 1996 STOCK AND INCENTIVE PLAN Plan Effective: January 1, 1996 As amended through: November 21, 1997 TABLE OF CONTENTS Article 1 Establishment and Purpose..........................................1 1.1 Establishment of the Plan.............................................1 1.2 Purpose of the Plan...................................................1 1.3 Effective Date of the Plan............................................1 Article 2 Definitions........................................................1 Article 3 Administration.....................................................5 3.1 The Committee.........................................................5 3.2 Authority of the Committee............................................6 Article 4 Shares Subject to the Plan.........................................6 4.1 Number of Shares......................................................6 4.2 Lapsed Awards.........................................................7 4.3 Adjustments in Authorized Plan Shares.................................7 Article 5 Eligibility and Participation......................................7 5.1 Eligibility...........................................................7 5.2 Actual Participation..................................................8 Article 6 Stock Options......................................................8 6.1 Grant of Options......................................................8 6.2 Form of Issuance......................................................8 6.3 Exercise Price........................................................9 6.4 Duration of Options...................................................9 6.5 Vesting of Options....................................................9 6.6 Exercise of Options...................................................9 6.7 Payment...............................................................9 6.8 Termination of Employment............................................11 6.9 Employee Transfers...................................................12 6.10 Restrictions on Exercise and Transfer of Options.....................12 6.11 Competition..........................................................13 Article 7 Restricted Stock..................................................13 7.1 Grant of Restricted Stock............................................13 7.2 Restricted Stock Agreement...........................................13 7.3 Transferability......................................................13 7.4 Other Restrictions...................................................14 7.5 Removal of Restrictions..............................................14 7.6 Voting Rights, Dividends and Other Distributions.....................14 7.7 Termination of Employment Due to Death or Disability.................14 7.8 Termination of Employment for Other Reasons..........................15 7.9 Employee Transfers...................................................15 Article 8 Performance Units and Performance Shares..........................15 8.1 Grants of Performance Units and Performance Shares...................15 8.2 Value of Performance Shares and Units................................15 8.3 Performance Period...................................................16 8.4 Performance Goals....................................................16 8.5 Dividend Equivalents on Performance Shares...........................17 8.6 Form and Timing of Payment of Performance Units and Performance Shares18 8.7 Termination of Employment Due to Death, Disability, or Retirement....19 8.8 Termination of Employment for Other Reasons..........................19 8.9 Termination of Employment for Cause..................................19 8.10 Nontransferability...................................................19 Article 9 Beneficiary Designation...........................................20 Article 10 Deferrals.......................................................20 10.1 Deferrals............................................................20 10.2 Deferral of Performance Unit and Performance Share Distributions.....20 Article 11 Employee Matter.................................................21 11.1 Employment Not Guaranteed............................................21 11.2 Participation........................................................21 11.3 Claims and Appeals...................................................21 Article 12 Change in Control...............................................22 Article 13 Amendment, Modification, and Termination........................22 13.1 Amendment, Modification, and Termination.............................22 13.2 Awards Previously Granted............................................22 Article 14 Withholding.....................................................22 14.1 Tax Withholding......................................................22 14.2 Share Withholding....................................................23 Article 15 Successors......................................................23 Article 16 Legal Construction..............................................23 16.1 Gender and Number....................................................23 16.2 Severability.........................................................23 16.3 Requirements of Law..................................................24 16.4 Securities Law Compliance............................................24 16.5 Governing Law........................................................24 SBC COMMUNICATIONS INC. 1996 STOCK AND INCENTIVE PLAN Article 1 Establishment and Purpose. 1.1 Establishment of the Plan. SBC Communications Inc., a Delaware corporation (the "Company" or "SBC"), hereby establishes an incentive compensation plan (the "Plan"), as set forth in this document. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of the Company's shareowners, and by providing Participants with an incentive for outstanding performance. The Plan is further intended to attract and retain the services of Participants upon whose judgment, interest, and special efforts the successful operation of SBC and its subsidiaries is dependent. 1.3 Effective Date of the Plan. The Plan shall become effective on January 1, 1996; however, grants may be made before that time subject to becoming effective on or after that date. During the first year this Plan is effective, Awards shall be issued only to the extent the potential payout of Shares shall not exceed 10% of the Shares approved for issuance under this Plan. Article 2 Definitions. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: (a) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock, Performance Units, or Performance Shares. (b) "Award Agreement" means an agreement which may be entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan. (c) "Board" or "Board of Directors" means the SBC Board of Directors. (d) "Cause" shall mean willful and gross misconduct on the part of an Employee that is materially and demonstrably detrimental to the Company or any Subsidiary as determined by the Committee in its sole discretion. (e) "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities, or (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new Director whose election by the Board of Directors or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareowners of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least eighty percent (80%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" means the committee or committees, as specified in Article 3, appointed by the Board to administer the Plan with respect to grants of Awards. (h) "Director" means any individual who is a member of the SBC Board of Directors. (i) "Disability" shall mean the Participant's inability to perform the Participant's normal Employment functions due to any medically determinable physical or mental disability, which can last or has lasted 12 months or is expected to result in death. (j) "Employee" means any management employee of the Company or of one of the Company's Subsidiaries. "Employment" means the employment of an Employee by the Company or one of its Subsidiaries. Directors who are not otherwise employed by the Company shall not be considered Employees under this Plan. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto. (l) "Exercise Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee. (m) "Fair Market Value" shall mean the closing price of Shares on the relevant date, or (if there were no sales on such date) the next preceding trading date, all as reported in the New York Stock Exchange Composite Trading listings, or in a similar report selected by the Committee. A trading day is any day that the Stock is traded on the New York Stock Exchange. (n) "Incentive Stock Option" or "ISO" means an option to purchase Shares from SBC, granted under this Plan, which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (o) "Insider" shall mean an Employee who is, on the relevant date, an officer, director, or ten percent (10%) beneficial owner of the Company, as those terms are defined under Section 16 of the Exchange Act. (p) "Key Executive Officer Short Term Award" means a Performance Unit expressed in dollars. (q) "Nonqualified Stock Option" or "NQSO" means the option to purchase Shares from SBC, granted under this Plan, which is not intended to be an Incentive Stock Option. (r) "Option" or "Stock Option" shall mean an Incentive Stock Option or a Nonqualified Stock Option, and shall include a Restoration Option. (s) "Participant" means a person who holds an outstanding Award granted under the Plan. (t) "Performance Unit" and "Performance Share" shall each mean an Award granted to an Employee pursuant to Article 8 herein. (u) "Plan" means this 1996 Stock and Incentive Plan. The Plan may also be referred to as the "SBC 1996 Stock and Incentive Plan" or as the "SBC Communications Inc. 1996 Stock and Incentive Plan." (v) "Restricted Stock" means an Award of Stock granted to an Employee pursuant to Article 7 herein. (w) "Restriction Period" means the period during which Shares of Restricted Stock are subject to restrictions or conditions under Article 7. (x) "Retirement" or to "Retire" shall mean the termination of a Participant's Employment with the Company or one of its Subsidiaries, for any reason other than death, Disability or for Cause, on or after the earlier of the following dates, or as otherwise provided by the Committee: (1) the date the Participant would be eligible to retire with an immediate pension under the rules of the SBC Supplemental Retirement Income Plan, whether or not actually a participant in such plan; or (2) the date the Participant has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 Years of more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to a Participant who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program upon termination of employment, the terms "Retirement" or to "Retire" shall include such Participant's termination of employment. (y) "Rotational Work Assignment Company ("RWAC") shall mean any entity with which SBC Communications Inc. or any of its Subsidiaries may enter into an agreement to provide an employee for a rotational work assignment. (z) "Shares" or "Stock" means the shares of common stock of the Company. (aa) "Subsidiary" shall mean any corporation in which the Company owns directly, or indirectly through subsidiaries, more than fifty percent (50%) of the total combined voting power of all classes of Stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns more than fifty percent (50%) of the combined equity thereof. (bb) "Window Period" means the period beginning on the third business day following the date of public release of the Company's quarterly sales and earnings information, and ending on the twelfth business day following such date. Article 3 Administration. 3.1 The Committee. Administration of the Plan shall be bifurcated as follows: (a) With respect to Insiders, the Plan and all Awards hereunder shall be administered only by the Human Resources Committee of the Board or such other Committee as may be appointed by the Board for this purpose (the "Disinterested Committee"), where each Director on such Disinterested Committee is a "Disinterested Person" (or any successor designation for determining who may administer plans, transactions or awards exempt under Section 16(b) of the Exchange Act), as that term is used in Rule 16b-3 under the Exchange Act, as that rule may be modified from time to time. (b) The Disinterested Committee and such other Committee as the Board may create, if any, specifically to administer the Plan with respect to non-Insiders (the "Non-Insider Committee") shall each have full authority to administer the Plan and all Awards hereunder with respect to all persons who are not Insiders, except as otherwise provided herein or by the Board. Either Committee may be replaced by the Board at any time. 3.2 Authority of the Committee. The Committee shall have full power except as limited by law and subject to the provisions herein, to select the recipients of Awards, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend, or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 13 herein) to amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. No Award other than Restoration Options may be made under the Plan after December 31, 2010. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive, and binding on all persons, including the Company, its stockholders, Employees, Participants, and their estates and beneficiaries. Subject to the terms of this Plan, the Committee is authorized, and shall not be limited in its discretion, to use any of the Performance Criteria specified herein in its determination of Awards under this Plan. Article 4 Shares Subject to the Plan. 4.1 Number of Shares. Subject to adjustment as provided in Section 4.3 herein, the number of Shares available for grant under the Plan shall not exceed 30 million Shares of Stock. No more than 10% of the Shares approved for issuance under this Plan may be Shares of Restricted Stock. No more than 40% of the Shares approved for issuance under this Plan may be issued to Participants as a result of Performance Share or Restricted Stock Awards. The Shares granted under this Plan may be either authorized but unissued or reacquired Shares. The Disinterested Committee shall have full discretion to determine the manner in which Shares available for grant are counted in this Plan. Without limiting the discretion of the Committee under this section, unless otherwise provided by the Committee, the following rules will apply for purposes of the determination of the number of Shares available for grant under the Plan or compliance with the foregoing limits: (a) The grant of a Stock Option or a Restricted Stock Award shall reduce the Shares available for grant under the Plan by the number of Shares subject to such Award. However, to the extent the Participant uses previously owned Shares to pay the Exercise Price or any taxes, or Shares are withheld to pay taxes, these Shares shall be available for regrant under the Plan. (b) With respect to Performance Shares, the number of Performance Shares granted under the Plan shall be deducted from the number of Shares available for grant under the Plan. The number of Performance Shares which cannot be, or are not, converted into Shares and distributed (including deferrals) to the Participant (after any applicable tax withholding) following the end of the Performance Period shall increase the number of Shares available for regrant under the Plan by an equal amount. (c) With respect to Performance Units representing a fixed dollar amount that may only be settled in cash, the Performance Units Award shall not affect the number of Shares available under the Plan. 4.2 Lapsed Awards. If any Award granted under this Plan is canceled, terminates, expires, or lapses for any reason, Shares subject to such Award shall be again available for the grant of an Award under the Plan. 4.3 Adjustments in Authorized Plan Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, Stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, an adjustment shall be made in the number and class of Shares which may be delivered under the Plan (including individual limits), and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and/or the number of outstanding Options, Shares of Restricted Stock, and Performance Shares constituting outstanding Awards, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights. Article 5 Eligibility and Participation. 5.1 Eligibility. All management Employees are eligible to participate in this Plan. 5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No Employee is entitled to receive an Award unless selected by the Committee. Article 6 Stock Options. 6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Employees at any time and from time to time, and under such terms and conditions, as shall be determined by the Committee. The Committee shall have discretion in determining the number of Shares subject to Options granted to each Employee; provided, however, that the maximum number of Shares subject to Options which may be granted to any single Employee during any calendar year shall not exceed 2% of the Shares approved for issuance under this Plan. The Committee may grant ISOs, NQSOs, or a combination thereof; provided, however, that no ISO may be issued after January 1, 2006. The Committee may authorize the automatic grant of additional Options ("Restoration Options") when a Participant exercises already outstanding Options, or options granted under a prior option plan of the Company, on such terms and conditions as it shall determine. Unless otherwise provided by the Committee, the number of Restoration Options granted to a Participant with respect to the exercise of an option (including an Option under this Plan) shall not exceed the number of Shares delivered by the Participant in payment of the Exercise Price of such option, and/or in payment of any tax withholding resulting from such exercise, and any Shares which are withheld to satisfy withholding tax liability arising out of such exercise. A Restoration Option shall have an Exercise Price of not less than 100% of the per Share Fair Market Value on the date of grant of such Restoration Option, and shall be subject to all the terms and conditions of the original grant, including the expiration date, and such other terms and conditions as the Committee in its sole discretion shall determine. 6.2 Form of Issuance. Each Option grant may be issued in the form of an Award Agreement and/or may be recorded on the books and records of the Company for the account of the Participant. If an Option is not issued in the form of an Award Agreement, then the Option shall be deemed granted as determined by the Committee. The terms and conditions of an Option shall be set forth in the Award Agreement, in the notice of the issuance of the grant, or in such other documents as the Committee shall determine. Such terms and conditions shall include the Exercise Price, the duration of the Option, the number of Shares to which an Option pertains (unless otherwise provided by the Committee, each Option may be exercised to purchase one Share), and such other provisions as the Committee shall determine, including, but not limited to whether the Option is intended to be an ISO or a NQSO. 6.3 Exercise Price. Unless a greater Exercise Price is determined by the Committee, the Exercise Price for each Option Awarded under this Plan shall be equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. 6.4 Duration of Options. Each Option shall expire at such time as the Committee shall determine at the time of grant (which duration may be extended by the Committee); provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 6.5 Vesting of Options. Options shall vest at such times and under such terms and conditions as determined by the Committee; provided, however, unless a later vesting period is provided by the Committee at or before the grant of an Option, one-third of the Options will vest on each of the first three anniversaries of the grant; if one Option remains after equally dividing the grant by three, it will vest on the first anniversary of the grant, if two Options remain, then one will vest on each of the first two anniversaries. The Committee shall have the right to accelerate the vesting of any Option; however, the Chairman of the Board or the Senior Vice President-Human Resources, or their respective successors, or such other persons designated by the Committee, shall have the authority to accelerate the vesting of Options for any Participant who is not an Insider. 6.6 Exercise of Options. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. Options shall be exercised by providing notice to the designated agent selected by the Company (if no such agent has been designated, then to the Company), in the manner and form determined by the Company, which notice shall be irrevocable, setting forth the exact number of Shares with respect to which the Option is being exercised and including with such notice payment of the Exercise Price. When Options have been transferred, the Company or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option. No Option may be exercised with respect to a fraction of a Share. 6.7 Payment. The Exercise Price shall be paid in full at the time of exercise. No Shares shall be issued or transferred until full payment has been received therefor. Payment may be made: (a) in cash, or (b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as the Committee or the Company may impose from time to time, and further subject to suspension or termination of this provision by the Committee or Company at any time, by: (i) delivery of Shares of Stock owned by the Participant in partial (if in partial payment, then together with cash) or full payment; provided, however, as a condition to paying any part of the Exercise Price in Stock, at the time of exercise of the Option, the Participant must establish to the satisfaction of the Company that the Stock tendered to the Company must have been held by the Participant for a minimum of six (6) months preceding the tender; or (ii) if the Company has designated a stockbroker to act as the Company's agent to process Option exercises, issuance of an exercise notice to such stockbroker together with instructions irrevocably instructing the stockbroker: (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a limit order) a sufficient portion of the Shares to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to the Company. In the event the stockbroker sells any Shares on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and the Company disclaims any responsibility for the actions of the stockbroker in making any such sales. No Stock shall be issued until the settlement date and until the proceeds (equal to the Option Price and tax withholding) are paid to the Company. If payment is made by the delivery of Shares of Stock, the value of the Shares delivered shall be equal to the Fair Market Value of the Shares on the day preceding the date of exercise of the Option. Restricted Stock may not be used to pay the Option Price. 6.8 Termination of Employment. Unless otherwise provided by the Committee, the following limitations on exercise of Options shall apply upon termination of Employment: (a) Termination by Death or Disability. In the event the Employment of a Participant shall terminate by reason of death or Disability, all outstanding Options granted to that Participant shall immediately vest as of the date of termination of Employment and may be exercised, if at all, no more than three (3) years from the date of the termination of Employment, unless the Options, by their terms, expire earlier. However, in the event the Participant was eligible to Retire at the time of termination of Employment, notwithstanding the foregoing, the Options may be exercised, if at all, no more than five (5) years from the date of the termination of Employment, unless the Options, by their terms, expire earlier. (b) Termination for Cause. If the Employment of a Participant shall be terminated by the Company for Cause, all outstanding Options held by the Participant shall immediately be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options. (c) Retirement or Other Termination of Employment. If the Employment of a Participant shall terminate for any reason other than the reasons set forth in (a) or (b), above, all outstanding Options which are vested as of the effective date of termination of Employment may be exercised, if at all, no more than five (5) years from the date of termination of Employment if the Participant is eligible to Retire, or one (1) year from the date of the termination of Employment if the Participant is not eligible to Retire, as the case may be, unless in either case the Options, by their terms, expire earlier. In the event of the death of the Participant after termination of Employment, this paragraph (c) shall still apply and not paragraph (a), above. (d) Options not Vested at Termination. Except as provided in paragraph (a), above, all Options held by the Participant which are not vested on or before the effective date of termination of Employment shall immediately be forfeited to the Company (and shall once again become available for grant under the Plan). (e) Notwithstanding the foregoing, the Committee may, in its sole discretion, establish different terms and conditions pertaining to the effect of termination of Employment, but no such modification shall shorten the terms of Options issued prior to such modification. 6.9 Employee Transfers. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) or between the Company or a Subsidiary and a RWAC, to the extent the period of employment at a RWAC is equal to or less than five (5) years, shall not be deemed a termination of Employment. Provided, however, for purposes of this Article 6, termination of employment with a RWAC without a concurrent transfer to the Company or any of its Subsidiaries shall be deemed a termination of Employment as that term is used herein. Similarly, termination of an entity's status as a Subsidiary or as a RWAC shall be deemed a termination of Employment of any Participants employed by such Subsidiary or RWAC. 6.10 Restrictions on Exercise and Transfer of Options. Unless otherwise provided by the Committee: (a) During the Participant's lifetime, the Participant's Options shall be exercisable only by the Participant or by the Participant's guardian or legal representative. After the death of the Participant, except as otherwise provided by SBC's Rules for Employee Beneficiary Designations, an Option shall only be exercised by the holder thereof (including, but not limited to, an executor or administrator of a decedent's estate) or his or her guardian or legal representative. (b) No Option shall be transferable except: (i) in the case of the Participant, only upon the Participant's death and in accordance with the SBC Rules for Employee Beneficiary Designations; and (ii) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution. 6.11 Competition. Notwithstanding anything in this Article 6 to the contrary, prior to a Change in Control, in the event the Committee determines, in its sole discretion, that a Participant is engaging in competitive activity with the Company, any Subsidiary, or any business in which any of the foregoing have a substantial interest (the "SBC Businesses"), the Committee may cancel any Option granted to such Participant, whether or not vested, in whole or in part. Such cancellation shall be effective as of the date specified by the Committee. Competitive activity shall mean any business or activity in the same geographical market where a substantially similar business activity is being carried on by an SBC Business, including, but not limited to, representing or providing consulting services to any person or entity that is engaged in competition with an SBC Business or that takes a position adverse to an SBC Business. However, competitive activity shall not include, among other things, owning a nonsubstantial interest as a shareholder in a competing business. The determination of whether a Participant has engaged in competitive activity with the Company shall be determined by the Committee in good faith and in its sole discretion. Article 7 Restricted Stock. 7.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees in such amounts and upon such terms and conditions as the Committee shall determine. In addition to any other terms and conditions imposed by the Committee, vesting of Restricted Stock may be conditioned upon the attainment of Performance Goals based on Performance Criteria in the same manner as provided in Section 8.4, herein, with respect to Performance Shares. No Employee may receive, in any calendar year, in the form of Restricted Stock more than one-third of 1% of the Shares approved for issuance under this Plan. 7.2 Restricted Stock Agreement. The Committee may require, as a condition to an Award, that a recipient of a Restricted Stock Award enter into a Restricted Stock Award Agreement, setting forth the terms and conditions of the Award. In lieu of a Restricted Stock Award Agreement, the Committee may provide the terms and conditions of an Award in a notice to the Participant of the Award, on the Stock certificate representing the Restricted Stock, in the resolution approving the Award, or in such other manner as it deems appropriate. 7.3 Transferability. Except as otherwise provided in this Article 7, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Restriction Period established by the Committee, which shall not be less than a period of three years. 7.4 Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock and/or restrictions under applicable Federal or state securities laws; and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. The Company shall also have the right to retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. 7.5 Removal of Restrictions. Except as otherwise provided in this Article 7, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Restriction Period and completion of all conditions to vesting, if any. However, unless otherwise provided by the Committee, the Committee, in its sole discretion, shall have the right to immediately waive all or part of the restrictions and conditions with regard to all or part of the Shares held by any Participant at any time. 7.6 Voting Rights, Dividends and Other Distributions. During the Restriction Period, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights and shall receive all regular cash dividends paid with respect to such Shares. Except as provided in the following sentence, in the sole discretion of the Committee, other cash dividends and other distributions paid to Participants with respect to Shares of Restricted Stock may be subject to the same restrictions and conditions as the Shares of Restricted Stock with respect to which they were paid. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions and conditions as the Shares of Restricted Stock with respect to which they were paid. 7.7 Termination of Employment Due to Death or Disability. In the event the Employment of a Participant shall terminate by reason of death or Disability, all Restriction Periods and all restrictions imposed on outstanding Shares of Restricted Stock held by the Participant shall immediately lapse and the Restricted Stock shall immediately become fully vested as of the date of termination of Employment. 7.8 Termination of Employment for Other Reasons. If the Employment of a Participant shall terminate for any reason other than those specifically set forth in Section 7.7 herein, all Shares of Restricted Stock held by the Participant which are not vested as of the effective date of termination of Employment immediately shall be forfeited and returned to the Company. 7.9 Employee Transfers. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) or between the Company or a Subsidiary and a RWAC, to the extent the period of employment at a RWAC is equal to or less than five (5) years, shall not be deemed a termination of Employment. Provided, however, for purposes of this Article, termination of employment with a RWAC without a concurrent transfer to the Company or any of its Subsidiaries shall be deemed a termination of Employment as that term is used herein. Similarly, termination of an entity's status as a Subsidiary or as a RWAC shall be deemed a termination of Employment of any Participants employed by such Subsidiary or RWAC. Article 8 Performance Units and Performance Shares. 8.1 Grants of Performance Units and Performance Shares. Subject to the terms of the Plan, Performance Shares and Performance Units may be granted to eligible Employees at any time and from time to time, as determined by the Committee. The Committee shall have complete discretion in determining the number of Performance Units and/or Performance Shares Awarded to each Participant. 8.2 Value of Performance Shares and Units. (a) A Performance Share is equivalent in value to a Share of Stock. In any calendar year, no individual may be Awarded Performance Shares having a potential payout of Shares of Stock exceeding two-thirds of 1% of the Shares approved for issuance under this Plan. (b) A Performance Unit shall be equal in value to a fixed dollar amount determined by the Committee. In any calendar year, no individual may be Awarded Performance Units having a potential payout equivalent exceeding the Fair Market Value of two-thirds of 1% of the Shares approved for issuance under this Plan. The number of Shares equivalent to the potential payout of a Performance Unit shall be determined by dividing the maximum cash payout of the Award by the Fair Market Value per Share on the effective date of the grant. In the event the Committee denominates a Performance Unit Award in dollars instead of Performance Units, the Award may be referred to as a Key Executive Officer Short Term Award. In all other respects, the Key Executive Officer Short Term Award will be treated in the same manner as Performance Units under this Plan. 8.3 Performance Period. The Performance Period for Performance Shares and Performance Units is the period over which the Performance Goals are measured. The Performance Period is set by the Committee for each Award; however, in no event shall an Award have a Performance Period of less than one year. 8.4 Performance Goals. For each Award of Performance Shares or Performance Units, the Committee shall establish performance objectives ("Performance Goals") for the Company, its Subsidiaries, and/or divisions of any of foregoing, based on the Performance Criteria and other factors set forth in (a) through (d), below. Performance Goals shall include payout tables, formulas or other standards to be used in determining the extent to which the Performance Goals are met, and, if met, the number of Performance Shares and/or Performance Units which would be converted into Stock and/or cash (or the rate of such conversion) and distributed to Participants in accordance with Section 8.6. All Performance Shares and Performance Units which may not be converted under the Performance Goals or which are reduced by the Committee under Section 8.6 or which may not be converted for any other reason after the end of the Performance Period shall be canceled at the time they would otherwise be distributable. When the Committee desires an Award to qualify under Section 162(m) of the Code, as amended, the Committee shall establish the Performance Goals for the respective Performance Shares and Performance Units prior to or within 90 days of the beginning of the service relating to such Performance Goal, and not later than after 25% of such period of service has elapsed. For all other Awards, the Performance Goals must be established before the end of the respective Performance Period. (a) The Performance Criteria which the Committee is authorized to use, in its sole discretion, are any of the following criteria or any combination thereof: (1) Financial performance of the Company (on a consolidated basis), of one or more of its Subsidiaries, and/or a division of any of the foregoing. Such financial performance may be based on net income and/or Value Added (after-tax cash operating profit less depreciation and less a capital charge). (2) Service performance of the Company (on a consolidated basis), of one or more of its Subsidiaries, and/or of a division of any of the foregoing. Such service performance may be based upon measured customer perceptions of service quality. (3) The Company's Stock price; return on shareholders' equity; total shareholder return (Stock price appreciation plus dividends, assuming the reinvestment of dividends); and/or earnings per share. (4) With respect to the Company (on a consolidated basis), to one or more of its Subsidiaries, and/or to a division of any of the foregoing: sales; costs; market share of a product or service; return on net assets; return on assets; return on capital; profit margin; and/or operating revenues, expenses or earnings. (b) If the performance of more than one Subsidiary is being measured to determine the attainment of performance goals, then a weighted average of the Subsidiaries' results shall be used, as determined by the Committee, including, but not limited to, basing such weighting upon the revenues, assets or net income for each Subsidiary for any year prior to the Performance Period or by using budgets to weight such Subsidiaries. (c) Except to the extent otherwise provided by the Committee in full or in part, if any of the following events occur during a Performance Period and would directly affect the determination of whether or the extent to which Performance Goals are met, they shall be disregarded in any such computation: changes in accounting principles; extraordinary items; changes in tax laws affecting net income and/or Value Added; natural disasters, including floods, hurricanes, and earthquakes; and intentionally inflicted damage to property which directly or indirectly damages the property of the Company or its Subsidiaries. No such adjustment shall be made to the extent such adjustment would cause the Performance Shares or Performance Units to fail to satisfy the performance based exemption of Section 162(m) of the Code. 8.5 Dividend Equivalents on Performance Shares. Unless reduced or eliminated by the Committee, a cash payment in an amount equal to the dividend payable on one Share will be made to each Participant for each Performance Share which on the record date for the dividend had been awarded to the Participant and not converted, distributed (or deferred) or canceled. 8.6 Form and Timing of Payment of Performance Units and Performance Shares. As soon as practicable after the applicable Performance Period has ended and all other conditions (other than Committee actions) to conversion and distribution of a Performance Share and/or Performance Unit Award have been satisfied (or, if applicable, at such other time determined by the Committee at or before the establishment of the Performance Goals for such Performance Period), the Committee shall determine whether and the extent to which the Performance Goals were met for the applicable Performance Units and Performance Shares. If Performance Goals have been met, then the number of Performance Units and Performance Shares to be converted into Stock and/or cash and distributed to the Participants shall be determined in accordance with the Performance Goals for such Awards, subject to any limits imposed by the Committee. Unless the Participant has elected to defer all or part of his Performance Units or Performance Shares as provided in Article 10, herein, payment of Performance Units and Performance Shares shall be made in a single lump sum, as soon as reasonably administratively possible following the determination of the number of Shares or amount of cash to which the Participant is entitled. Performance Units will be distributed to Participants in the form of cash. Performance Shares will be distributed to Participants in the form of 50% Stock and 50% Cash, or at the Participant's election, 100% Stock or 100% Cash. In the event the Participant is no longer an Employee at the time of the distribution, then the distribution shall be 100% in cash, provided the Participant may elect to take 50% or 100% in Stock. At any time prior to the distribution of the Performance Shares and/or Performance Units (or if distribution has been deferred, then prior to the time the Awards would have been distributed), unless otherwise provided by the Committee, the Committee shall have the authority to reduce or eliminate the number of Performance Units or Performance Shares to be converted and distributed or to mandate the form in which the Award shall be paid (i.e., in cash, in Stock or both, in any proportions determined by the Committee). Unless otherwise provided by the Committee, any election to take a greater amount of cash or Stock with respect to Performance Shares must be made in the calendar year prior to the calendar year in which the Performance Shares are distributed (or if distribution has been deferred, then in the year prior to the year the Performance Shares would have been distributed absent such deferral). In addition, if required in order to exempt the transaction from the provisions of Section 16(b) of the Exchange Act, any election by an Insider to take a greater amount in cash must be made during a Window Period and shall be subject to Committee approval. For the purpose of converting Performance Shares into cash and distributing the same to the holders thereof (or for determining the amount of cash to be deferred), the value of a Performance Share shall be the average of the Fair Market Values of Shares for the period of five (5) trading days ending on the valuation date. The valuation date shall be the first business day of the second month in the year of distribution (or the year it would have been distributed were it not deferred), except that in the case of distributions due to death or Disability, the valuation date shall be the first business day of the month in which the Committee determines the distribution. Performance Shares to be distributed in the form of Stock will be converted at the rate of one (1) Share of Stock per Performance Share. 8.7 Termination of Employment Due to Death, Disability, or Retirement. If the Employment of a Participant shall terminate by reason of death or Disability, the Participant shall receive a lump sum payout of all outstanding Performance Units and Performance Shares calculated as if all unfinished Performance Periods had ended with 100% of the Performance Goals achieved, payable in the year following the date of termination of Employment. In the event of Retirement, the full Performance Units and Performance Shares shall be converted and distributed based on and subject to the achievement of the Performance Goals and in accordance with all other terms of the Award and this Plan. 8.8 Termination of Employment for Other Reasons. If the Employment of a Participant shall terminate for other than a reason set forth in Section 8.7 (and other than for Cause), the number of Performance Units and Performance Shares to be converted and distributed shall be converted and distributed based upon the achievement of the Performance Goals and in accordance with all other terms of the Award and the Plan; however, the Participant may receive no more than a prorated payout of all Performance Units and Performance Shares, based on the portions of the respective Performance Periods that have been completed. 8.9 Termination of Employment for Cause. In the event that a Participant's Employment shall be terminated by the Company for Cause, all Performance Units and Performance Shares shall be forfeited by the Participant to the Company. 8.10 Nontransferability. Performance Units and Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than in accordance with the SBC Rules for Employee Beneficiary Designations. Article 9 Beneficiary Designation. In the event of the death of a Participant, distributions or Awards under this Plan, other than Restricted Stock, shall pass in accordance with the SBC Rules for Employee Beneficiary Designations. Article 10 Deferrals. 10.1 Deferrals. Unless otherwise provided by the Committee, a Participant may defer all or part of the Stock or cash to be received upon conversion and distribution of Performance Units or Performance Shares. In the event of the termination of Employment of a Participant prior to becoming eligible for Retirement, no deferrals under this Article shall be permitted and any previously deferred Performance Shares or Performance Units, and earnings thereon, shall be distributed as soon as administratively possible. 10.2 Deferral of Performance Unit and Performance Share Distributions. Prior to the calendar year in which Performance Units or Performance Shares are to be distributed (or if deferred, prior to the calendar year the Awards would have been distributed), Participants may elect to defer the receipt of a Performance Unit or Performance Share distribution upon such terms as the Committee deems appropriate. Unless otherwise provided by the Committee, Participants may elect to defer receipt of all or part of a Performance Unit or Performance Share for distribution in a lump sum in February of any calendar year following the year in which the Awards would otherwise be distributed, or to be distributed in up to 15 annual installments (each installment shall be equal to the total Shares or cash in the Award divided by the number of remaining installments), payable each calendar year in the month determined by the Participant, beginning as soon as administratively possible after Retirement or in a later month in the calendar year of Retirement, or in the calendar year immediately thereafter. (a) Deferred amounts which would otherwise have been distributed in cash shall be credited to the Participant's account and shall bear interest from the date the Awards would otherwise have been paid. The interest will be credited quarterly to the account at the declared rate determined by the Company from time to time, which shall not be less than one-fourth of the annual Moody's Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody's Investor Service, Inc., (or successor thereto) for the month of September before the calendar year in question. (b) Deferred amounts which would otherwise have been distributed in Shares by the Company shall be credited to the Participant's account as deferred Shares. The Participant's account shall also be credited on each dividend payment date for Shares with an amount equivalent to the dividend payable on the number of Shares equal to the number of deferred Shares in the Participant's account on the record date for such dividend. Such amount shall then be converted to a number of additional deferred Shares determined by dividing such amount by the price of Shares, as determined in the following sentence. The price of Shares related to any dividend payment date shall be the average of the Fair Market Values of Shares for the period of five (5) trading days ending on such dividend payment date, or the period of five (5) trading days immediately preceding such dividend payment date if the New York Stock Exchange is closed on the dividend payment date. (c) At any time during the calendar year prior to the calendar year during which an Award deferred under the provisions of this Article 10 is scheduled for distribution, a Participant may further defer the commencement of the distribution of such Award to a subsequent calendar year and upon such further deferral, change the number of installments applicable to the distribution of the Award. Amounts that are further deferred pursuant to this Article 10 shall continue to be subject to all provisions of this Plan including further distribution modifications as provided herein. Article 11. Employee Matter. 11.1 Employment Not Guaranteed. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's Employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or one of its Subsidiaries. 11.2 Participation. No Employee shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. 11.3 Claims and Appeals. Any claim under the Plan by a Participant or anyone claiming through a Participant shall be presented to the Committee. Any person whose claim under the Plan has been denied may, within sixty (60) days after receipt of notice of denial, submit to the Committee, a written request for review of the decision denying the claim. The Committee shall determine conclusively for all parties all questions arising in the administration of the Plan. Article 12 Change in Control. Upon the occurrence of a Change in Control: (a) Any and all Options granted hereunder immediately shall become vested and exercisable; (b) Any Restriction Periods and all restrictions imposed on Restricted Shares shall lapse and they shall immediately become fully vested; (c) The 100% Performance Goal for all Performance Units and Performance Shares relating to incomplete Performance Periods shall be deemed to have been fully achieved and shall be converted and distributed in accordance with all other terms of the Award and this Plan; provided, however, notwithstanding anything to the contrary in this Plan, no outstanding Performance Unit or Performance Share may be reduced. Article 13. Amendment, Modification, and Termination. 13.1 Amendment, Modification, and Termination. The Board may at any time suspend or terminate the Plan in whole or in part; the Disinterested Committee may at any time and from time to time, alter or amend the Plan in whole or in part. 13.2 Awards Previously Granted. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. Article 14 Withholding. 14.1 Tax Withholding. The Company shall deduct or withhold an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's employment tax obligations) required by law to be withheld with respect to any taxable event arising or as a result of this Plan ("Withholding Taxes"). 14.2 Share Withholding. With respect to withholding required upon the exercise of Options, upon the lapse of restrictions on Restricted Stock, upon the distribution of Performance Shares in the form of Stock, or upon any other taxable event hereunder involving the transfer of Stock to a Participant, the Company shall withhold Stock having a Fair Market Value on the date the tax is to be determined in an amount equal to the Withholding Taxes on such Stock. Any fractional Share of Stock payable to a Participant shall be withheld as additional Federal withholding, or, at the option of the Company, paid in cash to the Participant. Unless otherwise determined by the Committee, when the method of payment for the Exercise Price is from the sale by a stockbroker pursuant to Section 6.7(b)(ii), herein, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds. For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the Fair Market Value of the Stock. Prior to the end of any Performance Period a Participant may elect to have a greater amount of Stock withheld from the distribution of Performance Shares to pay withholding taxes; provided, however, the Committee may prohibit or limit any individual election or all such elections at any time. In addition, if required in order to exempt the transaction from the provisions of Section 16(b) of the Exchange Act, any such election by an Insider must be made during a Window Period and shall be subject to Committee approval. Article 15 Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. Article 16 Legal Construction. 16.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 16.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 16.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.4 Securities Law Compliance. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions or Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the plan or action by the Committee fails to comply with a condition of Rule 16b-3 or its successors, it shall not apply to the Insiders or transactions thereby. 16.5 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Texas. EX-10 16 NON-EMPLOYEE DIRECTOR STOCK AND DEFERRAL PLAN Exhibit 10-s SBC Communications Inc. Non-Employee Director Stock and Deferral Plan November 21, 1997 SBC Communications Inc. Non-Employee Director Stock and Deferral Plan Article 1. Purpose The purpose of the Non-Employee Director Stock and Deferral Plan (the "Plan") (formerly the Deferred Compensation Plan for Non-Employee Directors) is to promote the achievement of long-term objectives of SBC Communications Inc. ("SBC" or the "Company") by linking the personal interests of Non-Employee Directors to those of the Company's shareholders and to attract and retain Non-Employee Directors of outstanding competence. Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the defined meaning is intended, the initial letter of the word is capitalized: (a) "Award" means, individually or collectively, an award under this Plan of Stock Units. (b) "Board" or "Board of Directors" means the Board of Directors of the Company. (c) "Committee" means the Human Resources Committee of the Board of Directors of the Company. (d) "Company" means SBC Communications Inc., a Delaware corporation, together with any and all Subsidiaries. (e) "Director" means any individual who is a member of the Board of Directors of the Company, including Advisory Directors. (f) "Employee" means any full-time, nonunion, salaried employee of the Company or of the Company's Subsidiaries. For purposes of the Plan, an individual whose only employment relationship with the Company is as a Director, shall not be deemed to be an Employee. (g) "Fair Market Value" shall mean the closing price for Shares on the relevant date as reported on the consolidated tape, or if there is no sale on such date, then on the last previous day on which a sale was reported. (h) "Non-Employee Director" means any individual who is a member of the Board of Directors of the Company, but who is not otherwise an Employee of the Company, nor has otherwise been an Employee of the Company. (i) "Participant" means a person who is entitled to participate in the Plan. (j) "Shares" means shares of Common Stock of the Company, par value one dollar ($1.00) per share. (k) "Stock Unit" or "Unit" means an Award acquired by a Participant as a measure of participation under the Plan, and having a value equal to a Share. Article 3. Eligibility and Administration 3.1 Eligibility. Persons eligible to participate in the Plan are limited to Non-Employee Directors. 3.2 The Human Resources Committee. The Plan shall be administered by the Human Resources Committee of the Board of Directors of the Company, subject to the restrictions set forth in the Plan. 3.3 Administration by the Committee. The Committee shall have the full power, discretion, and authority to interpret and administer the Plan in a manner consistent with the Plan's provisions. However, in no event shall the Committee have the power to determine Plan eligibility, or to determine the number, the value, the vesting period, or the timing of Awards to be made under the Plan (all such determinations being automatic pursuant to the provisions of the Plan). 3.4 Decisions Binding. All determinations and decisions made by the Committee pursuant to the Plan, and all related orders or resolutions of the Committee shall be final, conclusive, and binding on all persons, including the Company, its shareholders, Participants, and their estates and beneficiaries. Article 4. Payment of Annual Retainer in Stock 4.1 Form of Annual Retainer. In lieu of receiving the annual retainer (which term, as used in this Plan, shall include any additional annual retainer for committee chairman) in cash, effective for payments on or after January 1, 1998, a Non-Employee Director may elect to receive all (100%) or fifty percent (50%) of the Director's annual retainer in the form of Shares. Such election shall be made prior to the beginning of, and will be effective for, the calendar year in which the annual retainer will be paid. Each election shall become irrevocable as of the last day such election may be made. Provided, however, Non-Employee Directors not serving on the Board prior to January 1, 1998, may, at any time within thirty (30) days of their original election to the Board, make an irrevocable election with respect to payments not yet made, effective for the then current calendar year. Unless the Non-Employee Director notifies the Secretary of the Company otherwise prior to the beginning of each subsequent calendar year, the election will renew automatically for an additional calendar year. 4.2 Payment of Shares. One fourth of the annual retainer is paid in advance on the first day of each quarter (or the first business day thereafter) and is fully earned on that date. For their first retainer payment only, newly elected Non-Employee Directors are paid the first day of the quarter next occurring on a pro-rata basis. Each fraction of a month is considered a whole month. The Shares paid pursuant to Section 4.1 shall be delivered as soon as administratively possible following the scheduled retainer payment date. The number of Shares to be paid shall equal the portion of the quarterly retainer being taken in stock, divided by the Fair Market Value of a Share on the date of the scheduled payment of the retainer. Any fractional Share shall be paid in cash as provided hereunder. 4.3 Holding Period for Shares. Any Shares acquired by a Director under this Article 4 may not be sold for one year after acquisition. Thereafter, such Shares shall only be sold pursuant to an effective registration statement or pursuant to an exemption from the Securities Act of 1933, including sales pursuant to Rule 144 thereunder. The Company may place a legend on the certificates for such Shares evidencing this restriction. Article 5. Award of Stock Units for Non-Employee Directors 5.1 Award of Deferred Stock Units for Non-Employee Directors. Commencing November 21, 1997, and then effective the day of each annual meeting of the Company's shareholders thereafter, each Non-Employee Director shall be Awarded that number of Stock Units that is equal to fifty percent (50%) of the annual retainer as in effect at the time of the Award, divided by the Fair Market Value of a Share on the date of the Award. Each Award is intended to be in consideration for service until the next annual meeting of shareholders, but will be fully earned on the date of the Award. Provided, however, if the Director terminates service on or before the day of the annual meeting of shareholders, the Award to be paid on such meeting date will not be issued. 5.2 Award of Deferred Stock Units for New Non-Employee Directors. The following applies only to Non-Employee Directors who originally became a Non-Employee Director after November 21, 1997. Each Non-Employee Director shall receive an annual Award of Stock Units effective the day of the annual meeting of shareholders. The number of Stock Units in each such Award shall equal thirteen thousand dollars ($13,000), divided by the Fair Market Value of a Share on the date of the Award. Each Award is intended to be in consideration for service until the next annual meeting of shareholders, but will be fully earned on the date of the Award. If the Director terminates service on the day of the annual meeting of shareholders, no such Award will be issued. No Director shall receive more than ten (10) Awards under this Section 5.2. 5.3 Deferral of Retainers, Committee Fees, and Meeting Fees into Stock Units. Effective for payments on or after January 1, 1998, each Non-Employee Director may elect to defer all (100%) or fifty percent (50%) of the cash portion of the Director's annual retainer into Stock Units. In addition, a Non-Employee Director may elect to defer all (100%) of the Director's Board and committee fees (collectively "Fees") into Stock Units. The number of Stock Units acquired shall equal the Fees and/or the portion of the annual retainer being deferred into Stock Units, divided by the Fair Market Value of a Share on the date of the scheduled payment of the Fees. Any deferral election under this Section 5.3 shall be made prior to the beginning of, and will be effective for, the calendar year in which such payments would otherwise be made. Each such election shall become irrevocable as of the last day such election may be made. Provided, however, Non-Employee Directors not serving on the Board prior to January 1, 1998, may, at any time within thirty (30) days of their original election to the Board, make an irrevocable election with respect to payments not yet made, effective for the then current calendar year. Unless the Non-Employee Director notifies the Secretary of the Company otherwise prior to the beginning of each subsequent calendar year, each election hereunder will renew automatically for an additional calendar year. 5.4 Payout of Deferred Stock Units. All Stock Units shall be paid out in the form of one Share for each Stock Unit. The Participant shall elect the timing of the payout for Stock Unit Awards no later than the calendar year prior to the first scheduled payment of such Stock Units; any prior elections by the Participant shall become irrevocable at that time. One election will apply to all Stock Units, whether from deferrals, annual Awards or otherwise. Stock Units acquired under this Plan shall be paid out in a lump sum payment or in up to fifteen (15) annual installments, as elected by the Participant. The lump sum payment or the first installment, as the case may be, shall be payable on the first day of February of the year following the calendar year of the termination of the Participant's service as a Director, or the first day of a later month selected by the Participant. All annual installments thereafter shall be payable on the anniversary of the first such payment. If the Director fails to make a timely election as to the number of installments, the Stock Units shall be paid out in four (4) annual installments. For Participants electing a payout of Stock Units in installments, the number of Stock Units to be paid out in each installment shall equal the number of Stock Units available for payout, divided by the number of remaining installments (including the installment being made). A fractional Stock Unit shall be paid in cash. 5.5 Stock Units. Each Stock Unit shall represent an unfunded and unsecured promise by SBC to issue a Share. On the record date for cash dividends payable on a Share, Participants holding Stock Units shall earn dividend equivalents paid in the form of additional Stock Units added to their account. The number of Stock Units so added shall equal the dividends on an equal number of Shares, divided by the Fair Market Value of a Share on the record date. 5.6 Holding Period for Shares. Any Shares acquired by a Director under this Article 5 may not be sold for one year after acquisition. Thereafter, such Shares shall only be sold pursuant to an effective registration statement or pursuant to an exemption from the Securities Act of 1933, including sales pursuant to Rule 144 thereunder. The Company may place a legend on the certificates for such Shares evidencing this restriction. Article 6. Cash Deferral Account 6.1 Cash Deferral Account. A cash deferral account (the "Cash Deferral Account") shall be established and maintained by the Company for each Participant that makes a cash deferral under the Plan. Each Cash Deferral Account shall be credited as of the date the amount deferred otherwise would have become due and payable to the Participant and shall be credited to reflect the interest return thereon. The establishment and maintenance of such Cash Deferral Accounts, however, shall not be construed as entitling any Participant to any specific assets of the Company and shall represent an unfunded and unsecured promise of the Company the amounts due thereunder. 6.2 Cash Deferral Elections. Effective for payments on or after January 1, 1998, each Non-Employee Director may elect to defer all (100%) or fifty percent (50%) of the cash portion of the Director's annual retainer into the Director's Cash Deferral Account. In addition, a Non-Employee Director may elect to defer all (100%) of the Director's Board and committee fees (collectively "Fees") into the Director's Cash Deferral Account. Any deferral election under this Section 6.2 shall be made prior to the beginning of, and will be effective for, the calendar year in which such payments would otherwise be made. Each such election shall become irrevocable as of the last day such election may be made. Provided, however, Non-Employee Directors not serving on the Board prior to January 1, 1998, may, at any time within thirty (30) days of their original election to the Board, make an irrevocable election with respect to payments not yet made, effective for the then current calendar year. Unless the Non-Employee Director notifies the Secretary of the Company otherwise prior to the beginning of each subsequent calendar year, each election hereunder will renew automatically for an additional calendar year. Deferral elections under the Plan made prior to November 21, 1997, shall remain in place through the end of 1997, and all such deferrals shall be credited to the Cash Deferral Account and continue to earn interest in accordance with Section 6.3. Any new Non-Employee Director joining the Board after November 21, 1997, and before January 1, 1998, may make an election with respect to 1997 annual retainers and fees in accordance with the Plan as it read immediately prior to the modifications of November 21, 1997. 6.3 Interest on Cash Deferral Accounts. The annual rate of interest on amounts in the Cash Deferral Accounts for 1997 and subsequent calendar years shall be the Moody's Corporate Bond Yield Average-Monthly Average Corporates as published by Moody's Investor Service, Inc. (or any successor thereto) for the month of September before the calendar year in question (if such yield is no longer published, a substantially similar average selected by the Human Resources Committee) or such other rate as the Human Resources Committee shall determine prior to the year for which the interest rate would be applicable. Interest shall be credited quarterly, in arrears. 6.4 Form and Timing of Payout of Cash Deferral Accounts. Cash Deferral Accounts shall be paid out in cash. The Participant shall elect the timing of the payout for Participant's Cash Deferral Account no later than the calendar year prior to the first scheduled payment thereof; any prior elections by the Participant shall become irrevocable at that time. One election shall apply to a Participant's entire Cash Deferral Account. A Participant's Cash Deferral Account shall be paid out in a lump sum payment or in up to fifteen (15) annual installments, as elected by the Participant. The lump sum payment or the first installment, as the case may be, shall be payable on the first day of February of the year following the calendar year of the termination of the Participant's service as a Director, or the first day of a later month selected by the Participant. All annual installments thereafter shall be payable on the anniversary of the first such payment. If the Director fails to make a timely election as to the number of installments, the Participant's Cash Deferral Account shall be paid out in four (4) annual installments. Article 7. Amendment, Modification, and Termination 7.1 Amendment, Modification, and Termination. Subject to the terms set forth in this Article 7, the Board may terminate, amend, or modify the Plan at any time and from time to time. 7.2 Awards Previously Granted. Unless required by law, no termination, amendment, or modification of the Plan shall in any material manner adversely affect any Award previously provided under the Plan, without the written consent of the Participant holding the Award. Article 8. Miscellaneous 8.1 Competition. Notwithstanding any election hereunder, in the event a Director ceases to be a Director of the Company and becomes a proprietor, officer, partner, employee, director or otherwise becomes affiliated with any business that is in competition with the Company or any of its subsidiaries, or becomes employed by any governmental agency having jurisdiction over the activities of the Company or any of its subsidiaries, all as determined by the Committee in its sole discretion, the entire balance hereunder may be immediately paid out at the election of the Company, in which case no further amounts may be earned under this Plan. 8.2 Elections. All elections and notices of any kind hereunder shall be in writing and provided to the Secretary of the Company. 8.3 Assignment. Except as otherwise provided herein, no rights under this Plan may be assigned by a Participant. 8.4 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 8.5 Death of a Director/Beneficiary Designation. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named primarily or contingently) to whom any benefit under the Plan is to be paid in the event of his or her death. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Secretary of SBC, and will be effective only when filed by the Participant in writing with the Secretary during his or her lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. In the event of the death of a Participant before full payment of all amounts due hereunder, the balance shall be paid in a lump sum as soon as administratively possible in accordance with the foregoing. Notwithstanding this, if the Participant so elects as part of the Participant's deferral elections, the Stock Units and/or the Cash Deferral Account will be paid out in the number of annual installments elected by the Participant, beginning on the first day of the month following the Participant's death and occurring annually thereafter; provided, however, if distributions to the Participant have already commenced at the time of the Participant's death, then under this election, distributions will continue as scheduled. 8.6 No Right of Nomination. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Company's shareholders. 8.7 Shares Available/Fractional Shares. The Shares delivered under the Plan may be either authorized but unissued Shares, or Shares which have been or may be reacquired by the Company, as determined from time to time by the Board. In no case shall a fractional Share be issued under this Plan. Any fractional Share payable hereunder, upon the conversion of a Stock Unit or otherwise, shall be payable in cash in an amount equal to such fraction of a Share times the Fair Market Value of a Share on the date the fractional Share would otherwise be payable. 8.8 Successors. All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 8.9 Requirements of Law. The granting of Awards under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 8.10 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the internal, substantive laws of the State of Texas. EX-10 17 AGREEMENT WITH PHILIP J. QUIGLEY EXHIBIT 10u PERSONAL & PRIVATE October 24, 1997 Mr. Philip J. Quigley 130 Kearney Street San Francisco, California 94108 Dear Phil: This will confirm our discussion of October 21, 1997. 1. We have announced your resignation from the SBC Board and your retirement as an employee to be effective December 30, 1997. The announcement reflected your contributions to the Company over your career and your continuing consulting work through March 2000, and in that capacity you will serve as Chairman of the California Business Roundtable in 1998. 2. You will continue to be paid in accordance with your 1997 Agreement through December 30, 1997. The remainder of your salary, through March 31, 1998, will be paid to you or your survivor in the event of your death after January 1 and on or before January 15, 1998, along with a cash award equivalent to your 1997 target Short Term award of $675,000. In return for this prepayment, you will make yourself available for consulting between December 30 and the following April 1, when your regular consulting agreement becomes effective. Solely for purposes of the PTG Executive Supplemental Cash Balance Plan; the PTG Executive Deferral Plan; and, the PTG 1996 Executive Deferred Compensation Plan, you will be treated and the plans applied as if you had been employed through March 30, 1998. 3. After January 1 and on or before January 15, 1998, we will pay you (or your survivor) the sum of $4,712,365. This will represent payment of Sections 6 and 7 of your 1994 Agreement with Pacific Telesis Group. Attached is a breakdown of the amounts due you, assuming the items you would choose to receive are those marked on the attached. 4. You will receive benefits under the SBC Executive Health Plan and SBC's financial counseling plan in accordance with the terms of those plans. SBC will provide for your office space and other amenities consistent with those provided by PTG to other former chairmen and described in Section 6 of your 1997 Agreement with SBC. 5. You will give SBC an option to extend your consulting agreement for a period of two additional years on the same terms as originally provided under your consulting agreement. The option will be exerciseable solely at SBC's discretion. For such option SBC will pay you (or your survivor) the sum of $500,000 after January 2 and on or before January 15, 1999. If SBC elects to exercise this option, it will provide you with written notice by December 31, 1999. 6. Paragraph 5 of the Agreement dated March 31, 1997, between you and SBC is amended to include the following: The Company shall not have the right to terminate this Agreement pursuant to this paragraph unless it notifies Mr. Quigley of the existence of a conflict at which time Mr. Quigley shall have 30 days to cure any conflict by ceasing engaging in the activity which gives rise to the conflict. If Mr. Quigley does not cease the activity that gives rise to the conflict, the Company may terminate the Agreement on ten days notice. 7. Except as discussed above, the rest of your 1994 and 1997 employment agreements will be implemented as provided in those agreements. Your Pacific Telesis pension and retirement benefits will be paid in accordance with your elections in those plans. If the terms of this proposal are acceptable to you, please indicate your agreement by signing below. Messrs. Whitacre and Hay, (the latter being the Chairman of the Human Resources Committee), advised me that at the Committee's November 1997 meeting they will recommend that the options you were granted on May 1 and 2, 1997 be vested in recognition of the fact that you will continue as a consultant of SBC and have granted SBC an option to extend that consultant relationship for two additional years. Very truly yours, Attachment I hereby resign as a Director of SBC and retire as an Officer, employee and Director of all SBC subsidiaries effective December 30, 1997. ------------------- Philip J. Quigley EX-10 18 RESOLUTIONS AMENDING THE PLAN Exhibit 10-v(i) CONSENT OF THE EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS OF PACIFIC TELESIS GROUP IN LIEU OF A MEETING THE UNDERSIGNED, being all the members of the Executive Committee of the Board of Directors of Pacific Telesis Group (the "Corporation"), a Nevada corporation, do hereby consent to and deem it advisable to adopt and do hereby adopt the following resolutions, without a meeting, pursuant to Nev. Rev. Stat. ss. 78.315, which consent shall have the same force and effect as a unanimous vote at a meeting duly held. WHEREAS, as a result of the merger on April 1, 1997, of the Corporation with SBC Communications Inc. (NV), a Nevada corporation, it is desirable to make changes to certain benefit plans of the Pacific Telesis Group: THEREFORE, BE IT: RESOLVED, that the Pacific Telesis Group Non-Qualified Savings Plan be, and it hereby is, amended as follows: The following language shall be added at the end of the first paragraph of Section 2: "An Employee who commences participation in another non-qualified deferral plan of Pacific Telesis Group or of any company controlling, controlled by or under common control with Pacific Telesis Group shall cease to be eligible to participate in this Plan." The following language shall be added at the end of the first paragraph of Section 4: "A Participant shall cease participation in this Plan effective upon participation in another non-qualified deferral plan of Pacific Telesis Group or of any company controlling, controlled by or under common control with Pacific Telesis Group." RESOLVED FURTHER, that the Pacific Telesis Group 1996 Executive Deferred Compensation Plan be, and it hereby is, amended as follows: The following paragraph shall be added at the end of Section 2: "Provided, however, an employee shall not be eligible to participate in this Plan if the employee participates in another non-qualified deferral plan of Pacific Telesis Group or of any company controlling, controlled by or under common control with Pacific Telesis Group." The last sentence of Section 4.2 shall be amended to read as follows: "An election with respect to Salary, STIP or Other Awards for services performed in a calendar year and/or with respect to LTIP for services performed in a multiple-year performance period shall be deemed irrevocably terminated when the employee, whether by transfer or termination of employment, or by participation in another non-qualified deferral plan of Pacific Telesis Group or of any company controlling, controlled by or under common control with Pacific Telesis Group, ceases to be eligible to participate in the Plan during such calendar year and/or such multiple-year performance period (as applicable)." RESOLVED FURTHER, that the Pacific Telesis Group 1996 Directors' Deferred Compensation Plan be, and it hereby is, amended as follows: The following paragraph shall be added at the end of Section 4.2: "If a Director of Pacific Telesis Group as of March 31, 1997, became a Director (which term shall be deemed to include an Advisory Director) of SBC Communications Inc., a Delaware corporation, on April 1, 1997, then such Director may irrevocably elect in writing, on or before December 31, 1997, that the Director shall not be deemed to have ceased being a Director of Pacific Telesis Group so long as the Director continuously serves as a Director of SBC Communications Inc." RESOLVED FURTHER, that the Pacific Telesis Group Deferred Compensation Plan for Non-Employee Directors be, and it hereby is, amended as follows: The following subsection 4(f) shall be added at the end of Section 4: "If a Director of Pacific Telesis Group as of March 31, 1997, became a Director (which term shall be deemed to include an Advisory Director) of SBC Communications Inc., a Delaware corporation, on April 1, 1997, then such Director may irrevocably elect in writing, on or before December 31, 1997, that the Director shall not be deemed to have ceased being a Director of Pacific Telesis Group so long as the Director continuously serves as a Director of SBC Communications Inc." The undersigned, consisting of all the members of the Executive Committee of the Board of Directors of the Corporation, have executed these resolutions effective November 21, 1997. Royce S. Caldwell James D. Ellis EX-12 19 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 SBC COMMUNICATIONS INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Dollars in Millions YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------------------------------- Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Accounting Changes* $ 2,237 $ 4,975 $ 4,383 $ 4,091 $ 2,070 Add: Interest Expense 947 812 957 935 1,005 Dividends on Preferred Securities 80 60 - - - 1/3 Rental Expense 130 108 77 85 81 ------------ ----------- ----------- ----------- ----------- Adjusted Earnings $ 3,394 $ 5,955 $ 5,417 $ 5,111 $ 3,156 ============ =========== =========== =========== =========== Total Interest Charges $ 1,067 $ 947 $ 957 $ 935 $ 1,005 Dividends on Preferred Securities 80 60 - - - 1/3 Rental Expense 130 108 77 85 81 ------------ ----------- ----------- ----------- ----------- Adjusted Fixed Charges $ 1,277 $ 1,115 $ 1,034 $ 1,020 $ 1,086 ============ =========== =========== =========== =========== Ratio of Earnings to Fixed Charges 2.66 5.34 5.24 5.01 2.91 * Undistributed earnings on investments accounted for under the equity method have been excluded.
EX-13 20 PORTIONS OF SBC'S 1997 ANNUAL REPORT Selected Financial and Operating Data Dollars in millions except per share amounts - ------------------------------------------------------------------------------------- At December 31 or for the year ended: 1997(1) 1996 1995 1994 1993(2) - ------------------------------------------------------------------------------------- Financial Data - ------------------------------------------------------------------------------------- Operating revenues $ 24,856 $ 23,445 $ 21,712 $ 21,006 $ 20,084 - ------------------------------------------------------------------------------------- Operating expenses $ 21,686 $ 17,609 $ 16,592 $ 16,056 $ 17,077 - ------------------------------------------------------------------------------------- Operating income $ 3,170 $ 5,836 $ 5,120 $ 4,950 $ 3,007 - ------------------------------------------------------------------------------------- Interest expense $ 947 $ 812 $ 957 $ 935 $ 1,005 - ------------------------------------------------------------------------------------- Equity in net income of affiliates $ 201 $ 207 $ 120 $ 226 $ 250 - ------------------------------------------------------------------------------------- Income taxes $ 863 $ 1,960 $ 1,519 $ 1,448 $ 658 - ------------------------------------------------------------------------------------- Income from continuing operations before extraordinary loss and cumulative effect of accounting changes (3) $ 1,474 $ 3,189 $ 2,958 $ 2,777 $ 1,589 - ------------------------------------------------------------------------------------- Net income (loss) $ 1,474 $ 3,279 $ (3,064) $ 2,800 $ (2,474) - ------------------------------------------------------------------------------------- Earnings per common share: * Income from continuing operations before extraordinary loss and cumulative effect of accounting changes (3) $ 0.81 $ 1.73 $ 1.61 $ 1.52 $ 0.88 - ------------------------------------------------------------------------------------- Net income (loss) $ 0.81 $ 1.78 $ (1.66) $ 1.54 $ (1.37) - ------------------------------------------------------------------------------------- Earnings per common share-Assuming Dilution: * Income from continuing operations before extraordinary loss and cumulative effect of accounting changes (3) $ 0.80 $ 1.72 $ 1.60 $ 1.52 $ 0.88 - ------------------------------------------------------------------------------------- Net income (loss) $ 0.80 $ 1.77 $ (1.66) $ 1.53 $ (1.37) - ------------------------------------------------------------------------------------- Total assets $ 42,132 $ 39,485 $ 37,112 $ 46,113 $ 47,695 - ------------------------------------------------------------------------------------- Long-term debt $ 12,019 $ 10,930 $ 10,409 $ 10,746 $ 10,588 - ------------------------------------------------------------------------------------- Construction and capital expenditures $ 5,766 $ 5,481 $ 4,338 $ 3,981 $ 4,021 - ------------------------------------------------------------------------------------- Free cash flow (4) $ 1,204 $ 1,935 $ 2,452 $ 2,952 $ 2,147 - ------------------------------------------------------------------------------------- Dividends declared per common share* (5) $ 0.895 $ 0.86 $ 0.825 $ 0.79 $ 0.755 - ------------------------------------------------------------------------------------- Book value per common share * (6) $ 5.38 $ 5.28 $ 4.57 $ 7.29 $ 8.34 - ------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 2.66 5.34 5.24 5.01 2.91 - ------------------------------------------------------------------------------------- Return on weighted average shareowners' equity (7) 14.75% 33.73% 23.97% 19.43% 11.06% - ------------------------------------------------------------------------------------- Debt ratio (6) 56.19% 55.49% 61.73% 48.57% 45.30% - ------------------------------------------------------------------------------------- Operating Data# - ------------------------------------------------------------------------------------- EBITDA (8) $ 8,092 $ 9,945 $ 9,154 $ 8,774 $ 6,750 - ------------------------------------------------------------------------------------- Network access lines in service (000) 33,440 31,841 30,317 29,147 28,234 - ------------------------------------------------------------------------------------- Access minutes of use (000,000) 129,817 123,303 112,874 100,800 93,877 - ------------------------------------------------------------------------------------- Wireless customers (000) 5,493 4,433 3,672 2,992 2,049 - ------------------------------------------------------------------------------------- Number of employees 118,340 109,870 108,189 110,390 113,755 - ------------------------------------------------------------------------------------- * Restated to reflect two-for-one stock split declared January 30, 1998. # Operating data may be periodically revised to reflect the most current information available. 1 As detailed in management's discussion and analysis of Results of Operations, 1997 results include charges for several items including strategic initiatives and ongoing merger integration costs, gain on the sale of SBC's interests in Bell Communications Research, Inc. and a first quarter after-tax settlement gain. Excluding these items, SBC reported an adjusted net income of $3,364 for 1997. 2 As noted in management's discussion and analysis of Other Business Matters - Restructuring Reserve, 1993 results include restructuring costs at Pacific Telesis Group. Excluding these costs, SBC reported income from continuing operations before extraordinary loss and cumulative effect of accounting changes of $2,450. 3 1996, Change in directory accounting; 1995, Discontinuance of Regulatory Accounting; 1994-1993, Income (loss) from spun-off operations; and 1993, Early Extinguishment of Debt and Cumulative Effect of Changes in Accounting Principles. 4 Free cash flow is net cash provided by operating activities less construction and capital expenditures. 5 Dividends declared by SBC's Board of Directors; these amounts do not include dividends declared and paid by Pacific Telesis Group prior to the merger. 6 Shareowners' equity used in book value per common share and debt ratio calculations includes extraordinary loss and changes in accounting principles. 7 Calculated using income before extraordinary loss and changes in accounting principles. These impacts are included in shareowners' equity. 8 EBITDA is earnings before interest, taxes, depreciation and amortization (operating income plus depreciation and amortization). SBC considers EBITDA an important component in our economic value added systems as an indicator of the operational strength and performance of our businesses. It is provided as supplemental information and is not intended to be a substitute for operating income, net income or net cash provided by operating activities as a measure of financial performance or liquidity.
Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts SBC Communications Inc. (SBC) is a holding company whose subsidiaries and affiliates operate predominantly in the communications services industry. SBC's subsidiaries and affiliates provide landline and wireless telecommunications services and equipment, directory advertising and cable television services. On April 1, 1997, SBC completed a merger which resulted in Pacific Telesis Group (PAC) becoming a wholly-owned subsidiary of SBC. Among PAC's subsidiaries are Pacific Bell (PacBell, which also includes its subsidiaries) and Nevada Bell. The merger was accounted for as a pooling of interests and a tax-free reorganization. Accordingly, the financial statements for the periods presented have been restated to include the accounts of PAC (see Note 3 to the Financial Statements). SBC's largest telephone subsidiaries are Southwestern Bell Telephone Company (SWBell), providing landline telecommunications and related services over approximately 16 million access lines in Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area), and PacBell, providing telecommunications and related services over approximately 17 million access lines in California. SBC also provides telecommunications and related services through its Nevada Bell subsidiary over approximately 300 thousand access lines in Nevada. (SWBell, PacBell and Nevada Bell are collectively referred to as the Telephone Companies.) The Telephone Companies are subject to regulation by each of the states in which they operate and by the Federal Communications Commission (FCC). This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes. All per share data has been restated to reflect the two-for-one stock split, effected in the form of a stock dividend, declared January 30, 1998 (see Note 15 to the Financial Statements). Results of Operations Summary Financial results, including percentage changes from the prior year, are summarized as follows: Percent Change ----------------- 1997 1996 1997 1996 1995 vs. vs. 1996 1995 - ------------------------------------------------------------------------------- Operating revenues $ 24,856 $ 23,445 $ 21,712 6.0% 8.0% Operating expenses $ 21,686 $ 17,609 $ 16,592 23.2% 6.1% Income before extraordinary loss and cumulative effect of $ 1,474 $ 3,189 $ 2,958 (53.8)% 7.8% accounting change Extraordinary loss - - $ (6,022) - - Cumulative effect of accounting change - $ 90 - - - Net income (loss) $ 1,474 $ 3,279 $ (3,064) - - =============================================================================== SBC recognized the cumulative effect of a change in accounting in 1996 relating to recognition of directory publishing revenues and related expenses and an extraordinary loss in 1995 from the discontinuance of regulatory accounting at SWBell and PacBell. SBC's net income for 1997 includes after-tax charges of approximately $2.0 billion reflecting strategic initiatives resulting from a comprehensive review of operations of the merged company, the impact of several regulatory rulings during the second quarter of 1997, costs incurred for customer number portability since the merger and charges for ongoing merger integration costs. Excluding these items, SBC reported net income of $3,487 for 1997. Net income for 1997 was also favorably affected by $33 representing SBC's after-tax gain on the sale of its interests in Bell Communications Research, Inc. (Bellcore) and a first quarter 1997 $90 after-tax settlement gain at PAC associated with lump-sum pension payments that exceeded the projected service and interest costs for 1996 retirements. Excluding these additional items, SBC reported an adjusted net income of $3,364 for 1997, 5.5% higher than 1996 income before cumulative effect of accounting change of $3,189. The primary factors contributing to this increase were growth in demand for services and products at the Telephone Companies and Southwestern Bell Mobile Systems (Mobile Systems), partially offset by increased expenses at PacBell, including expenses for the introduction of Personal Communications Services (PCS) operations in California and Nevada. The primary factors contributing to the increase in income before extraordinary loss and cumulative effect of accounting change in 1996 were growth in demand for services and products at the Telephone Companies and Mobile Systems. Items affecting the comparison of the operating results between 1997 and 1996, and between 1996 and 1995, are discussed in the following sections. Operating Revenues SBC's operating revenues for 1997 reflect reductions of $188 related primarily to the impact of several regulatory rulings during the second quarter of 1997. Excluding these reductions, SBC's operating revenues increased $1,599, or 6.8%, in 1997 and $1,733, or 8.0%, in 1996. Components of total operating revenues, including percentage changes from the prior year, are as follows: - ------------------------------------------------------------------------------- Percent Change ---------------- 1997 1996 1997 1996 1995 vs. vs. 1996 1995 - ------------------------------------------------------------------------------- Local service Landline $ 9,568 $ 8,754 $ 8,118 9.3% 7.8% Wireless 3,034 2,635 2,247 15.1 17.3 Network access Interstate 3,946 4,008 3,770 (1.5) 6.3 Intrastate 1,869 1,823 1,744 2.5 4.5 Long-distance service 2,115 2,240 2,072 (5.6) 8.1 Directory advertising 2,111 1,985 1,984 6.3 0.1 Other 2,213 2,000 1,777 10.7 12.5 ================================================================================ $ 24,856 $ 23,445 $ 21,712 6.0% 8.0% ================================================================================ Local Service Landline local service revenues increased in 1997 and 1996 due primarily to increases in demand, including increases in residential and business access lines and vertical services revenues. Total access lines increased by 5.0% in both years, of which approximately 50% was due to growth in California and over 30% was due to growth in Texas. Access lines in Texas and California account for approximately 80% of the Telephone Companies' access lines. Approximately 32% of access line growth in both years was due to sales of additional access lines to existing residential customers. Vertical services revenues, which include custom calling options, Caller ID and other enhanced services, increased by approximately 20% in 1997 and 29% in 1996. Local service revenues also reflect the implementation of the California High Cost Fund (CHCFB) that went into effect February 1, 1997. The California Public Utilities Commission (CPUC) has stated that the CHCFB is intended to directly subsidize the provision of service to high cost areas and allow PacBell to set competitive rates for other services. The rebalancing provisions of the CHCFB resulted in a shift from long-distance revenues of $84 and intrastate network access revenues of $26 to local service revenues in 1997. For further information on the operations of the CHCFB, see the discussion under the heading "Regulatory Environment - California." Additionally, Federal payphone deregulation in 1997 increased local service revenues and decreased long-distance service revenues and interstate network access revenues; the overall impact was a slight increase in total operating revenues. Rate reductions in 1997 due to CPUC price cap orders partially offset increases in landline local service revenues. Wireless local service revenues increased in 1997 and 1996 due primarily to growth in the number of Mobile Systems' cellular customers of 16.3% and 20.7%, partially offset by declines in average revenue per customer. 1997 wireless local service revenues also include revenues from the introduction of PCS operations in California, Nevada and Oklahoma. At December 31, 1997, SBC had 5,068,000 traditional cellular customers, 60,000 resale customers and 365,000 PCS customers. At December 31, 1996, SBC had 4,398,000 traditional cellular customers and 35,000 resale customers. Network Access Interstate network access revenues decreased in 1997 due to $187 in charges. These charges include billing claim settlements related to the Percentage Interstate Usage (PIU) factor in California and several Federal regulatory issues including end-user charges, recovery of certain employee-related expenses and the retroactive effect of the productivity factor adjustment mandated in the July 1, 1997 Federal price cap filing. While the change in the PIU factor in California, which is used to allocate network access revenues between interstate and intrastate jurisdictions, also had the effect of increasing intrastate network access revenues, it resulted in a slight decline in total network access revenues. Excluding these impacts, interstate network access revenues increased in 1997 and 1996 due largely to increases in demand for access services by interexchange carriers. Growth in revenues from end-user charges attributable to an increasing access line base also contributed to the increases in both years. Partially offsetting these increases were the effects of the rate reductions of approximately $100 in 1997 and $115 in 1996 related to the FCC's productivity factor adjustment. Intrastate network access revenues in 1997 reflect an increase due to the PIU settlements and a decrease due to the effects of the CHCFB described above. Excluding these impacts, intrastate network access revenues increased slightly in 1997 and 1996 as increases in demand, including usage by alternative intraLATA toll carriers, were partially offset by state regulatory rate orders. Long-Distance Service revenues decreased in 1997 due to the effect of the CHCFB discussed above, regulatory rate orders, price competition from alternative intraLATA toll carriers and the introduction and deployment of extended area local service plans at SWBell. These decreases were somewhat offset by increases due to growth in wireless revenues and demand resulting from California's growing economy. Long-distance service revenues increased in 1996 due principally to increases in demand resulting from California's growing economy and to growth in Mobile Systems' long-distance revenues, including interLATA service that began in February 1996. Additionally, revenues in 1996 increased due to the reduction in 1995 from SWBell intraLATA toll pool settlement payments and accruals for rate reductions relating to an appealed 1992 rate order in Oklahoma. The settlement of the appeals in October 1995 eliminated the need to continue these accruals. These increases in 1996 revenues were somewhat offset by the impact of price competition from alternative intraLATA toll carriers. Directory Advertising revenues increased in 1997 due mainly to increased demand at Southwestern Bell Yellow Pages, Inc. (Yellow Pages) and Pacific Bell Directory (PBDirectory) and the publication of directories in 1997 that were not published in 1996. Directory advertising revenues were relatively unchanged in 1996 as increased revenues were offset by the decrease resulting from the January 1996 sale of SBC's publishing contracts for GTE Corporation's service areas to GTE Directories. Excluding the impact of this sale, revenues increased 5.1% in 1996. Other operating revenues increased in 1997 and 1996 due primarily to increased equipment sales at Mobile Systems and Pacific Bell Mobile Services and revenues from new business initiatives, primarily voice messaging services and Internet services. Increased demand for PacBell and SWBell nonregulated services and products also contributed to the increases in both years. Operating Expenses SBC's operating expenses for 1997 reflect approximately $2.9 billion of charges related to strategic initiatives resulting from a comprehensive review of operations of the merged company, the impact of several regulatory rulings during the second quarter of 1997 (see Note 3 to the Financial Statements), costs incurred for customer number portability since the merger and charges for ongoing merger integration costs. Excluding these charges, SBC's operating expenses increased $1,188, or 6.7%, in 1997 and $1,017, or 6.1%, in 1996. Components of total operating expenses, including percentage changes from the prior year, are as follows: - ------------------------------------------------------------------------------- Percent Change --------------- 1997 1996 1997 1996 1995 vs. vs. 1996 1995 - ------------------------------------------------------------------------------- Cost of services and $ 9,488 $ 8,250 $ 7,864 15.0% 4.9% products Selling, general and 7,276 5,250 4,694 38.6 11.8 administrative Depreciation and 4,922 4,109 4,034 19.8 1.9 amortization - ---------------------------------------------------------------- $ 21,686 $ 17,609 $ 16,592 23.2% 6.1% =============================================================================== Cost of Services and Products reflects charges of $334 in 1997 relating to SBC's strategic initiatives, operational reviews, costs incurred for customer number portability since the merger and ongoing merger integration costs; excluding these charges, expenses increased $904, or 11.0%, in 1997. A significant part of this increase was caused by the introduction of PCS operations during 1997. Other major factors contributing to the increase included increases in employee compensation, including increases related to force additions and contract labor, growth at Mobile Systems, network expansion and maintenance and interconnection costs. Cost of services and products increased in 1996 due primarily to increases in employee compensation, growth at Mobile Systems, network expansion and maintenance, and expenses related to local competition preparation and new business initiatives, such as PCS, Internet services and network integration. Selling, General and Administrative expense in 1997 reflects $1,952 of charges relating to SBC's strategic initiatives, operational reviews and ongoing merger integration costs. As discussed in Note 3 to the Financial Statements, the most significant of these charges included shutdown of the Advanced Communications Network (ACN), regulatory costs related to the approval of the merger with SBC by California and Nevada regulators, and reorganization initiatives. Excluding these charges, expenses increased $74, or 1.4%, in 1997. Significantly increasing expenses was the introduction of PCS operations during 1997. Other major factors contributing to the increase included growth at Mobile Systems, expenses related to new business initiatives, primarily voice messaging and Internet services, and increases in employee compensation, sales agents commissions and uncollectibles. These increases were partially offset by PAC's first quarter 1997 $152 settlement gain associated with lump-sum pension payments that exceeded the projected service and interest costs for 1996 retirements. Selling, general and administrative expense increased in 1996 due primarily to growth at Mobile Systems and increases in contracted services, employee compensation and software costs. Expenses incurred at PAC to prepare support systems for local competition and for new business initiatives also contributed to the increase in 1996. Depreciation and Amortization in 1997 reflects charges totaling $592 to record impairment of plant and intangibles. As discussed in Note 3 to the Financial Statements, the most significant of these impairments related to the wireless digital TV operations in southern California, certain analog switching equipment in California, certain rural and other telecommunications equipment in Nevada, selected wireless equipment and cable within commercial buildings in California. Excluding these charges, depreciation and amortization increased $221, or 5.4%, in 1997 due primarily to overall higher plant levels. Reduced depreciation beginning with the second quarter of 1997 on analog switching equipment in California at PacBell partially offset this increase. Depreciation and amortization also increased in 1996 due primarily to overall higher plant levels. Interest Expense increased $135, or 16.6%, in 1997 and decreased $145, or 15.2%, in 1996. The 1997 increase was due primarily to increased average debt levels at SBC. Also contributing to the increase was interest associated with the second quarter 1997 one-time charges, primarily interest on the merger-approval costs. The 1996 decrease was due to a change in PAC's capital structure, which replaced a portion of interest expense with amounts recorded as Other Income (Expense) - Net (see Note 10 to the Financial Statements), lower long-term debt levels in SBC subsidiaries other than PAC, and capitalization of interest during construction required by the discontinuance of regulatory accounting in the third quarter of 1995. Under regulatory accounting, the Telephone Companies accounted for capitalization of both interest and equity costs during periods of construction as other income. Equity in Net Income of Affiliates decreased $6 in 1997 and increased $87 in 1996. The 1997 decrease reflects decreased income from SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications company. This lower income resulted from the change in the functional currency used by SBC to record its interest in Telmex from the peso to the U.S. dollar beginning in 1997 and SBC's reduced ownership percentage after the sale of Telmex L shares. Results also reflect preoperating expenses in several international investments including long-distance in France, Switzerland and Israel, and cellular communications in Taiwan. These decreases were mainly offset by income from SBC's May 1997 investment in Telkom SA Limited (Telkom) of South Africa, whose results reflected strong growth and expense management, and lower losses resulting from the reduced involvement in Tele-TV. The 1996 increase reflects increased income from Telmex, due to the relative stabilization of the peso compared to 1995 and net gains on international affiliate transactions. Results for 1995 include losses on SBC's United Kingdom cable television operations, which were accounted for under the equity method prior to October 1995, and exchange losses on the non-peso denominated debt of Telmex. Results for 1996 and 1995 also reflect reductions in the translated amount of U.S. dollar earnings from Telmex's operations. Operational growth at Telmex in both years somewhat offset these declines. SBC's earnings from foreign affiliates will continue to be generally sensitive to exchange rate changes in the value of the respective local currencies. SBC's foreign investments are recorded under U.S. generally accepted accounting principles (GAAP), which include adjustments for the purchase method of accounting and exclude certain adjustments required for local reporting in specific countries, such as inflation adjustments. SBC's equity earnings in 1998 will reflect SBC's investment in Telkom for a full year of operations (see Note 16 to the Financial Statements for discussion of the Telkom investment). Other Income (Expense) - Net decreased $5 in 1997 and $276 in 1996. Results for 1997 reflect $26 in second quarter charges related to SBC's strategic initiatives, primarily writeoffs of nonoperating plant. Other decreases relate primarily to the market valuation adjustment on certain SBC debt redeemable either in cash or Telmex L shares and distributions paid on an additional $500 of Trust Originated Preferred Securities (TOPrS) sold by PAC in June 1996. Partially offsetting these increased expenses were the gain recognized from the sale of SBC's interests in Bellcore, royalty payments associated with software developed by an affiliate and the gain on the sale of Telmex L shares. The decrease in 1996 reflects the inclusion in 1995 of the gain recognized from the merger of SBC's United Kingdom cable television operations into TeleWest (see Note 16 to the Financial Statements) and interest income from tax refunds, somewhat offset by expenses associated with the refinancing of long-term debt by the Telephone Companies (see Note 9 to the Financial Statements). Additional decreases in 1996 related to the reclassification of interest during construction required by the discontinuance of regulatory accounting in the third quarter of 1995 and the change in PAC's capital structure noted in the discussion of Interest Expense (see Note 10 to the Financial Statements). Income Tax expense decreased $1,097, or 56.0%, in 1997 and increased $441, or 29.0%, in 1996. Income taxes for 1997 reflect the tax effect of charges for strategic initiatives resulting from SBC's comprehensive review of operations of the merged company, the impact of several regulatory rulings during the second quarter of 1997, costs incurred for customer number portability since the merger and charges for ongoing merger integration costs. Excluding these items, income taxes for 1997 were lower. Contributing to the decrease in income tax expense in 1997 was, among other items, realization of foreign tax credits. Income taxes paid, net of refunds, reflect the impact of reduced tax payments due to merger-related and integration costs incurred. The 1996 increase was due primarily to higher income before income taxes. Taxes also increased in 1996 reflecting a full year's effects of the elimination of excess deferred taxes and the reduction in the amortization of investment tax credits resulting from the discontinuance of regulatory accounting, which occurred in the latter part of 1995. Extraordinary Loss In 1995, SBC recorded an extraordinary loss of $6 billion from the discontinuance of regulatory accounting. The loss included a reduction in the net carrying value of telephone plant and the elimination of net regulatory assets of SWBell and PacBell (see Note 2 to the Financial Statements). Cumulative Effect of Accounting Change As discussed in Note 1 to the Financial Statements, PBDirectory changed its method of recognizing directory publishing revenues and related expenses effective January 1, 1996. The cumulative after-tax effect of applying the new method to prior years is recognized as of January 1, 1996 as a one-time, non-cash gain applicable to continuing operations of $90, or $0.05 per share. The gain is net of deferred taxes of $53. Management believes this change to the issue basis method is preferable because it is the method generally followed in the publishing industry, including Yellow Pages, and better reflects the operating activity of the business. This accounting change is not expected to have a significant effect on net income in future periods. Operating Environment and Trends of the Business Regulatory Environment The telecommunications industry is in transition from a tightly regulated industry overseen by multiple regulatory bodies, to a more incentive-based, market driven industry monitored by state and federal agencies. The Telephone Companies' wireline telecommunications operations remain subject to regulation by the seven states in which they operate for intrastate services and by the FCC for interstate services. In 1997, new price cap regulatory plans were implemented for the Telephone Companies in Missouri and Nevada, and in Oklahoma, legislation passed allowing alternative regulation. The Telephone Companies under price cap regulation have the freedom to establish and modify prices for some services as long as they do not exceed the price caps, as well as the freedom to change prices for some services without regulatory approval. Federal Regulation During 1997, the FCC issued an Access Reform Order restructuring access charges paid for interexchange carrier access to the Telephone Companies' networks. The order raises the flat monthly end user charge for primary business lines, and additional residence and business lines, and lowers the price caps on per minute access charges for interstate long distance carriers. These changes, which took effect in 1997 and January 1998, are supposed to shift sources of revenue from carriers to end users without changing the total amount of revenue received by the Local Exchange Carriers (LECs). The FCC's price cap plan for the LECs provides for changes to be made annually to the price caps for inflation, productivity and changes in other costs. In 1997 the Telephone Companies were ordered to begin using a 6.5% productivity offset, with no sharing. Prior to 1997, there were three productivity offsets, two of which provided for a sharing of profits above a specified earnings level with the Telephone Companies' customers and a higher productivity offset which did not include sharing. The Telephone Companies had elected the higher 5.3% productivity offset without sharing. With the passage of the Telecommunications Act of 1996 (Telecom Act), the FCC has been conducting further proceedings in conjunction with access reform to address a number of pricing and productivity issues, and is performing a broader review of price cap regulation in the context of the increasingly more competitive telecommunications environment. The Chairman of the FCC has indicated that the FCC intends to act on these proceedings in 1998. The Telecom Act and FCC actions taken to implement provisions of the Telecom Act are discussed further under the heading "Competitive Environment." Pursuant to the Telecom Act, the local coin rate in the payphone industry was deregulated by the FCC on October 7, 1997, and LECs were required to remove any direct or indirect subsidy of payphone service from their regulated telecommunications operations. Removal of the subsidy caused the Telephone Companies to raise local coin rates throughout their operating territories in 1997. State Regulation With the implementation of Nevada's price cap plan which eliminated the sharing provision previously in effect, six of the seven state regulatory plans under which the Telephone Companies operate do not include sharing. The California price cap plan still includes sharing. However, there has been no sharing in California in the last two years. California The California Public Utility Commission's (CPUC) form of price caps requires PacBell to submit an annual price cap filing to determine prices for categories of services for each new year. The productivity factor used in calculating price caps has been set equal to the inflation factor for the period 1996-1998. The price cap plan includes a sharing mechanism that requires PacBell to share its earnings with customers above certain earnings levels. In December 1997, the CPUC adopted a decision on PacBell's 1997 price cap filing resulting in a revenue reduction in 1998 of approximately $86 effective January 1, 1998. The reduction reflects items accrued in the 1997 results of operations, including, among other things, the rate reduction ordered in the CPUC decision approving the SBC/PAC merger and the gain on the sale of PacBell's interest in Bellcore. Because of these accruals, the order will not materially affect SBC's results of operations in 1998. In an April 1997 ruling, the CPUC reaffirmed that postretirement benefit costs were appropriately recoverable in PacBell's price cap filings as exogenous costs. The CPUC continued to allow recovery in 1998 consistent with the amount requested by PacBell in an October 1997 filing. The CPUC also ordered a further proceeding to address future procedures and amounts for recovery. In May 1997, the FCC adopted new separations rules that shifted recovery of a substantial amount of billing and collection costs to the interstate jurisdiction. PacBell filed for a waiver of the requirement and was denied the waiver in December 1997. As a result, PacBell could be required to refund an annualized amount of approximately $21 to customers since July 1997, with refunds commencing in 1999. In 1996, the CPUC issued an order on universal service and established the CHCFB to subsidize telephone service in California's high cost areas. The estimated $352 cost of the program is expected to be collected from customers of all telecommunications providers who will contribute to the fund through a 2.87% surcharge on all bills for telecommunications services provided in California. The surcharge became effective February 1, 1997. To maintain revenue neutrality, PacBell will reduce its revenues dollar for dollar for amounts it will receive from the fund. This reduction will occur through an across the board surcredit on all products and services (except for residential basic exchange services and contracts) or through permanent rate reductions for those services that previously subsidized universal service. PacBell filed to reduce permanently certain toll and access rates. Hearings were held in October 1997, and a decision is expected in the second or third quarter of 1998. PacBell expects to receive approximately $305 annually from the CHCFB fund based on CPUC estimates of the cost of providing universal service. PacBell believes the new program underestimates the cost of providing universal service and that the average cost of providing service is up to 33% higher per line, per month than the CPUC estimate. As a result, subsidies for universal service will remain in the prices for PacBell's competitive services, which may place it at a competitive disadvantage. In 1992, PacBell entered into a settlement with tax authorities and others which fixed a specific methodology for valuing utility property for tax purposes for a period of eight years. As a result, the CPUC opened an investigation to determine if any resulting property tax savings should be returned by PacBell to its customers. Intervenors have asserted that as much as $20 of annual property tax savings should be treated as an exogenous cost reduction in PacBell's annual price cap filings and that as much as $90 in past property tax savings as of December 31, 1997, plus interest, should be returned to customers. PacBell believes that, under the CPUC's regulatory framework, any property tax savings qualify only as a component of shareable earnings and not as an exogenous cost. In an interim opinion issued in June 1995, the CPUC ruled in favor of intervenors, but decided to defer a final decision on the matter pending resolution in a separate proceeding of the criteria for exogenous cost treatment under its regulatory framework. To date, the CPUC has taken no further action on the issue. More than 120 applications for certification to provide competitive local service have been approved by the CPUC, with over 25 more applications pending approval. As a result, PacBell expects competition to continue to develop for local service, but the financial impact of this competition cannot be reasonably estimated at this time. Texas The Public Utility Regulatory Act, which became effective in May 1995 (PURA), allows SWBell and other LECs to elect to move from rate of return regulation to price regulation with elimination of earnings sharing. In September 1995, SWBell notified the Texas Public Utility Commission (TPUC) that it elected incentive regulation under the new law. Basic local service rates are capped at existing levels for four years following the election. The TPUC is prohibited from reducing switched access rates charged by LECs to interexchange carriers while rates are capped. LECs electing price regulation must commit to network and infrastructure improvement goals, including expansion of digital switching and advanced high-speed services to qualifying public institutions, such as schools, libraries and hospitals, requesting the services. PURA also established an infrastructure grant fund for use by public institutions in upgrading their communications and computer technology. PURA provided for a total fund assessment of $150 annually on all telecommunications providers in Texas for a ten-year period. The 1997 Texas legislative session changed the funding for the infrastructure grant from annually collecting $150 for ten years to a flat rate (1.25%) applied to all telecommunications providers' sales taxable revenues. The law also provides a cap of $1,500 for the life of the fund. SWBell's annual payments will increase from the current level in 1997 of $36 per year to approximately $50 for each of the next three years. Due to the industry's growth in revenues, the fund should be completely funded before the original ten years. PURA establishes local exchange competition by allowing other companies that desire to provide local exchange services to apply for certification by the TPUC, subject to certain build-out requirements, resale restrictions and minimum service requirements. PURA provides that SWBell will remain the default carrier of "1 plus" intraLATA long-distance traffic until SWBell is allowed to carry interLATA long-distance. In 1996, MCI Communications Corporation (MCI) and AT&T Corp. (AT&T) sued the state of Texas, alleging that PURA violates the Texas state constitution, and claiming that PURA establishes anticompetitive barriers designed to prevent MCI, AT&T and Sprint Corporation (Sprint) from providing local services within Texas. The FCC, also in response to petitions filed by AT&T and MCI, preempted and voided portions of PURA that required certain new entrants to build telephone networks to cover a 27-square-mile area in any market they entered. Furthermore, the FCC also preempted rules that excluded competitors from entering markets with fewer than 31,000 access lines and which made resale of Centrex phone services subject to a limited property restriction. AT&T and MCI have dismissed their suits regarding this matter. In October 1997, SWBell filed with the FCC a Petition for Reconsideration regarding the preemption of the property restriction for Centrex services. More than 170 applications for certification to provide competitive local service have been approved by the TPUC, with over 25 more applications pending approval. As a result, SWBell expects competition to continue to develop for local service, but the financial impact of this competition cannot be reasonably estimated at this time. Missouri Effective September 26, 1997, the Missouri Public Service Commission (MPSC) determined that SWBell is now subject to price cap regulation. Prices in effect as of December 31, 1996 are the initial maximum allowable rates for services and cannot be adjusted until January 1, 2000 for basic and access services and until January 1, 1999 for non-basic services. On an exchange basis where a competitor begins operations, the January 1, 1999 freeze on maximum allowable rates for non-basic services is removed. After those dates, caps for basic and access services may be adjusted based on one of two government indices while caps for non-basic services may be increased up to 8% per year. In an exchange where competition for basic local service exists for five years, services will be declared competitive and subject to market pricing unless the MPSC finds effective competition does not exist. The Office of Public Counsel and MCI have sought judicial review of the MPSC determination. Oklahoma Oklahoma enacted legislation, effective July 1, 1997, which allows for alternative regulation in Oklahoma for telecommunications providers. Key provisions of the new law allow SWBell to apply for alternative regulation at any time, impose a restriction against the Oklahoma Corporation Commission (OCC) initiating a rate case until February 5, 2001, establish a Universal Service Fund (USF), and require SWBell to keep intrastate access rates at parity with interstate rates. SWBell is allowed to seek partial recovery of the access rate reductions from the USF. In addition, the new law allows for streamlined tariff processing procedures and establishes a framework to have services declared competitive and eventually deregulated. Competitive Environment Competition continues to increase for telecommunication and information services. Recent changes in legislation and regulation have increased the opportunities for alternative service providers offering telecommunications services. Technological advances have expanded the types and uses of services and products available. As a result, SBC faces increasing competition in significant portions of its business. Domestic On February 8, 1996, the Telecom Act was enacted into law. The Telecom Act is intended to address various aspects of competition within, and regulation of, the telecommunications industry. The Telecom Act provides that all post-enactment conduct or activities which were subject to the consent decree issued at the time of AT&T divestiture of the Regional Holding Companies (RHCs), referred to as the Modification of Final Judgment (MFJ), are now subject to the provisions of the Telecom Act. In April 1996, the United States District Court for the District of Columbia issued its Opinion and Order terminating the MFJ and dismissing all pending motions related to the MFJ as moot. This ruling effectively ended 13 years of RHC regulation under the MFJ. Among other things, the Telecom Act also defines conditions SBC must comply with before being permitted to offer interLATA long-distance service within California, Texas, Missouri, Kansas, Oklahoma, Arkansas and Nevada (regulated operating areas) and establishes certain terms and conditions intended to promote competition for the Telephone Companies' local exchange services. Under the Telecom Act, SBC may immediately offer interLATA long-distance outside the regulated operating areas and over its wireless network both inside and outside the regulated operating areas. Before being permitted to offer landline interLATA long-distance service in any state within the regulated operating areas, SBC must apply for and obtain state-specific approval from the FCC. The FCC's approval, which involves consultation with the United States Department of Justice and appropriate state commissions, requires favorable determinations that the Telephone Companies have entered into interconnection agreement(s) that satisfy a 14-point "competitive checklist" with predominantly facilities-based carrier(s) that serve residential and business customers or, alternatively, that the Telephone Companies have a statement of terms and conditions effective in that state under which they offer the "competitive checklist" items. The FCC must also make favorable public interest and structural separation determinations in connection with such applications. In July 1997, SBC brought suit in the U.S. District Court for the Northern District of Texas (U.S. District Court), seeking a declaration that parts of the Telecom Act are unconstitutional on the grounds that they improperly discriminate against the Telephone Companies by imposing restrictions that prohibit the Telephone Companies by name from offering interLATA long-distance and other services that other LECs are free to provide. The suit challenged only those portions of the Telecom Act that exclude the Telephone Companies from competing in certain lines of business. On December 31, 1997 the U.S. District Court ruled in favor of SBC and declared certain sections of the Telecom Act unconstitutional, thereby allowing SBC to enter interLATA long-distance in the Telephone Companies' operating areas. If upheld, this ruling is expected to speed competition in the interLATA long-distance markets in SBC's regulated operating areas. The FCC and competitor intervenors have sought and received a stay of the decision by the U.S. District Court. In August 1996, the FCC issued rules by which competitors could connect with LECs' networks, including those of the Telephone Companies. Among other things, the rules addressed unbundling of network elements, pricing for interconnection and unbundled elements (Pricing Provisions), and resale of retail telecommunications services. The FCC rules were appealed by numerous parties, including SBC. In July 1997, the United States Court of Appeals for the Eighth Circuit in St. Louis (8th Circuit) held that the FCC did not have authority to promulgate rules related to the pricing of local intrastate telecommunications and that its rules in that regard were invalid. The 8th Circuit also overturned the FCC's rules which allowed competitors to "pick and choose" among the terms and conditions of approved interconnection agreements. In October 1997, the 8th Circuit issued a subsequent decision clarifying that the Telecom Act does not require the incumbent LECs to deliver network elements to competitors in anything other than completely unbundled form. In September 1997, a number of parties including SBC, filed petitions to enforce the July 1997 ruling of the 8th Circuit that the right to set local exchange prices, including the pricing methodology used, is reserved exclusively to the states. The petitions responded to the FCC's rejection of Ameritech Corporation's interLATA long-distance application in Michigan in which the FCC stated it intended to apply its own pricing standards to RHC interLATA applications. The petitioners asserted the FCC was violating state authority. On January 22, 1998 the 8th Circuit ordered the FCC to abide by the July 1997 ruling and reiterated that the FCC cannot use interLATA long-distance applications made by SBC and other RHC wireline subsidiaries wishing to provide interLATA long-distance to attempt to re-impose the pricing standards ruled invalid in July 1997 by the 8th Circuit. On January 26, 1998, the U.S. Supreme Court agreed to hear all appeals of the July 1997 8th Circuit decision. The effects of the FCC rules are dependent on many factors including, but not limited to: the ultimate resolution of the pending appeals; the number and nature of competitors requesting interconnection, unbundling or resale; and the results of the state regulatory commissions' review and handling of related matters within their jurisdictions. Accordingly, SBC is not able to assess the impact of the FCC rules at this time. Landline Local Service Recent state legislative and regulatory developments also allow increased competition for local exchange services. Companies wishing to provide competitive local service have filed numerous applications with state commissions throughout the Telephone Companies' regulated operating areas, and the commissions of each state have been approving these applications since late 1995. Under the Telecom Act, companies seeking to interconnect to the Telephone Companies' networks and exchange local calls must enter into interconnection agreements with the Telephone Companies. These agreements are then subject to approval by the appropriate state commissions. SBC has reached over 250 interconnection and resale agreements with competitive local service providers, and most have been approved by the relevant state commissions. AT&T and other competitors are reselling SBC local exchange services, and as of December 31, 1997, there were approximately 500,000 SBC access lines supporting services of resale competitors throughout the Telephone Companies' regulated operating areas, most of them in Texas and California. Many competitors have placed facilities in service and have begun advertising campaigns and offering services. Beginning in 1996, SWBell was also granted facilities-based and resale operating authority in territories served by other LECs. SWBell began local exchange service offerings to these areas during 1997. The CPUC authorized facilities-based local services competition effective January 1996 and resale competition effective March 1996. While the CPUC has established local competition rules and interim prices, several issues still remain to be resolved, including final rates for resale and LEC provisioning and pricing of certain network elements to competitors. In order to provide services to resellers, PacBell uses established operating support systems and has implemented electronic ordering systems and a customer care/billing center. Costs to implement local competition, especially number portability, are substantial. The CPUC has set a schedule to review PacBell's recovery of its local competition implementation costs incurred since January 1, 1996. The CPUC has issued orders regarding the implementation of competition in 1997. Some of the key ones include permitting the resale of Centrex services to businesses only, prohibiting aggregation of customers to obtain toll discounts, enforcing optional calling plans retail tariff restrictions on resale, prohibiting sharing of certain Centrex features to route intraLATA calls, adopting no discount on private line resale, ordering resale of voice mail to competitors, and allowing collection of intrastate access charges on unbundled network elements. The CPUC order on resale of voice mail service was stayed and is being reviewed. In December 1997, the TPUC set rates that SWBell may charge for access and interconnection to its telephone network. The TPUC decision sets pricing for dozens of network components and completes a consolidated arbitration between SWBell and six of its competitors, including AT&T and MCI. SWBell has TPUC-approved resale and interconnection agreements with approximately 80 local service providers, with approximately 15 pending approval. In Missouri, the MPSC issued orders on a consolidated arbitration hearing with AT&T and MCI and on selected items with Metropolitan Fiber Systems (MFS). Among other terms, the orders established discount rates for resale of SWBell services and prices for unbundled network elements. SWBell appealed the interconnection agreement resulting from the first arbitration proceeding on November 5, 1997; a decision is still pending. A second arbitration process to address other interconnection issues with AT&T has concluded, and the MPSC ordered that an agreement be filed. SWBell has sought reconsideration of this order. As a result of the Telecom Act and conforming interconnection agreements, the Telephone Companies expect increased competitive pressure in 1998 and beyond from multiple providers in various markets including facilities-based Competitive Local Exchange Carriers (CLECs), interexchange carriers (IXCs) and resellers. At this time, management is unable to assess the effect of competition on the industry as a whole, or financially on SBC, but expects both losses of market share in local service and gains resulting from new business initiatives, vertical services and new service areas. Wireless Local Service In 1993, the FCC adopted an order allocating radio spectrum and licenses for PCS. PCS utilizes wireless telecommunications digital technology at a higher frequency radio spectrum than cellular. Like cellular, it is designed to permit access to a variety of communications services regardless of subscriber location. In an FCC auction, which concluded in March 1995, PCS licenses were awarded in 51 major markets. SBC or affiliates acquired PCS licenses in the Major Trading Areas (MTAs) of Los Angeles-San Diego, California; San Francisco-Oakland-San Jose, California; Memphis, Tennessee; Little Rock, Arkansas; and Tulsa, Oklahoma. The California licenses cover substantially all of California and Nevada. SBC is currently operational in all of its major California-Nevada markets and Tulsa, Oklahoma. During 1996, SBC received several AT&T cellular networks in Arkansas in exchange for SBC's PCS licenses in Memphis, Tennessee and Little Rock, Arkansas and other consideration. In November 1996, Pacific Bell Mobile Services (PBMS) conducted an extensive PCS trial in San Diego, California. Service was formally launched in San Diego, California in January 1997, in Las Vegas, Nevada in February 1997, in Sacramento, California in March 1997, in San Francisco in May 1997, in Los Angeles in July 1997 and in Bakersfield, California in October 1997. The network incorporates the Global System for Mobile Communications (GSM) standard which is widely used in Europe. PBMS is selling PCS as an off-the-shelf product in retail stores across California and Nevada. Significant competition exists, particularly from the two established cellular companies in each market. In an FCC auction which concluded in January 1997, SBC acquired eight additional PCS licenses for Basic Trading Areas (BTAs) that are within the five-state area. SBC also has state approved interconnection agreements to receive reciprocal compensation from interexchange carriers and other local service providers accessing its wireless networks in all states where it provides wireless services. Companies granted licenses in MTAs and BTAs where SBC also provides service include subsidiaries and affiliates of AT&T, Sprint and other RHCs. Significant competition from PCS providers exists in SBC's major markets. Competition has been based upon both price and product packaging and has contributed to SBC's decline in average subscriber revenue per wireless customer. Long-Distance Competition continues to intensify in the Telephone Companies' intraLATA long-distance markets. It is estimated that providers other than PacBell now serve more than half of the business intraLATA long-distance customers in PacBell's service areas. The OCC recommended that SBC be allowed to offer interLATA long-distance in Oklahoma. Notwithstanding that recommendation, the FCC denied SBC such authority and SBC has appealed the decision in the D.C. Court of Appeals where the case is pending. Since the Telecom Act, SBC has entered the wireless long-distance markets, and offers wireless long-distance service in all of its wireless service areas. In addition, through affiliates SBC also offers landline interLATA long-distance services to customers in selected areas outside the Telephone Companies' operating areas. Other In the future, it is likely that additional competitors will emerge in the telecommunications industry. Cable television companies and electric utilities have expressed an interest in, or already are, providing telecommunications services. As a result of recent and prospective mergers and acquisitions within the industry, SBC may face competition from entities offering both cable TV and telephone services in the Telephone Companies' regulated operating areas. Interexchange carriers have been certified to provide local service, and a number of other major carriers have publicly announced their intent to provide local service in certain markets, some of which are in the Telephone Companies' regulated operating areas. Public communications services such as public payphone services will also face increased competition as a result of federal deregulation of the payphone industry. SBC is aggressively representing its interests regarding competition before federal and state regulatory bodies, courts, Congress and state legislatures. SBC will continue to evaluate the increasingly competitive nature of its business, and develop appropriate competitive, legislative and regulatory strategies. International Telmex was granted a concession in 1990, which expired in August 1996, as the sole provider of long-distance services in Mexico. In 1995, the Mexican Senate and Chamber of Deputies passed legislation providing for the introduction of competition into the Mexican long-distance market. This legislation specified that there would be an unlimited number of long-distance concessions and that Telmex was required to provide 60 interconnection points by January 1, 1997, and more than 200 interconnection points by the year 2000. Several large competitors have received licenses to compete with Telmex and begun operations, including a joint venture between AT&T and Alfa S.A. de C.V., a Mexican consortium, and Avantel, S.A., a joint venture between MCI and Grupo Financiero Banamex-Accival, Mexico's largest financial group. Balloting for presubscription of long-distance service is currently occurring among Telmex's customers in selected areas. At the end of 1997, Telmex had retained about 75% of its long-distance customers in areas that had completed balloting. Other Business Matters Merger Agreement On January 5, 1998, SBC and Southern New England Telecommunications Corporation (SNET) jointly announced a definitive agreement to merge an SBC subsidiary with SNET, in a transaction in which each share of SNET common stock will be exchanged for 1.7568 shares of SBC common stock (equivalent to approximately 120 million shares, or 6.5% of SBC's outstanding shares at December 31, 1997). After the merger, SNET will be a wholly-owned subsidiary of SBC. The transaction 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 as well as approval by the shareowners of SNET at a special meeting expected to be held on March 27, 1998. If approvals are granted, the transaction is expected to close by the end of 1998. Restructuring Reserve In December 1993, PAC established a reserve to record the incremental cost of force reductions associated with restructuring PAC's business processes, of $1,431 in expenses, which impacted net income by $861. This restructuring was expected to allow PacBell to eliminate approximately 10,000 employee positions through 1997, net of approximately 4,000 new positions expected to be created. For the three-year period 1994 through 1996, net force reductions totalled 9,168. This table sets forth the status and activity of this reserve during that three-year period: - ------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------- Balance - beginning of year $ 228 $ 819 $ 1,097 Charges: cash outlays (195) (372) (216) non-cash 64 (219) (62) - ------------------------------------------------------------------------- Balance - end of year $ 97 $ 228 $ 819 ========================================================================= The remaining 1996 reserve of $97 was used during 1997. As a result of the new initiatives arising from the merger with PAC, net force changes during 1997 are not meaningful to the restructuring reserve. Acquisitions and Dispositions In addition to the items discussed in Note 16 to the Financial Statements, SBC has made several acquisitions and dispositions since 1995. In 1995, SBC made the following acquisitions: a wireless system serving Watertown, New York, and 100% of the stock of Cross Country Wireless (CCW), a wireless cable television operator providing service to 40,000 customers in Riverside, California and with licenses to provide service in Los Angeles, Orange County and San Diego. The CCW acquisition involved the issuance of stock valued at approximately $120 and assumption of $55 in debt. Additionally, SBC made the following equity investments in 1995: a $317 investment to acquire 40% of VTR S.A. (VTR), a privately owned Chilean telecommunications holding company which was 51% owned by Grupo Luksic (Luksic), a large Chilean conglomerate, and an investment in a South African wireless company. In 1996, SBC made the following additional investments: an investment to maintain its indirect 10% ownership in a French cellular company to offset dilution of its interest resulting from other equity sales, and an increase in its holding in VTR to 49% through the purchase of shares from another minority shareholder. Also in 1996, SBC and the other RHCs reached an agreement to sell Bellcore. This sale was finalized in 1997. During 1997, SBC contributed its French cellular holdings and an additional $240 to acquire a 15% interest in Cegetel, S.A, a newly formed company which is intended to provide a broad base of telecommunications services throughout France. Luksic exercised an option to purchase shares of VTR from SBC, reducing SBC's ownership to 44%; in December 1997, VTR sold its wireless services operations. SBC also sold its interests in an Australian directory publisher in 1997. During the third quarter of 1997, SBC reached agreement to sell its cable television properties in Montgomery County, Maryland and Arlington, Virginia, as well as its purchase option to invest in cable television operations in Chicago, Illinois. These transactions are expected to close during 1998. Throughout 1997 and in February 1998, SBC sold portions of its Telmex L shares so that SBC's total equity investment remained below 10% of Telmex's total equity capitalization. None of these transactions had a material effect on SBC's financial results in 1997, 1996 or 1995, nor does management expect them to have a material effect on SBC's financial position or results of operations in 1998. Strategic Realignment In July 1995, SBC announced a strategic realignment of functions, and recognized $139 in selling, general and administrative expenses. These expenses include postemployment benefits for approximately 2,400 employees arising from the future consolidation of operations, streamlining support and administrative functions and integrating financial systems. Full implementation of the realignment had been delayed due to the merger with PAC, and the realignment plans and all remaining liabilities were either integrated with or superseded by the post-merger initiatives. The charge reduced net income for 1995 by approximately $88. Liquidity and Capital Resources Capital Expenditures and Other Commitments To provide high-quality communications services to its customers, SBC, particularly its landline and wireless operations, must make significant investments in property, plant and equipment. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory commitments. SBC's capital expenditures totaled $5,766, $5,481 and $4,338 for 1997, 1996 and 1995. The Telephone Companies' capital expenditures increased 7% in 1997 and 26% in 1996 due primarily to demand-related growth, network upgrades, customer-contracted requirements, ISDN projects, PCS build-out and SWBell's regulatory commitments. In 1998, management expects total capital spending to decrease slightly from 1997, to between $5,500 and $5,700. Capital expenditures in 1998 will relate primarily to the continued evolution of the Telephone Companies' networks, including amounts agreed to under regulation plans at SWBell, and continued build-out of Mobile Systems' markets and PBMS. SBC expects to fund ongoing capital expenditures with cash provided by operations. SWBell continues to make additional network and infrastructure improvements over periods ranging through 2001 to satisfy regulatory commitments. Total capital expenditures under these commitments will vary based on actual demand of potential end users. SWBell anticipates spending approximately $100 in 1998 associated with these commitments. PacBell has purchase commitments of approximately $190 remaining in connection with its previously announced program for deploying an all-digital switching platform with ISDN and SS-7 capabilities. Over the next few years, SBC expects to incur significant capital and software expenditures for customer number portability, which allows customers to switch to new local competitors and keep the same phone number, and interconnection. SBC expects capital costs and expenses associated with customer number portability to total up to $1.2 billion on a pre-tax basis over the next four years. Full recovery of customer number portability costs is required under the Telecom Act; however, the FCC has not yet determined when or how those significant costs will be recovered. SBC has filed a tariff for recovery of these costs. No action has been taken by the FCC on this tariff, pending the issuance of its order on customer number portability. SBC is unable to predict the likelihood of the FCC permitting the tariffs to become effective. Capital costs and expenses associated with interconnection will vary based on the number of competitors seeking interconnection, the particular markets entered and the number of customers served by those competitors. Accordingly, SBC is currently unable to reasonably estimate the future costs that will be incurred associated with interconnection. SBC currently operates numerous date-sensitive computer applications and systems throughout its business. As the century change approaches, it will be essential for SBC to ensure that these systems properly recognize the year 2000 and continue to process critical operational and financial information. SBC has established processes for evaluating and managing the risks and costs associated with preparing its systems and applications for the year 2000 change. Total expenses for this project have been estimated to be less than $250 over the next three years. SBC expects to substantially complete modifications and incur most of these costs during 1998 to allow for thorough testing before the year 2000. Dividends Declared Dividends declared by the Board of Directors of SBC (Board) were $0.895 per share in 1997, $0.86 per share in 1996, and $0.825 per share in 1995. These per share amounts do not include dividends declared and paid by PAC prior to the merger. The total dividends paid by SBC and PAC were $1,638 in 1997, $1,680 in 1996 and $1,933 in 1995. Pursuant to the terms of the merger agreement, PAC reduced its dividend beginning in the second quarter of 1996. The lower second and third quarter dividends paid in 1996 improved 1996 cash flow by approximately $195. SBC's dividend policy considers both the expectations and requirements of shareowners, internal requirements of SBC and long-term growth opportunities. On January 30, 1998, the Board declared a first quarter 1998 dividend of $0.23375 per share. Cash, Lines of Credit and Cash Flows SBC had $398 of cash and cash equivalents available at December 31, 1997. Commercial paper borrowings as of December 31, 1997, totaled $1,268. SBC has entered into agreements with several banks for lines of credit totaling $2,475, all of which may be used to support commercial paper borrowings (see Note 9 to the Financial Statements). SBC had no borrowings outstanding under these lines of credit as of December 31, 1997. During 1997, as in 1996 and 1995, SBC's primary source of funds continued to be cash generated from operations, as shown in the Consolidated Statements of Cash Flows. Net cash provided by operating activities exceeded SBC's construction and capital expenditures during 1997, as in 1996 and 1995; this excess is referred to as free cash flow, a supplemental measure of liquidity. SBC generated free cash flow of $1,204, $1,935 and $2,452 in 1997, 1996 and 1995. During 1996 PAC issued $1,000 of TOPrS, $500 at 7.56% in January 1996 and $500 at 8.5% in June 1996 (see Note 10 to the Financial Statements). The proceeds were used to retire outstanding short-term debt, primarily commercial paper that had increased significantly during 1995. During 1997, 1996 and 1995, the Telephone Companies refinanced long-term debt with an aggregate principal amount of $964. Total Capital SBC's total capital consists of debt (long-term debt and debt maturing within one year), TOPrS and shareowners' equity. Total capital increased $958 in 1997 and $1,844 in 1996. The increase in 1997 was due to higher debt levels and 1997 earnings. The increase in 1996 was due to PAC's increased financing requirements and the reinvestment of earnings, partially offset by the acquisition of treasury shares. Debt Ratio SBC's debt ratio was 56.2%, 55.5% and 61.7% at December 31, 1997, 1996 and 1995. The debt ratio is affected by the same factors that affect total capital. For 1995, the decrease in equity caused by the discontinuance of regulatory accounting increased the debt ratio by 13.2 percentage points. Employee Stock Ownership Plans See Note 13 to the Financial Statements. SBC Communications Inc. Consolidated Statements of Income Dollars in millions except per share amounts - -------------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------- Operating Revenues Local service $ 12,602 $ 11,389 $ 10,365 Network access 5,815 5,831 5,514 Long-distance service 2,115 2,240 2,072 Directory advertising 2,111 1,985 1,984 Other 2,213 2,000 1,777 - -------------------------------------------------------------------------------------------- Total operating revenues 24,856 23,445 21,712 - -------------------------------------------------------------------------------------------- Operating Expenses Cost of services and products 9,488 8,250 7,864 Selling, general and administrative 7,276 5,250 4,694 Depreciation and amortization 4,922 4,109 4,034 - -------------------------------------------------------------------------------------------- Total operating expenses 21,686 17,609 16,592 - -------------------------------------------------------------------------------------------- Operating Income 3,170 5,836 5,120 - -------------------------------------------------------------------------------------------- Other Income (Expense) Interest expense (947) (812) (957) Equity in net income of affiliates 201 207 120 Other income (expense) - net (87) (82) 194 - -------------------------------------------------------------------------------------------- Total other income (expense) (833) (687) (643) - -------------------------------------------------------------------------------------------- Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Accounting Change 2,337 5,149 4,477 - -------------------------------------------------------------------------------------------- Income taxes 863 1,960 1,519 - -------------------------------------------------------------------------------------------- Income Before Extraordinary Loss and Cumulative Effect of Accounting Change 1,474 3,189 2,958 - -------------------------------------------------------------------------------------------- Extraordinary Loss from Discontinuance of Regulatory Accounting, net of tax - - (6,022) Cumulative Effect of Accounting Change, net of tax - 90 - - -------------------------------------------------------------------------------------------- Net Income (Loss) $ 1,474 $ 3,279 $ (3,064) - -------------------------------------------------------------------------------------------- Earnings Per Common Share: * Income Before Extraordinary Loss and Cumulative Effect of Accounting Change $ 0.81 $ 1.73 $ 1.61 Net Income (Loss) $ 0.81 $ 1.78 $ (1.66) - -------------------------------------------------------------------------------------------- Earnings Per Common Share-Assuming Dilution: * Income Before Extraordinary Loss and Cumulative Effect of Accounting Change $ 0.80 $ 1.72 $ 1.60 Net Income (Loss) $ 0.80 $ 1.77 $ (1.66) - -------------------------------------------------------------------------------------------- * Restated to reflect two-for-one stock split declared January 30, 1998. The accompanying notes are an integral part of the consolidated financial statements.
SBC Communications Inc. Consolidated Balance Sheets Dollars in millions except per share amounts - -------------------------------------------------------------------------------------- December 31, --------------------------- 1997 1996 - -------------------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 398 $ 314 Short-term cash investments 320 432 Accounts receivable - net of allowances for uncollectibles of $395 and $311 5,015 4,684 Prepaid expenses 349 287 Deferred income taxes 622 201 Deferred charges 82 102 Other current assets 276 251 - -------------------------------------------------------------------------------------- Total current assets 7,062 6,271 - -------------------------------------------------------------------------------------- Property, Plant and Equipment - Net 27,339 26,080 - -------------------------------------------------------------------------------------- Intangible Assets - Net of Accumulated Amortization of $1,002 and $611 3,269 3,589 - -------------------------------------------------------------------------------------- Investments in Equity Affiliates 2,740 1,964 - -------------------------------------------------------------------------------------- Other Assets 1,722 1,581 - -------------------------------------------------------------------------------------- Total Assets $ 42,132 $ 39,485 - -------------------------------------------------------------------------------------- Liabilities and Shareowners' Equity Current Liabilities Debt maturing within one year $ 1,953 $ 2,335 Accounts payable and accrued liabilities 7,888 6,584 Dividends payable 411 393 - -------------------------------------------------------------------------------------- Total current liabilities 10,252 9,312 - -------------------------------------------------------------------------------------- Long-Term Debt 12,019 10,930 - -------------------------------------------------------------------------------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,639 853 Postemployment benefit obligation 4,929 5,070 Unamortized investment tax credits 417 498 Other noncurrent liabilities 1,984 2,181 - -------------------------------------------------------------------------------------- Total deferred credits and other noncurrent liabilities 8,969 8,602 - -------------------------------------------------------------------------------------- Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts# 1,000 1,000 - -------------------------------------------------------------------------------------- Shareowners' Equity Preferred shares ($1 par value, 10,000,000 authorized: none issued) - - Common shares ($1 par value, 2,200,000,000 authorized: issued 1,867,022,568* at December 31, 1997 and 1,867,545,248* at December 31, 1996) 934 934 Capital in excess of par value 9,418 9,422 Retained earnings 1,146 1,297 Guaranteed obligations of employee stock ownership plans (183) (229) Deferred Compensation - LESOP trust (119) (161) Foreign currency translation adjustment (574) (637) Treasury shares (29,741,356* at December 31, 1997 and 41,233,878* at December 31, 1996, at cost) (730) (985) - -------------------------------------------------------------------------------------- Total shareowners' equity 9,892 9,641 - -------------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $ 42,132 $ 39,485 - -------------------------------------------------------------------------------------- * Restated to reflect two-for-one stock split declared January 30, 1998. # The trusts contain assets of $1,030 in principal amount of the Subordinated Debentures of Pacific Telesis Group. The accompanying notes are an integral part of the consolidated financial statements.
SBC Communications Inc. Consolidated Statements of Cash Flows Dollars in millions, increase (decrease) in cash and cash equivalents - ------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ 1,474 $ 3,279 $ (3,064) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,922 4,109 4,034 Undistributed earnings from investments in equity affiliates (100) (138) (58) Provision for uncollectible accounts 523 395 346 Amortization of investment tax credits (81) (80) (95) Deferred income tax expense 215 626 609 Extraordinary loss, net of tax - - 6,022 Cumulative effect of accounting change, net of tax - (90) - Changes in operating assets and liabilities: Accounts receivable (854) (765) (463) Other current assets (69) (50) 77 Accounts payable and accrued liabilities 1,400 632 (76) Other - net (460) (502) (542) - ------------------------------------------------------------------------------------------- Total adjustments 5,496 4,137 9,854 - ------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 6,970 7,416 6,790 - ------------------------------------------------------------------------------------------- Investing Activities Construction and capital expenditures (5,766) (5,481) (4,338) Investments in affiliates (26) (74) (54) Purchase of short-term investments (916) (1,005) (704) Proceeds from short-term investments 1,029 816 587 Dispositions 578 96 14 Acquisitions (1,115) (442) (1,186) - ------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (6,216) (6,090) (5,681) - ------------------------------------------------------------------------------------------- Financing Activities Net change in short-term borrowings with original maturities of three months or less (505) (977) 1,402 Issuance of other short-term borrowings 1,079 209 91 Repayment of other short-term borrowings (805) (134) (91) Issuance of long-term debt 1,498 989 981 Repayment of long-term debt (506) (408) (1,086) Early extinguishment of debt and related call premiums - - (465) Issuance of trust originated preferred securities - 1,000 - Purchase of fractional shares (15) - - Issuance of common shares - 111 74 Purchase of treasury shares (80) (650) (216) Issuance of treasury shares 293 52 82 Dividends paid (1,622) (1,664) (1,814) Other (7) (106) - - ------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (670) (1,578) (1,042) - ------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 84 (252) 67 - ------------------------------------------------------------------------------------------- Cash and cash equivalents beginning of year 314 566 499 - ------------------------------------------------------------------------------------------- Cash and Cash Equivalents End of Year $ 398 $ 314 $ 566 - ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
SBC Communications Inc. Consolidated Statements of Shareowners' Equity Dollars in millions except per share amounts - ------------------------------------------------------------------------------------------------------------------------------------ Guaranteed Deferred Obligations Compensation of Employee Leveraged Foreign Common Shares Capital in Retained Stock Employee Stock Currency Treasury Shares ------------- Excess of Earnings Ownership Ownership Translation ---------------- Shares Amount Par Value (Deficit) Plans Trust Adjustment Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 930,665,766 $ 931 $ 9,258 $ 4,665 $ (315) $ (306) $ (363) (11,401,628) $(463) Net income (loss) for the year ($(1.66) per share*) - - - (3,064) - - - - - Dividends to shareowners ($0.825 per share*) - - - (1,933) - - - - - Reduction of debt associated with Employee Stock Ownership Plans - - - - 43 - - - - Cost of LESOP trust shares allocated to employee accounts - - - - - 64 - - - Foreign currency translation adjustment, net of income tax benefit of $116 - - - - - - (215) - - Issuance of common shares 3,196,076 3 129 - - - - - - Purchase of treasury shares - - - - - - - (4,610,713) (216) Issuance of treasury shares: Dividend Reinvestment Plan - - 19 - - - - 2,730,666 111 Other issuances - - (8) - - - - 2,158,694 87 Other - - - 16 - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 933,861,842 934 9,398 (316) (272) (242) (578) (11,122,981) (481) - ----------------------------------------------------------------------------------------------------------------------------------- Net income for the year ($1.78 per share*) - - - 3,279 - - - - - Dividends to shareowners ($0.86 per share*) - - - (1,680) - - - - - Reduction of debt associated with Employee Stock Ownership Plans - - - - 43 - - - - Cost of LESOP trust shares allocated to employee accounts - - - - - 81 - - - Foreign currency translation adjustment, net of income tax benefit of $28 - - - - - - (59) - - Purchase of common shares (89,218) - - - - - - - - Purchase of treasury shares - - - - - - - (13,099,709) (650) Issuance of treasury shares: Dividend Reinvestment Plan - - 26 - - - - 2,667,752 109 Other issuances - - (5) - - - - 937,999 37 Other - - 3 14 - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 933,772,624 934 9,422 1,297 (229) (161) (637) (20,616,939) (985) - ----------------------------------------------------------------------------------------------------------------------------------- Net income for the year ($0.81 per share*) - - - 1,474 - - - - - Dividends to shareowners ($0.895 per share*) - - - (1,638) - - - - - Reduction of debt associated with Employee Stock Ownership Plans - - - - 46 - - - - Cost of LESOP trust shares allocated to employee accounts - - - - - 42 - - - Foreign currency translation adjustment, net of income tax expense of $38 - - - - - - 63 - - Purchase of common shares (261,340) - - - - - - - - Purchase of treasury shares - - - - - - - (1,547,110) (80) Issuance of treasury shares - - (38) - - - - 7,293,371 335 Other - - 34 13 - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 933,511,284 $ 934 $ 9,418 $ 1,146 $ (183) $ (119) $ (574) (14,870,678) $(730) - ----------------------------------------------------------------------------------------------------------------------------------- * Restated to reflect two-for-one stock split declared January 30, 1998. The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements Dollars in millions except per share amounts Note 1. Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of SBC Communications Inc. and its majority-owned subsidiaries (SBC). SBC's subsidiaries and affiliates operate predominantly in the communications services industry, providing landline and wireless telecommunications services and equipment, directory advertising and cable television services both domestically and worldwide. SBC's largest subsidiaries are Southwestern Bell Telephone Company (SWBell) providing telecommunications services in Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area), and Pacific Telesis Group (PAC), providing telecommunications services in California and Nevada. PAC's subsidiaries include Pacific Bell (PacBell, which also includes its subsidiaries) and Nevada Bell. (SWBell, PacBell and Nevada Bell are collectively referred to as the Telephone Companies.) All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships, joint ventures and less than majority-owned subsidiaries are principally accounted for under the equity method. Earnings from certain foreign investments accounted for under the equity method are included for periods ended within three months of SBC's year end. Financial information has been restated to reflect the two-for-one stock split, effected in the form of a stock dividend, declared January 30, 1998 (see Note 15). Certain amounts in prior period financial statements have been reclassified to conform to the current year's presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Income Taxes - Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Investment tax credits earned prior to their repeal by the Tax Reform Act of 1986 are amortized as reductions in income tax expense over the lives of the assets which gave rise to the credits. Cash Equivalents - Cash equivalents include all highly liquid investments with original maturities of three months or less. Deferred Charges - Directory advertising costs are deferred until the directory is published and advertising revenues related to these costs are recognized. Cumulative Effect of Accounting Change - Prior to January 1, 1996, Pacific Bell Directory (a subsidiary of PacBell) recognized revenues and expenses related to publishing directories in California using the "amortization" method, under which revenues and expenses were recognized over the lives of the directories, generally one year. Effective January 1, 1996, Pacific Bell Directory 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, and better reflects the operating activity of the business. The cumulative after-tax effect of applying the change in method to prior years is recognized as of January 1, 1996 as a one-time, non-cash gain applicable to continuing operations of $90, or $0.05 per share. The gain is net of deferred taxes of $53. Had the current method been applied during 1995, income before extraordinary loss and accounting change would not have been materially affected. Property, Plant and Equipment - Property, plant and equipment is stated at cost. The cost of additions and substantial betterments of property, plant and equipment is capitalized. The cost of maintenance and repairs of property, plant and equipment is charged to operating expenses. Property, plant and equipment is depreciated using straight-line methods over their estimated economic lives, generally ranging from 3 to 50 years. Prior to the discontinuance of regulatory accounting in the third quarter of 1995, SWBell and PacBell computed depreciation using certain straight-line methods and rates as prescribed by regulators. In accordance with composite group depreciation methodology, when a portion of the Telephone Companies' depreciable property, plant and equipment is retired in the ordinary course of business, the gross book value is charged to accumulated depreciation; no gain or loss is recognized on the disposition of this plant. Intangible Assets - Intangible assets consist primarily of wireless cellular and Personal Communications Services (PCS) licenses, television licenses, customer lists and the excess of consideration paid over net assets acquired in business combinations. These assets are being amortized using the straight-line method, over periods generally ranging from 5 to 40 years. At December 31, 1997 and 1996, amounts included in net intangible assets for licenses were $2,625 and $2,695. Management periodically reviews the carrying value and lives of all intangible assets based on expected future cash flows. Software Costs - The costs of computer software purchased or developed for internal use are expensed as incurred. However, initial operating system software costs are capitalized and amortized over the lives of the associated hardware. Advertising Costs - Costs for advertising products and services or corporate image are expensed as incurred. Foreign Currency Translation - Local currencies are generally considered the functional currency for SBC's share of foreign operations, except in countries considered highly inflationary. SBC translates its share of foreign assets and liabilities at current exchange rates. Revenues and expenses are translated using average rates during the year. The ensuing foreign currency translation adjustments are recorded as a separate component of Shareowners' Equity. Other transaction gains and losses resulting from exchange rate changes on transactions denominated in a currency other than the local currency are included in earnings as incurred. Earnings Per Common Share - In 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128) replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options and other stock-based compensation. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to FAS 128 requirements. Derivative Financial Instruments - SBC does not invest in any derivatives for trading purposes. From time to time SBC invests in immaterial amounts of interest rate swaps in order to manage exposure to interest rate risk and foreign currency forward exchange contracts in order to manage exposure to changes in foreign currency rates. Amounts related to derivative contracts are recorded using the hedge accounting approach. SBC currently does not recognize the fair values of these derivative financial investments or their changes in fair value in its financial statements. PAC has entered into an equity swap contract to hedge exposure to risk associated with its recorded liability for certain outstanding employee stock options relating to stock of AirTouch Communications Inc. (see Note 10). The equity swap contract and its liability are recorded at fair value in the balance sheet as other assets or liabilities. Note 2. Discontinuance of Regulatory Accounting In the third quarter of 1995, SWBell and PacBell discontinued their application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). FAS 71 requires depreciation of telephone plant using lives set by regulators which are generally longer than those established by unregulated companies and the deferral of certain costs and obligations based on regulatory actions (regulatory assets and liabilities). As a result of the adoption of price-based regulation for most of SWBell's revenues and the acceleration of competition in the California and five-state area telecommunications markets, management determined that SWBell and PacBell no longer met the criteria for application of FAS 71. Upon discontinuance of FAS 71 by SWBell and PacBell, SBC recorded a non-cash, extraordinary charge to net income of $6,022 (after a net deferred tax benefit of $4,037). This charge was comprised of an after-tax charge of $5,739 to reduce the net carrying value of telephone plant, and an after-tax charge of $283 for the elimination of net regulatory assets. The components of the charge were as follows: ---------------------------------------------------------------------- Pre-tax After-tax ---------------------------------------------------------------------- Increase telephone plant accumulated $ 9,476 $ 5,739 depreciation Elimination of net regulatory assets 583 283 ====================================================================== Total $ 10,059 $ 6,022 ====================================================================== The increase in accumulated depreciation of $9,476 reflected the effects of adopting depreciable lives for SWBell's and PacBell's plant categories which more closely reflect the economic and technological lives of the plant. The adjustment was supported by discounted cash flow analyses, that estimated amounts of telephone plant that may not be recoverable from discounted future cash flows. These analyses included consideration of the effects of anticipated competition and technological changes on plant lives and revenues. Following is a comparison of new lives to those prescribed by regulators for selected plant categories: ------------------------------------------------------------------------ Average Lives (in Years) ------------------------------------------------------------------------ Regulator- Estimated Prescribed Economic ------------------------------------------------------------------------ Digital switch 17 10-11 Digital circuit 10-12 7-8 Copper cable 19-26 14-18 Fiber cable 27-30 20 Conduit 57-59 50 ======================================================================== The increase in accumulated depreciation at SWBell also included an adjustment of approximately $450 to fully depreciate analog switching equipment scheduled for replacement. Remaining analog switching equipment is being depreciated using an average remaining life of four years. The discontinuance of FAS 71 for external financial reporting purposes also required the elimination of net regulatory assets of $583. Regulatory assets and liabilities are related primarily to accounting policies used by regulators in the ratemaking process which are different from those used by non-regulated companies. The differences arose predominantly in the accounting for income taxes, deferred compensated absences, and in California, pension costs and debt redemption costs. These items were required to be eliminated with the discontinuance of accounting under FAS 71. SWBell and PacBell accounting and reporting for regulatory purposes are not affected by the discontinuance of FAS 71 for external financial reporting purposes. With the discontinuance of FAS 71, SWBell and PacBell began accounting for interest on funds borrowed to finance construction as an increase in property, plant and equipment and a reduction of interest expense. Under the provisions of FAS 71, both companies capitalized both interest and equity costs allowed by regulators during periods of construction as other income and as an addition to the cost of plant constructed. Additionally, PacBell began accounting for pension costs under Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," (FAS 87) and Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" (FAS 88). Note 3. Merger with PAC On April 1, 1997, SBC and PAC completed the merger of an SBC subsidiary with PAC, in a transaction in which each share of PAC common stock was exchanged for 1.4629 shares of SBC common stock (equivalent to approximately 626 million shares; both the exchange ratio and shares issued have been restated to reflect the two-for-one stock split declared January 30, 1998). 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. Accordingly, the financial statements for the periods presented prior to the merger have been restated to include the accounts of PAC. Operating revenues, income before extraordinary loss and cumulative effect of accounting change and net income (loss) of the separate companies for the pre-merger periods of the last three years were as follows: ----------------------------------------------------------------------- Three months ended March 31, Year Ended December 31, ----------------------------------------------------------------------- 1997 1996 1995 ----------------------------------------------------------------------- Operating revenues: SBC $ 3,456 $ 13,857 $ 12,670 PAC 2,535 9,588 9,042 ----------------------------------------------------------------------- Combined $ 5,991 $ 23,445 $ 21,712 ----------------------------------------------------------------------- Income before extraordinary loss and cumulative effect of accounting change: SBC $ 517 $ 2,101 $ 1,889 PAC 352 1,057 1,048 Adjustments (12) 31 21 ----------------------------------------------------------------------- Combined $ 857 $ 3,189 $ 2,958 ----------------------------------------------------------------------- Net income (loss): SBC $ 517 $ 2,101 $ (930) PAC 352 1,142 (2,312) Adjustments (12) 36 178 ----------------------------------------------------------------------- Combined $ 857 $ 3,279 $ (3,064) ----------------------------------------------------------------------- The combined results include the effect of changes applied retroactively to conform accounting methodologies between PAC and SBC for, among other items, pensions, postretirement benefits, sales commissions and merger transaction costs as well as certain deferred tax adjustments resulting from the merger. In each case, SBC believes the new methods are more prevalent and better reflect the operations of the business. Transaction costs and one-time charges relating to the closing of the merger were $359 ($215 net of tax) including, among other items, the present value of amounts to be returned to California ratepayers as a condition of the merger and expenses for investment banker and professional fees. Of this total, $287 ($180 net of tax) is included in expenses in 1997, and $72 ($35 net of tax) in 1996. 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 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. Following is a discussion of the most significant of these charges. Reorganization SBC is centralizing several key functions that will support the operations of the Telephone Companies, including network planning, strategic marketing and procurement. It is also consolidating a number of corporate-wide support activities, including research and development, information technology, financial transaction processing and real estate management. The Telephone Companies will continue as separate legal entities. These initiatives will result in the creation of some jobs and the elimination and realignment of others, with many of the affected employees changing job responsibilities and in some cases assuming positions in other locations. SBC recognized a charge of approximately $338 ($213 net of tax) during the second quarter of 1997 in connection with these initiatives. This charge was comprised mainly of postemployment benefits, primarily related to severance, and costs associated with closing down duplicate operations, primarily contract cancellations. Other charges arising out of the merger related to relocation, retraining and other effects of consolidating certain operations are being recognized in the periods those charges are incurred. During the second half of 1997, SBC incurred $501 ($304 net of tax) of merger-related charges. Impairments/asset valuation As a result of SBC's merger integration plans, strategic review of domestic operations and organizational realignments, SBC reviewed the carrying values of related long-lived assets. This review included estimating remaining useful lives and cash flows and identifying assets to be abandoned. Where this review indicated impairment, discounted cash flows related to those assets were analyzed to determine the amount of the impairment. As a result of these reviews, SBC wrote off some assets and recognized impairments to the value of other assets with a combined charge of $965 ($667 after tax) recorded in the second quarter of 1997. These impairments and writeoffs related to the wireless digital TV operations in southern California, certain analog switching equipment in California, certain rural and other telecommunications equipment in Nevada, selected wireless equipment, duplicate or obsolete equipment, cable within commercial buildings in California, certain nonoperating plant and other assets. Video curtailment/purchase commitments SBC also announced that it is scaling back its limited direct investment in video services. As a result of this curtailment, SBC has halted construction on the Advanced Communications Network (ACN) in California. As part of an agreement with the ACN vendor, SBC paid the liabilities of the ACN trust that owned and financed ACN construction, incurred costs to shut down all construction previously conducted under the trust and received certain consideration from the vendor. In the second quarter of 1997, SBC recognized its net expense of $553 ($346 after tax) associated with these activities. Additionally, SBC curtailed several other video-related activities including discontinuing its broadband network video trials in Richardson, Texas and San Jose, California, substantially scaling back its involvement in the Tele-TV joint venture and withdrawing from the Americast venture. Americast partners are disputing the withdrawal in arbitration and litigation, the outcome of which cannot be predicted. The collective impact of these decisions resulted in a charge of $145 ($92 after tax) in the second quarter of 1997. Note 4. Merger Agreement with Southern New England Telecommunications Corporation (SNET) On January 5, 1998, SBC and SNET jointly announced a definitive agreement to merge an SBC subsidiary with SNET, in a transaction in which each share of SNET common stock will be exchanged for 1.7568 shares of SBC common stock (equivalent to approximately 120 million shares, or 6.5% of SBC's outstanding shares at December 31, 1997; both the exchange ratio and shares to be issued have been restated to reflect the two-for-one stock split declared January 30, 1998). After the merger, SNET will be a wholly-owned subsidiary of SBC. The transaction 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 as well as approval by the shareowners of SNET at a special meeting expected to be held on March 27, 1998. If approvals are granted, the transaction is expected to close by the end of 1998. Note 5. Pacific Telesis Group Financial Information The following table presents summarized financial information for Pacific Telesis Group at December 31, or for the year then ended: -------------------------------------------------------------------------- 1997 1996 1995 -------------------------------------------------------------------------- Balance Sheets Current assets $ 2,835 $ 2,474 $ 2,434 Noncurrent assets 14,041 14,134 13,407 Current liabilities 4,513 3,527 4,641 Noncurrent liabilities 10,305 10,308 9,010 -------------------------------------------------------------------------- Income Statements Operating revenues $ 10,101 $ 9,588 $ 9,042 Operating income (loss) (166) 2,198 2,011 Income (loss) before extraordinary loss and cumulative effect of accounting changes (546) 1,057 1,048 Net income (loss) (224) 1,142 (2,312) --------------------------------------------------------------------------
SBC has not provided separate financial statements and other disclosures for PAC as management has determined that such information is not material to the holders of the Trust Originated Preferred Securities (TOPrS) (see Note 10). On January 30, 1998, SBC guaranteed payment of the obligations of the TOPrS. Note 6. Earnings Per Share A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for income before extraordinary loss and cumulative effect of accounting change for the years ended December 31, 1997, 1996 and 1995 are shown in the table below. Per share amounts have been restated to reflect the two-for-one stock split declared January 30, 1998. -------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 -------------------------------------------------------------------- Numerators Numerator for basic earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 1,474 $ 3,189 $ 2,958 -------------------------------------------------------------------- Dilutive potential common shares: Other stock-based compensation 3 2 2 -------------------------------------------------------------------- Numerator for diluted earnings per share $ 1,477 $ 3,191 $ 2,960 -------------------------------------------------------------------- Denominators Denominator for basic earnings per share: Weighted average number of common shares outstanding (000) 1,828,395 1,841,240 1,840,861 -------------------------------------------------------------------- Dilutive potential common shares (000): Stock options 11,791 6,783 4,910 Other stock-based compensation 4,443 3,410 2,936 -------------------------------------------------------------------- Denominator for diluted earnings per share 1,844,629 1,851,433 1,848,707 -------------------------------------------------------------------- Basic earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 0.81 $ 1.73 $ 1.61 Extraordinary loss - - (3.27) Cumulative effect of accounting change - 0.05 - -------------------------------------------------------------------- Net income (loss) $ 0.81 $ 1.78 $ (1.66) -------------------------------------------------------------------- Diluted earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 0.80 $ 1.72 $ 1.60 Extraordinary loss - - (3.26) Cumulative effect of accounting change - 0.05 - -------------------------------------------------------------------- Net income (loss) $ 0.80 $ 1.77 $ (1.66) -------------------------------------------------------------------- Note 7. Property, Plant and Equipment Property, plant and equipment is summarized as follows at December 31: --------------------------------------------------------------------- 1997 1996 --------------------------------------------------------------------- Telephone Companies plant In service $ 60,122 $ 56,638 Under construction 1,147 1,614 --------------------------------------------------------------------- 61,269 58,252 Accumulated depreciation and amortization (36,384) (34,515) --------------------------------------------------------------------- Total Telephone Companies 24,885 23,737 --------------------------------------------------------------------- Other 4,017 3,534 Accumulated depreciation and amortization (1,563) (1,191) --------------------------------------------------------------------- Total other 2,454 2,343 --------------------------------------------------------------------- Property, plant and equipment-net $ 27,339 $ 26,080 ===================================================================== SBC's depreciation expense as a percentage of average depreciable plant was 7.4% for 1997, 6.9% for 1996 and 7.0% for 1995. Certain facilities and equipment used in operations are under operating or capital leases. Rental expenses under operating leases for 1997, 1996 and 1995 were $390, $324 and $231. At December 31, 1997, the future minimum rental payments under noncancelable operating leases for the years 1998 through 2002 were $168, $171, $113, $86 and $66, and $238 thereafter. Capital leases were not significant. Note 8. Equity Investments Investments in affiliates accounted for under the equity method include SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications company. SBC is a member of a consortium that holds all of the AA shares of Telmex stock, representing voting control of the company. The consortium is controlled by a group of Mexican investors led by an affiliate of Grupo Carso, S.A. de C.V. SBC also owns L shares which have limited voting rights. Throughout 1997 and in February 1998, SBC sold portions of its L shares so that its total equity investment remained below 10% of Telmex's total equity capitalization. Other major equity investments held by SBC include a 1997 investment of $760 in South African telecommunications (see Note 16), an indirect 15% ownership in Cegetel, a joint venture providing a broad range of telecommunications offerings in France, investments in Chilean telecommunications operations and minority ownership of several domestic wireless properties. The following table is a reconciliation of SBC's investments in equity affiliates: --------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------- Beginning of year $ 1,964 $ 1,616 $ 1,776 Additional investments 1,076 337 447 Equity in net income 201 207 120 Dividends received (90) (70) (62) Currency translation adjustments (135) (94) (268) Reclassifications and other adjustments (276) (32) (397) ===================================================================== End of year $ 2,740 $ 1,964 $ 1,616 ===================================================================== Currency translation adjustments for 1997 primarily reflect the effect of the exchange rate fluctuations on SBC's investments in South African and French telecommunications. The currency translation adjustment for 1995 primarily reflects the effect on SBC's investment in Telmex of the decline in the value of the Mexican peso relative to the U.S. dollar during 1995. In 1997, SBC used the U.S. dollar, instead of the peso, as the functional currency for its investment in Telmex due to the Mexican economy becoming highly inflationary. Other adjustments for 1997 reflect the sale of portions of SBC's Telmex L shares and the change to the cost method of accounting in 1997 for SBC's 1995 investment in South African wireless operations. Other adjustments for 1995 reflect the change in October 1995 to the cost method of accounting for SBC's United Kingdom cable television operations (see Note 16). Undistributed earnings from equity affiliates were $862 and $762 at December 31, 1997 and 1996. Note 9. Debt Long-term debt, including interest rates and maturities, is summarized as follows at December 31: ------------------------------------------------------------------------------ 1997 1996 ------------------------------------------------------------------------------ SWBell Debentures 4.50%-5.88% 1997-2006 $ 500 $ 600 6.13%-6.88% 2000-2024 1,550 1,200 7.00%-7.75% 2009-2027 1,750 1,500 ------------------------------------------------------------------------------ 3,800 3,300 Unamortized discount--net of premium (36) (29) ------------------------------------------------------------------------------ Total debentures 3,764 3,271 ------------------------------------------------------------------------------ Notes 5.04%-7.67% 1997-2010 1,236 1,118 Unamortized discount (6) (6) ------------------------------------------------------------------------------ Total notes 1,230 1,112 ------------------------------------------------------------------------------ PacBell Debentures 4.62%-5.88% 1999-2006 475 475 6.00%-6.88% 2002-2034 1,194 1,194 7.12%-7.75% 2008-2043 2,250 2,150 8.50% 2031 225 225 ------------------------------------------------------------------------------ 4,144 4,044 Unamortized discount--net of premium (89) (89) ------------------------------------------------------------------------------ Total debentures 4,055 3,955 ------------------------------------------------------------------------------ Notes 6.25%-8.70% 2001-2009 1,300 1,150 Unamortized discount (18) (18) ------------------------------------------------------------------------------ Total notes 1,282 1,132 ------------------------------------------------------------------------------ Other notes 5.76%-6.98% 1997-2007 188 310 7.00%-9.50% 1997-2020 1,318 1,140 ------------------------------------------------------------------------------ 1,506 1,450 Unamortized premium (discount) 71 (14) ------------------------------------------------------------------------------ Total other notes 1,577 1,436 ------------------------------------------------------------------------------ Guaranteed obligations of employee stock ownership plans (1) 8.41%-9.40% 1997-2000 153 208 ------------------------------------------------------------------------------ Capitalized leases 294 303 ------------------------------------------------------------------------------ Total long-term debt, including current maturities 12,355 11,417 Current maturities (336) (487) ============================================================================== Total long-term debt $ 12,019 $ 10,930 ============================================================================== (1) See Note 13.
In February 1998, SBC called $630 of debentures and notes of SWBell, PacBell and SBC Communications Capital Corporation (included in Other notes). Estimated net income impact from unamortized discounts and call premiums is $(8). During 1995, SBC refinanced long-term debentures of SWBell and PacBell. Costs of $36 associated with refinancing are included in other income (expense) - net, with related income tax benefits of $14 included in income taxes in SBC's Consolidated Statements of Income. At December 31, 1997, the aggregate principal amounts of long-term debt scheduled for repayment for the years 1998 through 2002 were $336, $500, $469, $986 and $879. As of December 31, 1997, SBC was in compliance with all covenants and conditions of instruments governing its debt. Debt maturing within one year consists of the following at December 31: ---------------------------------------------------------------------- 1997 1996 ---------------------------------------------------------------------- Commercial paper $ 1,268 $ 1,848 Current maturities of long-term debt 336 487 Other short-term debt 349 - ====================================================================== Total $ 1,953 $ 2,335 ====================================================================== The weighted average interest rate on commercial paper debt at December 31, 1997 and 1996 was 6.0%. SBC has entered into agreements with several banks for lines of credit totaling $1,000. All of these agreements may be used to support commercial paper borrowings and are on a negotiated fee basis with interest rates negotiable at time of borrowing. There were no borrowings outstanding under these lines of credit at December 31, 1997. Another group of uncommitted lines of credit with banks that do not require compensating balances or commitment fees, and accordingly are subject to continued review, amounted to approximately $1,475 at December 31, 1997. Note 10. Financial Instruments The carrying amounts and estimated fair values of SBC's long-term debt, including current maturities and other financial instruments, are summarized as follows at December 31: ----------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------------------------------------------- SWBell debentures $3,764 $3,828 $3,271 $3,208 SWBell notes 1,230 1,271 1,112 1,115 PacBell debentures 4,055 4,337 3,955 3,917 PacBell notes 1,282 1,342 1,132 1,171 Other notes 1,577 1,768 1,436 1,478 TOPrS 1,000 1,034 1,000 990 Guaranteed obligations of employee stock ownership plans(1) 153 159 208 219 ---------------------------------------------------------------------- (1) See Note 13. The fair values of SBC's long-term debt were estimated based on quoted market prices, where available, or on the net present value method of expected future cash flows using current interest rates. The fair value of the TOPrS was estimated based on quoted market prices. The carrying amounts of commercial paper debt approximate fair values. SBC does not hold or issue any financial instruments for trading purposes. SBC's cash equivalents and short-term investments are recorded at amortized cost. The carrying amounts of cash and cash equivalents and short-term investments and customer deposits approximate fair values. Pacific Telesis Financing I and II (the Trusts) were formed for the exclusive purpose of issuing preferred and common securities representing undivided beneficial interests in the Trusts and investing the proceeds from the sales of TOPrS in unsecured subordinated debt securities of PAC. Under certain circumstances, dividends on TOPrS could be deferred for up to a period of five years. PAC sold $1 billion of TOPrS, $500 at 7.56% in January 1996 through Pacific Telesis Financing I and $500 at 8.5% in June 1996 through Pacific Telesis Financing II. As of December 31, 1997, the Trusts held subordinated debt securities of PAC in principal amounts of $516 and $514 with interest rates of 7.56% and 8.5%. Both issues of TOPrS were priced at $25 per share, have an original 30-year maturity that may be extended up to 49 years, and are callable five years after date of sale at par and are included on the balance sheet as corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts. The proceeds were used to retire short-term indebtedness, primarily commercial paper. On January 30, 1998, SBC guaranteed payment of the obligations of the TOPrS. Derivatives PAC has entered into an equity swap contract to hedge exposure to risk of market changes related to its recorded liability for outstanding employee stock options for common stock of AirTouch Communications, Inc. (spun-off operations) and associated stock appreciation rights (SARs)(see Note 14). PAC plans to make open market purchases of the stock of spun-off operations to satisfy its obligation for options that are exercised. Off-balance-sheet risk exists to the extent the market price of the stock of spun-off operations rises above the market price reflected in the liability's current carrying value. The equity swap was entered into to hedge this exposure and minimize the impact of market fluctuations. The contract entitles PAC to receive settlement payments to the extent the price of the common stock of spun-off operations rises above the notional value of $23.74 per share, but imposes an obligation to make payments to the extent the price declines below this level. The swap also obligates PAC to make a monthly payment of a fee based on LIBOR. The total notional amount of the contract, $32 and $60 as of December 31, 1997 and 1996 covers the approximate number of the outstanding options and SARs of spun-off operations on that date. PAC plans to periodically adjust downward the outstanding notional amount as the options and SARs are exercised. The equity swap contract expires April 1999. Both the equity swap and PAC's liability for the stock options and SARs of spun-off operations are carried in the balance sheet at their market values, which were immaterial as of December 31, 1997 and 1996. Gains and losses from quarterly market adjustments of the carrying amounts substantially offset. As of December 31, 1997 and 1996, the accounting loss that would be incurred from nonperformance by the counterparty to the equity swap was $14 and $4. However, management does not expect to realize any loss from counterparty nonperformance. Note 11. Income Taxes Significant components of SBC's deferred tax liabilities and assets are as follows at December 31: ------------------------------------------------------------------ 1997 1996 ------------------------------------------------------------------ Depreciation and amortization $ 3,648 $ 3,283 Other 2,255 1,017 ------------------------------------------------------------------ Deferred tax liabilities 5,903 4,300 ------------------------------------------------------------------ Employee benefits 2,391 2,221 Unamortized investment tax credits 169 195 Other 2,394 1,328 ------------------------------------------------------------------ Deferred tax assets 4,954 3,744 ------------------------------------------------------------------ Deferred tax assets valuation allowance 68 96 ------------------------------------------------------------------ Net deferred tax liabilities $ 1,017 $ 652 ================================================================== The decrease in the valuation allowance is the result of an evaluation of the uncertainty associated with the realization of certain deferred tax assets. The valuation allowance is maintained in deferred tax assets for certain unused federal and state loss carryforwards. The components of income tax expense are as follows: ---------------------------------------------------------------------------- 1997 1996 1995 ---------------------------------------------------------------------------- Federal Current $ 705 $ 1,242 $ 829 Deferred--net 57 468 520 Amortization of investment tax credits (81) (80) (95) ---------------------------------------------------------------------------- 681 1,630 1,254 ---------------------------------------------------------------------------- State and local Current 24 172 176 Deferred--net 158 158 89 ---------------------------------------------------------------------------- 182 330 265 ---------------------------------------------------------------------------- Total $ 863 $ 1,960 $ 1,519 ============================================================================
A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate (35%) to income before income taxes, extraordinary loss and cumulative effect of accounting change is as follows: ---------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------------------------------------------------------------- Taxes computed at federal statutory rate $ 818 $ 1,802 $ 1,567 Increases (decreases) in income taxes resulting from: Amortization of investment tax credits over the life of the plant that gave rise to the credits (53) (53) (92) State and local income taxes--net of federal income tax benefit 118 215 172 Other--net (20) (4) (128) ---------------------------------------------------------------------------------- Total $ 863 $ 1,960 $ 1,519 ==================================================================================
Note 12. Employee Benefits Pensions - Substantially all employees of SBC are covered by one of three noncontributory pension and death benefit plans. The pension benefit formula used in the determination of pension cost for nonmanagement employees is based on a flat dollar amount per year of service according to job classification. For PAC managers, benefits accrue in separate account balances based on a fixed percentage of each employee's monthly salary with interest. For all other managers, benefits accrue in separate account balances based on a fixed percentage of each employee's monthly salary plus interest or are determined based upon a stated percentage of adjusted career income. SBC's objective in funding the plans, in combination with the standards of the Employee Retirement Income Security Act of 1974 (as amended), is to accumulate funds sufficient to meet its benefit obligations to employees upon their retirement. Contributions to the plans are made to a trust for the benefit of plan participants. Plan assets consist primarily of stocks, U.S. government and domestic corporate bonds, index funds and real estate. Net pension cost is composed of the following: ----------------------------------------------------------------------- 1997 1996 1995 ----------------------------------------------------------------------- Service cost--benefits earned during the period $ 278 $ 297 $ 311 Interest cost on projected benefit obligation 1,146 1,131 1,161 Actual return on plan assets (3,775) (2,919) (4,232) Other--net 2,161 1,270 2,813 ----------------------------------------------------------------------- Net pension cost (benefit) $ (190) $ (221) $ 53 ----------------------------------------------------------------------- The following table sets forth the pension plans' funded status and the amounts included in SBC's Consolidated Balance Sheets at December 31: -------------------------------------------------------------------- 1997 1996 -------------------------------------------------------------------- Fair value of plan assets $23,092 $ 20,738 Less: Actuarial present value of projected benefit obligation 16,746 15,006 -------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 6,346 5,732 Unrecognized prior service cost 1,108 845 Unrecognized net gain (6,564) (6,072) Unamortized transition asset (811) (973) -------------------------------------------------------------------- Prepaid (accrued) pension cost $ 79 $ (468) ==================================================================== The projected benefit obligation was increased $202 at December 31, 1996, for the cost of force reductions anticipated to take place in 1996 and 1997 and recognized in SBC's financial statements under FAS 88. Significant weighted average assumptions used in developing pension information include: -------------------------------------------------------------------------- 1997 1996 1995 -------------------------------------------------------------------------- Discount rate for determining projected benefit obligation 7.25% 7.5% 7.25% Long-term rate of return on plan assets 8.5% 8.55% 8.0% Composite rate of compensation increase 4.3% 4.3% 4.3% -------------------------------------------------------------------------- The projected benefit obligation is the actuarial present value of all benefits attributed by the pension benefit formula to previously rendered employee service. It is measured based on assumptions concerning future interest rates and employee compensation levels. Should actual experience differ from the actuarial assumptions, the benefit obligation will be affected. In April 1997 management amended the pension plan for non-PAC managers to a cash balance pension plan effective June 1, 1997. Under the new plan, participants accrue benefits based on a percentage of pay plus interest. In addition, a transition benefit is phased in over five years. The new plan also requires computation of a grandfathered benefit using the old formula for five years. Participants receive the greater of the cash balance benefit or the grandfathered benefit. The new cash balance plan allows lump sum benefit payments in addition to annuities. This change did not have a significant impact on SBC's net income for 1997. In March 1996, management amended the pension plan for PAC managers from a final pay plan to a cash balance plan effective July 1, 1996. An enhanced transition benefit, based on frozen pay and service as of June 30, 1996, was established to preserve benefits already accrued by salaried employees under the final pay plan and resulted in an increase in earned benefits for most employees. SBC also updated the actuarial assumptions used in valuing the PAC plans to reflect changes in market interest rates and recent experience, including a change in its assumption concerning future ad hoc increases in pension benefits. Taken together, these changes increased net income by approximately $125 during 1996. The actuarial estimate of the accumulated benefit obligation does not include assumptions about future compensation levels. The accumulated benefit obligation as of December 31, 1997 was $15,565, of which $14,404 was vested. At December 31, 1996 these amounts were $13,965 and $12,376. Approximately 4,200 and 2,200 employees left PacBell during 1996 and 1995 under retirement or voluntary and involuntary severance programs and received special pension benefits and cash incentives in connection with the PacBell restructuring and related force reduction programs. Annual pension cost excludes $(64) and $219 of additional pension costs charged to PacBell's restructuring reserve in 1996 and 1995. During 1997, the significant amount of lump sum pension payments resulted in a partial settlement of PAC's pension plans. In accordance with FAS 88, net settlement gains in the amount of $299 were recognized in 1997. Of this amount, $152 was recognized in the first quarter of 1997 and related primarily to managers who terminated employment in 1996. These gains are not included in the net pension cost shown in the preceding table. In December 1996, under the provisions of Section 420 of the Internal Revenue Code, SBC transferred $73 in pension assets to a health care benefit account for the reimbursement of retiree health care benefits paid by SBC. No additional pension assets were transferred to the health care benefit account in 1997. Supplemental Retirement Plans - SBC also provides senior and middle management employees with nonqualified, unfunded supplemental retirement and savings plans. These plans include supplemental defined pension benefits as well as compensation deferral plans, some of which include a corresponding match by SBC based on a percentage of the compensation deferral. Expenses related to these plans were $89, $88 and $91 in 1997, 1996 and 1995. Liabilities of $892 and $758 related to these plans have been included in other noncurrent liabilities in SBC's Consolidated Balance Sheets at December 31, 1997 and 1996. Postretirement Benefits - SBC provides certain medical, dental and life insurance benefits to substantially all retired employees under various plans and accrues actuarially determined postretirement benefit costs as active employees earn these benefits. Employees retiring after certain dates will pay a share of the costs of medical coverage that exceed a defined dollar medical cap. Such future cost sharing provisions have been reflected in determining SBC's postretirement benefit costs. Postretirement benefit cost is composed of the following: --------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------- Service cost--benefits earned during the period $ 102 $ 101 $ 99 Interest cost on accumulated postretirement benefit obligation (APBO) 480 475 496 Actual return on assets (619) (375) (452) Other--net 398 208 318 ===================================================================== Postretirement benefit cost $ 361 $ 409 $ 461 ===================================================================== SBC maintains Voluntary Employee Beneficiary Association (VEBA) trusts to fund postretirement benefits. During 1997 and 1996, SBC contributed $415 and $320 into the VEBA trusts to be ultimately used for the payment of postretirement benefits. Assets consist principally of stocks and U.S. government and corporate bonds. The following table sets forth the plans' funded status and the amount included in SBC's Consolidated Balance Sheets at December 31: ----------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------- Retirees $ 4,470 $ 4,047 Fully eligible active plan participants 773 706 Other active plan participants 1,932 1,819 ----------------------------------------------------------------------- Total APBO 7,175 6,572 Less: Fair value of plan assets 3,533 2,697 ----------------------------------------------------------------------- APBO in excess of plan assets 3,642 3,875 Unrecognized prior service cost 24 (31) Unrecognized net gain 1,105 1,119 ----------------------------------------------------------------------- Accrued postretirement benefit obligation $ 4,771 $ 4,963 ======================================================================= In December 1995, one of the life insurance benefit plans was merged with one of the medical plans. The fair value of plan assets restricted to the payment of life insurance benefits only was $887 and $746 at December 31, 1997 and 1996. At December 31, 1997 and 1996, the accrued life insurance benefits included in the accrued postretirement benefit obligation were $74 and $57. The assumed medical cost trend rate in 1998 is 7.5%, decreasing gradually to 5.5% in 2002, prior to adjustment for cost-sharing provisions of the plan for active and certain recently retired employees. The assumed dental cost trend rate in 1998 is 6%, reducing to 5% in 2002. Raising the annual medical and dental cost trend rates by one percentage point increases the APBO as of December 31, 1997 by $458 and increases the aggregate service and interest cost components of the net periodic postretirement benefit cost for 1997 by approximately $45. Significant assumptions for the discount rate, long-term rate of return on plan assets and composite rate of compensation increase used in developing the APBO and related postretirement benefit costs were the same as those used in developing the pension information. Note 13. Other Employee Benefits Employee Stock Ownership Plans - SBC maintains contributory savings plans which cover substantially all employees. Under the savings plans, SBC matches a stated percentage of eligible employee contributions, subject to a specified ceiling. SBC has three leveraged Employee Stock Ownership Plans (ESOPs) as part of the existing savings plans. Two of the ESOPs were funded with notes issued by the savings plans to various lenders, the proceeds of which were used to purchase shares of SBC's common stock in the open market. These notes are unconditionally guaranteed by SBC and therefore presented as a reduction to shareowners' equity and an increase in long-term debt. They will be repaid with SBC contributions to the savings plans, dividends paid on SBC shares and interest earned on funds held by the ESOPs. The third ESOP purchased PAC treasury shares in exchange for a promissory note from the plan to PAC. Since PAC is the lender, this note is not reflected as a liability and the remaining cost of unallocated trust shares is carried as a reduction of shareowners' equity. Principal and interest on the note are paid from employer contributions and dividends received by the trust. All PAC shares were exchanged for SBC shares effective with the merger April 1, 1997. The provisions of this ESOP were unaffected by this exchange. SBC's match of employee contributions to the savings plans is fulfilled with shares of stock allocated from the ESOPs and with purchases of SBC's stock in the open market. Shares held by the ESOPs are released for allocation to the accounts of employees as employer matching contributions are earned. Benefit cost is based on a combination of the contributions to the savings plans and the cost of shares allocated to participating employees' accounts. Both benefit cost and interest expense on the notes are reduced by dividends on SBC's shares held by the ESOPs and interest earned on the ESOPs' funds. Information related to the ESOPs and the savings plans is summarized below: ------------------------------------------------------------------------ 1997 1996 1995 ------------------------------------------------------------------------ Benefit expense--net of dividends and interest income $ 46 $ 65 $ 66 Interest expense--net of dividends and interest income 18 26 37 ------------------------------------------------------------------------ Total expense $ 64 $ 91 $ 103 ======================================================================== Company contributions for ESOPs $ 98 $ 108 $ 89 ======================================================================== Dividends and interest income for debt service $ 58 $ 62 $ 72 ======================================================================== SBC shares held by the ESOPs are summarized as follows at December 31: ----------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------- Unallocated 15,621,250 31,005,792 Committed to be allocated 282,388 355,188 Allocated to participants 43,151,816 31,119,148 ======================================================================= Total 59,055,454 62,480,128 ======================================================================= Note 14. Stock-Based Compensation Under various SBC plans, senior and other management employees and non-employee directors have received stock options, SARs, performance shares and nonvested stock units to purchase shares of SBC common stock. Options issued through December 31, 1997 carry exercise prices equal to the market price of the stock at the date of grant and have maximum terms ranging from five to ten years. Depending upon the grant, vesting of options may occur up to four years from the date of grant. Performance shares are granted to key employees in the form of common stock and/or in cash based upon the price of common stock at date of grant and are awarded at the end of a two or three year period, subject to the achievement of certain performance goals. Nonvested stock units are also valued at market price of the stock at date of grant and vest over a three year period. Up to 156 million shares may be issued under these plans. In 1996 SBC elected to continue measuring compensation cost for these plans using the intrinsic value based method of accounting prescribed in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Accordingly, no compensation cost for SBC's stock option plans has been recognized. The compensation cost that has been charged against income for SBC's other stock-based compensation plans, primarily SARs and nonvested stock units, totaled $43, $22 and $24 for 1997, 1996 and 1995. Had compensation cost for stock option plans been recognized using the fair value based method of accounting at the date of grant for awards in 1997, 1996 and 1995 as defined by FAS 123, SBC's net income (loss) would have been $1,400, $3,250 and $(3,074) and basic net income (loss) per share would have been $0.77, $1.77 and $(1.67). Options and SARs held by the continuing employees of PAC at the time of the AirTouch Communications Inc. spin-off were supplemented with an equal number of options and SARs for common shares of spun-off operations. The exercise prices for outstanding options and SARs held by continuing employees of PAC were adjusted downward to reflect the value of the supplemental spun-off operations' options and SARs. The balance sheet reflects a related liability equal to the difference between the current market price of spun-off operations stock and the exercise prices of the supplemental options outstanding (see Note 10). As of December 31, 1997, 831,139 supplemental spun-off operations options and SARs were outstanding with expiration dates ranging from 1998 to 2003. Outstanding options and SARs that were held by employees of the wireless operations at the spin-off date were replaced by options and SARs for common shares of spun-off operations. The spun-off operations assumed liability for these replacement options and SARs. For purposes of these pro forma disclosures, the estimated fair value of the options granted after 1994 is amortized to expense over the options' vesting period. Because most employee options vest over a two to three year period, these disclosures will not be indicative of future pro forma amounts until the FAS 123 rules are applied to all outstanding non-vested awards. The fair value for these options was estimated at the date of grant, using a Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995: risk-free interest rate of 6.57%, 6.26% and 6.34%; dividend yield of 2.99%, 4.92% and 3.61%; expected volatility factor of 15%, 18% and 18%; and expected option life of 5.8, 4.7 and 4.6 years. Information related to options and SARs is summarized below and has been restated to reflect the two-for-one stock split declared January 30, 1998: ------------------------------------------------------------------------------ Weighted Average Number Exercise Price ------------------------------------------------------------------------------ Outstanding at January 1, 1995 43,988,164 $19.52 Granted 16,735,644 23.49 Exercised (4,373,340) 16.90 Forfeited/Expired (1,509,368) 21.36 ------------------------------------------------------------------------------ Outstanding at December 31, 1995 (25,524,518 exercisable at weighted average price of $19.05) 54,841,100 20.89 Granted 24,643,276 22.98 Exercised (3,767,420) 18.73 Forfeited/Expired (1,518,552) 21.56 ------------------------------------------------------------------------------ Outstanding at December 31, 1996 (35,522,826 exercisable at weighted average price of $20.13) 74,198,404 21.68 Granted 32,034,238 27.58 Exercised (17,118,968) 20.52 Forfeited/Expired (4,441,532) 25.49 ------------------------------------------------------------------------------ Outstanding at December 31, 1997 (40,802,392 exercisable at weighted average price of $21.02) 84,672,142 $23.95 ==============================================================================
Information related to options and SARs outstanding at December 31, 1997: ------------------------------------------------------------------------------------- Exercise Price Range $12.00-12.49 $12.50-19.99 $20.00-22.49 $22.50-29.19 ------------------------------------------------------------------------------------- Number of options and SARs: Outstanding 67,560 9,877,430 18,978,694 55,748,458 Exercisable 67,560 9,877,430 18,944,252 11,913,150 Weighted average exercise price: Outstanding $ 12.08 $ 17.50 $ 20.92 $ 26.13 Exercisable $ 12.08 $ 17.50 $ 20.92 $ 24.14 Weighted average remaining contractual life 0.8 year 5.9 years 6.2 years 7.5 years =====================================================================================
The weighted-average grant-date fair value of each option granted during 1997, 1996 and 1995 was $5.65, $3.45 and $4.16. Note 15. Shareowners' Equity Common Stock Split - On January 30, 1998, the Board of Directors of SBC (Board) declared a two-for-one stock split, effected in the form of a stock dividend, on the shares of SBC's common stock. Each shareholder of record on February 20, 1998 will receive an additional share of common stock for each share of common stock then held. The stock will be issued March 19, 1998. SBC will retain the current par value of $1.00 per share for all shares of common stock. Shareowners' Rights Plan - The Shareowners' Rights Plan (Plan) becomes operative in certain events involving the acquisition of 20% or more of SBC's common stock by any person or group in a transaction not approved by the Board, or the designation by the Board of a person or group owning more than 10% of the outstanding stock as an adverse person, as provided in the Plan. Upon the occurrence of these events, each right, unless redeemed by the Board, generally entitles the holder (other than the holder triggering the right) to purchase an amount of common stock of SBC (or, in certain circumstances, of the potential acquiror) having a value equal to two times the exercise price of $160. The rights expire in January 1999. After giving effect to stock splits in January 1998 and May 1993, effected in the form of a stock dividend, each share of common stock represents one-quarter of a right. The rights have certain antitakeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire SBC on terms not approved by the Board. The rights should not interfere with any merger or other business combination approved by the Board since the rights may be redeemed. Note 16. Acquisitions and Dispositions In May 1997, a consortium made up of SBC and Telekom Malaysia Berhad, 60% owned by SBC, completed the purchase of 30% of Telkom SA Limited (Telkom), the state-owned telecommunications company of South Africa. SBC invested $760, approximately $600 of which will remain in Telkom. In October 1995, SBC combined its United Kingdom cable television operations with those of TeleWest Communications, P.L.C., a publicly held joint venture between Telecommunications, Inc. and U S WEST, Inc. The resulting entity, TeleWest P.L.C. (TeleWest), is the largest cable television operator in the United Kingdom. SBC owns approximately 15% of the new entity and accounts for its investment using the cost method of accounting. Restrictions expiring over the next three years exist on the sale of SBC's interest in TeleWest. SBC recorded an after-tax gain of $111 associated with the combination. During 1995, SBC purchased at auction PCS licenses in Los Angeles-San Diego, California; San Francisco-Oakland-San Jose, California; Memphis, Tennessee; Little Rock, Arkansas; and Tulsa, Oklahoma for approximately $769. During 1996, SBC received several AT&T cellular networks in Arkansas in exchange for SBC's PCS licenses in Memphis and Little Rock and other consideration. These acquisitions were primarily accounted for under the purchase method of accounting. The purchase prices in excess of the underlying fair value of identifiable net assets acquired are being amortized over periods not to exceed 40 years. Results of operations of the properties acquired have been included in the consolidated financial statements from their respective dates of acquisition. The above developments did not have a significant impact on consolidated results of operations for 1997 or 1995, nor would they had they occurred on January 1 of the respective periods. Note 17. Additional Financial Information - ------------------------------------------------------------------------------- December 31, ---------------------- Balance Sheets 1997 1996 - ------------------------------------------------------------------------------- Accounts payable and accrued liabilities Accounts payable $ 2,848 $ 2,741 Accrued taxes 1,108 893 Advance billing and customer deposits 699 611 Compensated future absences 524 479 Accrued interest 306 279 Accrued payroll 315 194 Other 2,088 1,387 - ------------------------------------------------------------------------------- Total $ 7,888 $ 6,584 =============================================================================== - ------------------------------------------------------------------------------- Statements of Income 1997 1996 1995 - ------------------------------------------------------------------------------- Interest expense incurred $ 1,067 $ 948 $ 1,000 Capitalized interest (120) (136) (43) - ------------------------------------------------------------------------------- Total interest expense $ 947 $ 812 $ 957 =============================================================================== Allowance for funds used during construction - - $ 48 =============================================================================== - ------------------------------------------------------------------------------- Statements of Cash Flows 1997 1996 1995 - ------------------------------------------------------------------------------- Cash paid during the year for: Interest $ 920 $ 799 $ 974 Income taxes $ 410 $ 1,283 $ 1,220 - ------------------------------------------------------------------------------- No customer accounted for more than 10% of consolidated revenues in 1997, 1996 or 1995. Several subsidiaries of SBC have negotiated contracts with the Communications Workers of America (CWA). Approximately 67% of SBC's employees are represented by the CWA. Contracts covering an estimated 77,000 employees between the CWA and several SBC subsidiaries end in 1998. New contracts are scheduled to be negotiated in 1998. Note 18. Quarterly Financial Information (Unaudited) - -------------------------------------------------------------------------------- Basic Earnings Stock Price (3) (Loss) per -------------------------- Calendar Total Operating Net Income Common Quarter Operating Income (Loss) Share (3) High Low Close Revenues(4) (Loss) - -------------------------------------------------------------------------------- 1997 First (1)$ 5,973 $ 1,586 $ 857 $ 0.47 $ 29.125 $ 24.813 $ 26.250 Second (1) 5,921 (933) (787) (0.43) 30.938 24.625 30.938 Third (1) 6,329 1,472 816 0.45 31.125 26.781 30.719 Fourth (1) 6,633 1,045 588 0.32 38.063 30.000 36.625 - ------------------------------------------ Annual(1)$ 24,856 $ 3,170 $ 1,474 $ 0.81 ================================================================================ 1996 First (2)$ 5,564 $ 1,458 $ 888 $ 0.48 $ 30.125 $ 24.875 $ 26.313 Second 5,731 1,489 803 0.44 25.375 23.125 24.625 Third 5,948 1,532 867 0.47 25.500 23.000 24.063 Fourth 6,202 1,357 721 0.39 27.625 23.500 25.938 - ------------------------------------------ Annual(2)$ 23,445 $ 5,836 $ 3,279 $ 1.78 ================================================================================ (1)Net income (loss) includes $90 first quarter pension settlement gain for 1996 retirements (see Note 12), $1.6 billion second quarter charges related to post-merger initiatives (see Note 3), $43 and $360 of third and fourth quarter merger integration costs and customer number portability expenses and $33 fourth quarter gain on sale of SBC's interests in Bell Communications Research, Inc. (2)Net Income and Earnings per Common Share reflect a cumulative effect of accounting change of $90 or $0.05 per share from change in accounting for directory operations. (3)Restated to reflect two-for-one stock split declared January 30, 1998. Stock prices have not been adjusted to reflect the merger with PAC. (4) Quarterly information has been restated to conform to the current presentation of promotional discounts. Report of Independent Auditors The Board of Directors and Shareowners SBC Communications Inc. We have audited the accompanying consolidated balance sheets of SBC Communications Inc. (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1996 and 1995 financial statements of Pacific Telesis Group, a wholly-owned subsidiary, which statements reflect total assets constituting 42% of the Company's related 1996 consolidated financial statement total and which reflect total operating revenues constituting approximately 41% and 42% of the Company's related consolidated financial statement totals for the years ended December 31, 1996 and 1995, respectively. Those statements were audited by other auditors whose report, which has been furnished to us, included an explanatory paragraph that describes the change in its method of recognizing directory publishing revenues and related expenses, and the discontinuance of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." Our opinion, insofar as it relates to the 1996 and 1995 data included for Pacific Telesis Group, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1996 and 1995, the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SBC Communications Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, Pacific Bell, a subsidiary of Pacific Telesis Group, changed its method of recognizing directory publishing revenues and related expenses effective January 1, 1996. As discussed in Note 2 to the consolidated financial statements, SBC Communications Inc. discontinued its application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" in 1995. ERNST & YOUNG LLP San Antonio, Texas February 20, 1998 Report of Management The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The integrity and objectivity of the data in these financial statements, including estimates and judgments relating to matters not concluded by year end, are the responsibility of management, as is all other information included in the Annual Report, unless otherwise indicated. The financial statements of SBC Communications Inc. (SBC) have been audited by Ernst & Young LLP, independent auditors. Management has made available to Ernst & Young LLP all of SBC's financial records and related data, as well as the minutes of shareowners' and directors' meetings. Furthermore, management believes that all representations made to Ernst & Young LLP during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the costs of an internal accounting controls system should not exceed, in management's judgment, the benefits to be derived. Management also seeks to ensure the objectivity and integrity of its financial data by the careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communication programs aimed at ensuring that its policies, standards and managerial authorities are understood throughout the organization. Management continually monitors the system of internal accounting controls for compliance. SBC maintains an internal auditing program that independently assesses the effectiveness of the internal accounting controls and recommends improvements thereto. The Audit Committee of the Board of Directors, which consists of eight directors who are not employees, meets periodically with management, the internal auditors and the independent auditors to review the manner in which they are performing their responsibilities and to discuss auditing, internal accounting controls and financial reporting matters. Both the internal auditors and the independent auditors periodically meet alone with the Audit Committee and have access to the Audit Committee at any time. /s/ Edward E. Whitacre Jr. Edward E. Whitacre Jr. Chairman of the Board and Chief Executive Officer /s/ Donald E. Kiernan Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer Stock Trading Information Trading: SBC is listed on the New York, Chicago and Pacific stock exchanges and The Swiss Exchange. SBC is traded on the London Stock Exchange through the SEAQ International Markets facility. Ticker symbol (NYSE): SBC Newspaper stock listing: SBC or SBC Comm APPENDIX All page numbers referenced in this Exhibit and the Form 10-K relate to the printed Annual Report. The order of the sections is as they appear in the printed Annual Report. The colored graphs and related footnotes that appear in the printed document are approximately 1-1/4 inches by 2-1/4 inches. The Stock Data section appears on the back cover. The section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appears on pages 19-30. The text of this section appears in two columns. A stacked bar graph titled "Income From Continuing Operations Before Extraordinary Loss and Accounting Changes (dollars in billions)" appears in the right column towards the bottom of page 19. The graph shows Income From Continuing Operations Before Extraordinary Loss and Accounting Changes for the past five years. The graph also shows special charges for 1993 and 1997 above Income From Continuing Operations Before Extraordinary Loss and Accounting Changes. The actual figures for both items are listed on the graph. Listed below are the plot points, with the first column representing Income From Continuing Operations Before Extraordinary Loss and Accounting Changes and the second column representing Special Charges: 1993 1.6 .9 1994 2.8 1995 3.0 1996 3.2 1997 1.5 1.9 The following footnote appears at the side of the graph: Results for 1997 and 1993 were affected by special charges. A stacked bar graph titled "Distribution of Revenues (dollars in billions)" appears in the left column on page 20 and below the section titled "Local Service". The graph shows various categories of revenue distribution for the past five years. The actual figures are listed on the graph. Listed below are the plot points by category: Local Network Directory Year Total service access Long-distance advertising Other ---- ----- ------- ------ ------------- ----------- ----- 1993 20.1 8.7 5.0 3.0 1.9 1.5 1994 21.0 9.2 5.2 2.9 2.0 1.7 1995 21.7 10.3 5.5 2.1 2.0 1.8 1996 23.4 11.4 5.8 2.2 2.0 2.3 1997 24.9 12.6 5.8 2.1 2.1 3.0 The following footnote appears at the side of the graph: Operating revenue growth has been driven by local service growth. In the section titled "Operating Environment and Trends of the Business", a stacked bar graph titled "Access Lines " appears in the right column on page 23 above the subsection titled "State Regulation". The graph shows access lines in total and by state for the past five years. Total access line figures are listed on the graph. Listed below are the plot points: - ---------------------------------------------------------------------------- Year Total Arkansas California Kansas Missouri Nevada Oklahoma Texas - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 1993 28.2 .8 14.8 1.1 2.2 .3 1.4 7.6 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 1994 29.1 .8 15.3 1.2 2.2 .3 1.4 7.9 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 1995 30.3 .9 15.8 1.2 2.3 .3 1.5 8.3 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 1996 31.8 .9 16.6 1.3 2.4 .3 1.5 8.8 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 1997 33.4 .9 17.4 1.3 2.5 .3 1.7 9.3 - ---------------------------------------------------------------------------- The following footnote appears at the side of the graph: Access lines in California and Texas account for 80% of total access lines. A stacked bar graph titled "Local Service (dollars in billions)" appears in the left column at the top of page 26. The graph shows landline and wireless local service revenues for the past five years. The actual figures are listed on the graph. Listed below are the plot points: - ------------------------------------------------- Year Total Landline Wireless - ------------------------------------------------- - ------------------------------------------------- 1993 8.7 7.4 1.3 - ------------------------------------------------- - ------------------------------------------------- 1994 9.2 7.5 1.7 - ------------------------------------------------- - ------------------------------------------------- 1995 10.3 8.1 2.2 - ------------------------------------------------- - ------------------------------------------------- 1996 11.4 8.8 2.6 - ------------------------------------------------- - ------------------------------------------------- 1997 12.6 9.6 3.0 - ------------------------------------------------- The following footnote appears at the side of the graph: Wireless local service revenues have more than doubled in the last four years. A bar graph titled "Wireless Penetration (network-based non-PCS)" appears in the left column on page 27 above the subsection titled "Wireless Local Service". The graph shows the percentage of Wireless Penetration for network-based non-PCS services for the past five years. Actual figures are listed on the graph. Listed below are the plot points: 1993 5.7% 1994 7.4% 1995 9.0% 1996 10.8% 1997 12.2% The following footnote appears at the side of the graph: SBC's wireless penetration for its network-based non-PCS services is among the highest in the industry. A bar graph titled "Capital Expenditures (dollars in billions)" appears in the left column on page 29 and below the section titled "Liquidity and Capital Resources" and the subsection titled "Capital Expenditures and Other Commitments". The graph shows Capital Expenditures for the past five years. The actual figures are listed on the graph. Listed below are the plot points: 1993 4.0 1994 4.0 1995 4.3 1996 5.5 1997 5.8 The following footnote appears at the side of the graph: Continued growth and the build-out of PCS networks led to increases in capital expenditures. A bar graph titled "Dividends (whole dollars adjusted for stock split)" appears in the left column at the top of page 30 above the subsection titled "Cash, Lines of Credit and Cash Flows". The graph shows dividends for the past 5 years. The actual figures are listed on the graph. Listed below are the plot points: 1993 0.755 1994 0.790 1995 0.825 1996 0.860 1997 0.895 The following footnote appears at the side of the graph: SBC has increased its dividend every year since divestiture. EX-21 21 PRINCIPAL SUBSIDIARIES EXHIBIT 21 PRINCIPAL SUBSIDIARIES OF SBC COMMUNICATIONS INC. AS OF DECEMBER 31, 1997 State of Conducts Name Incorporation Business Under Southwestern Bell Missouri Same Telephone Company Southwestern Bell Dually incorporated in Same Mobile Systems, Inc. Delaware and Virginia SBC International, Inc. Delaware Same Southwestern Bell Missouri Same Yellow Pages, Inc. SBC Media Ventures, Inc. Delaware Same Pacific Telesis Group Nevada Same EX-23 22 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23-a Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of SBC Communications Inc. (SBC) of our report dated February 20, 1998, included in the 1997 Annual Report to Shareowners of SBC. Our audits also included the financial statement schedules of SBC listed in Item 14(a). These schedules are the responsibility of SBC's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8) pertaining to the SBC Savings Plan and Savings and Security Plan (Nos. 33-54309 and 333-24295), the Stock Savings Plan (Nos. 33-37451 and 33-54291), the SBC Communications Inc. 1992 Stock Option Plan (No. 33-49855) and the SBC Communications Inc. 1995 Management Stock Option Plan (No. 33-61715), and in the Registration Statements (Form S-3) pertaining to the SBC Communications Inc. Direct Stock Purchase and Reinvestment Plan (Nos. 333-44553 and 333-08979), and SBC Communications Capital Corporation and SBC Communications Inc. (Nos. 33-45490 and 33-56909), and in the Registration Statement (Form S-4) pertaining to SBC Communications Inc. (No. 333-45837), and in the related Prospectuses of our report dated February 20, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP San Antonio, Texas March 10, 1998 EX-23 23 CONSENT OF INDEPENDENT ACCOUNTANT EXHIBIT 23-b CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in the Annual Report for the year ended December 31, 1997 on Form 10-K and the accompanying Proxy Statement dated on or about March 11, 1998 of SBC Communications Inc., of our report dated February 27, 1997, on our audits of the consolidated financial statements and financial statement schedule of Pacific Telesis Group and Subsidiaries as of December 31, 1996, and for each of the two years in the period then ended, as included in Pacific Telesis Group's annual report on Form 10-K for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statements (Form S-8) pertaining to the SBC Savings Plan and Savings and Security Plan (Nos. 33-54309 and 333-24295), the Stock Savings Plan (Nos. 33-37451 and 33-54291), the SBC Communications Inc. 1992 Stock Option Plan (No. 33-49855)and the SBC Communications Inc. 1995 Management Stock Option Plan (No. 33-61715) and in the Registration Statements (Form S-3) pertaining to the SBC Communications Inc. Direct Stock Purchase and Reinvestment Plan (Nos. 333-44553 and 333-08979), and SBC Communications Capital Corporation and SBC Communications Inc. (Nos. 33-45490 and 33-56909), and in the Registration Statement (Form S-4) pertaining to SBC Communictions Inc. (No. 333-45837), and in the related Prospectuses of our report dated February 27, 1997, on our audits of the consolidated financial statements and financial statement schedule of Pacific Telesis Group and Subsidiaries as of December 31, 1996 and for each of the two years in the period then ended, as included in Pacific Telesis Group's annual report on Form 10-K for the year ended December 31, 1996. COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. San Francisco, California March 11, 1998 EX-24 24 POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is an officer and a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, his attorney, for him and in his name, place and stead, and in his office and capacity in the Corporation as an officer and a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/Edward E. Whitacre, Jr. - ---------------------------------- Edward E. Whitacre, Jr. Director and Chairman of the Board and Chief Executive Officer Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is an officer and a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, his attorney, for him and in his name, place and stead, and in his office and capacity in the Corporation as an officer, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Royce S. Caldwell - -------------------------------- Royce S. Caldwell President-SBC Operations and Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is an officer of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, his attorney, for him and in his name, place and stead, and in his office and capacity in the Corporation as an officer, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ D. E. Kiernan - -------------------------------- D. E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Clarence C. Barksdale - ---------------------------------- Clarence C. Barksdale Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ James E. Barnes - ---------------------------------- James E. Barnes Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ August A. Busch III - ---------------------------------- August A. Busch III Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Ruben R. Cardenas - ---------------------------------- Ruben R. Cardenas Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ William P. Clark - ---------------------------------- William P. Clark Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Martin K. Eby, Jr. - ---------------------------------- Martin K. Eby, Jr. Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Herman E. Gallegos - ---------------------------------- Herman E. Gallegos Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Jess T. Hay - ---------------------------------- Jess T. Hay Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Bobby R. Inman - ---------------------------------- Bobby R. Inman Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Charles F. Knight - ---------------------------------- Charles F. Knight Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Mary S. Metz - ---------------------------------- Mary S. Metz Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Haskell M. Monroe, Jr. - ---------------------------------- Haskell M. Monroe, Jr. Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Toni Rembe - ---------------------------------- Toni Rembe Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ S. Donley Ritchey - ---------------------------------- S. Donley Ritchey Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Richard M. Rosenberg - ---------------------------------- Richard M. Rosenberg Director Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: THAT, WHEREAS, SBC COMMUNICATIONS INC., a Delaware corporation, hereinafter referred to as the "Corporation," proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K, and WHEREAS, the undersigned is a director of the Corporation; NOW, THEREFORE, the undersigned hereby constitutes and appoints Edward E. Whitacre, Jr., James D. Ellis, Donald E. Kiernan, Alfred G. Richter, Jr., Judith M. Sahm, or any one of them, all having addresses in the City of San Antonio and State of Texas, the undersigned's attorney, for the undersigned and in the undersigned's name, place and stead, and in the undersigned's office and capacity in the Corporation as a director, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto, hereby giving and granting to said attorneys full power and authority to do and perform each and every act and thing whatsoever requisite or necessary to be done in and concerning the premises, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned executed this Power of Attorney the 30th day of January 1998. /s/ Patricia P. Upton - ---------------------------------- Patricia P. Upton Director EX-27 25
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC COMMUNICATIONS INC.'S DECEMBER 31,1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1997 DEC-31-1997 398 320 5,410 395 0 7,062 65,286 37,947 42,132 10,252 12,019 0 0 934 8,958 42,132 0 24,856 0 9,488 4,922 523 947 2,337 863 1,474 0 0 0 1,474 0.81 0.80 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 COST OF SERVICES AND PRODUCTS IN THE FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO REGULATION S-X,RULE 5-03(B).
EX-99.C1 26 REPORT OF INDEPENDENT ACCOUNTANTS EXHIBIT 99-c REPORT OF THE INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowner of Pacific Telesis Group: We have audited the consolidated balance sheet of Pacific Telesis Group (a wholly owned subsidiary of SBC Communications Inc. effective April 1, 1997) and Subsidiaries (the "Company"), as of December 31, 1996, the related consolidated statements of income, shareowners' equity and cash flows for each of the two years in the period then ended, and the financial statement schedule as of and for the two years ended December 31, 1996, as included in the Company's annual report on Form 10-K for the year ended December 31, 1996. These consolidated financial statements and the financial statement schedule are the responsibility of management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Telesis Group and Subsidiaries as of December 31, 1996, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein as of and for the two years ended December 31, 1996. As discussed in Note A to the consolidated financial statements, Pacific Bell, a subsidiary of Pacific Telesis Group, changed its method of recognizing directory publishing revenues and related expenses effective January 1, 1996. Also discussed in Note A, Pacific Bell discontinued its application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" during 1995. COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. San Francisco, California February 27, 1997 -----END PRIVACY-ENHANCED MESSAGE-----