-----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, RXgLxuJVX6hzhhvp+AIDaZl+TdM2oM7fWUX0PAAai3j40H2dUYvkzUte+02ta9D4 bfq+IeLhJmEdfkHHNyVfHA== 0000732717-99-000007.txt : 19990315 0000732717-99-000007.hdr.sgml : 19990315 ACCESSION NUMBER: 0000732717-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 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-K SEC ACT: SEC FILE NUMBER: 001-08610 FILM NUMBER: 99563927 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-K 1 ANNUAL REPORT ON FORM 10-K FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-8610 SBC COMMUNICATIONS INC. Incorporated under the laws of the State of Delaware I.R.S. Employer Identification Number 43-1301883 175 E. Houston, San Antonio, Texas 78205-2233 Telephone Number 210-821-4105 Securities registered pursuant to Section 12(b) of the Act: (See attached Schedule A) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Based on composite closing sales price of $52 7/8 per share on February 26, 1999, the aggregate market value of all voting and non-voting stock held by non-affiliates was $103,706,200,000. As of February 26, 1999, 1,962,346,336 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of SBC Communications Inc.'s Annual Report to Shareowners for the fiscal year ended December 31, 1998 (Parts I and II). (2) Portions of SBC Communications Inc.'s Notice of 1999 Annual Meeting and Proxy Statement dated March 12, 1999 (Parts III and IV). SCHEDULE A Securities Registered Pursuant To Section 12(b) Of The Act: Name of each exchange Title of each class on which registered Common Shares (Par Value $1.00 Per Share) New York, Chicago and Pacific Stock Exchanges 7.75 % Exchangeable Notes, New York Stock Exchange Due March 15, 2001 7.56% Pacific Telesis Group New York Stock Exchange Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts 8.50% Pacific Telesis Group New York Stock Exchange Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts TABLE OF CONTENTS Item Page - ----- ---- PART I 1. Business....................................................... 4 2. Properties..................................................... 18 3. Legal Proceedings.............................................. 18 4. Submission of Matters to a Vote of Security Holders............ 18 Executive Officers of the Registrant.............................. 19 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 20 6. Selected Financial and Operating Data.......................... 20 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 20 7A. Quantitative and Qualitative Disclosures about Market Risk..... 20 8. Financial Statements and Supplementary Data.................... 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 20 PART III 10. Directors and Executive Officers of the Registrant............. 21 11. Executive Compensation......................................... 21 12. Security Ownership of Certain Beneficial Owners and Management. 21 13. Certain Relationships and Related Transactions................. 21 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22 PART I ITEM 1. BUSINESS GENERAL SBC Communications Inc. (SBC) is a holding company whose subsidiaries and affiliates operate predominantly in the communications services industry. SBC's subsidiaries and affiliates provide wireline and wireless telecommunications services and equipment, directory advertising, publishing and cable television services. SBC's principal Wireline subsidiaries are Southwestern Bell Telephone Company (SWBell), providing telecommunications services over approximately 16 million access lines in Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area), and Pacific Bell (PacBell), providing telecommunications services over approximately 18 million access lines in California. SBC also provides telecommunications services through The Southern New England Telephone Company (SNETel) subsidiary over approximately 2 million access lines in Connecticut, and over approximately 300,000 access lines in Nevada through its Nevada Bell subsidiary. (SWBell, PacBell, SNETel and Nevada Bell are collectively referred to as the Telephone Companies.) The Telephone Companies provide local exchange services within authorized regions (in-region) and are subject to regulation by each state in which they operate and by the Federal Communications Commission (FCC). SBC was incorporated under the laws of the State of Delaware in 1983 and has its principal executive offices at 175 E. Houston, San Antonio, Texas 78205-2233 (telephone number 210-821-4105). SBC was formed as one of the original seven regional holding companies (RHCs) created to hold AT&T Corp.'s (AT&T) local telephone companies. AT&T divested SBC by means of a spin-off of stock to its shareowners on January 1, 1984 (divestiture) resulting in SBC becoming a separate publicly traded company. The divestiture was made pursuant to a consent decree, referred to as the Modification of Final Judgment (MFJ), issued by the United States District Court for the District of Columbia (District Court). On February 8, 1996, the Federal Government enacted the Telecommunications Act of 1996 (Telecom Act), a major, wide-ranging amendment to the Communications Act of 1934. By its specific terms, the Telecom Act supersedes the jurisdiction of the District Court with regard to activities occurring after the date of enactment. The FCC is given authority for all post-enactment conduct, with the District Court retaining jurisdiction of pre-enactment conduct for a five-year period. As a result of these provisions, on April 11, 1996 the District Court issued its Opinion and Order terminating the MFJ and dismissing all pending motions as moot, thereby effectively ending 13 years regulation of RHCs under the MFJ. In December 1997, the United States District Court for the Northern District of Texas ruled that parts of the Telecom Act were unconstitutional on the grounds that they improperly discriminate against certain subsidiaries of SBC by imposing restrictions that prohibit certain of the Telephone Companies by name from offering interLATA long distance and other services that other Local Exchange Carriers are free to provide. In September 1998, the United States Court of Appeals for the Fifth Circuit (5th Circuit) reversed this decision and ruled that the challenged provisions of the Telecom Act were constitutional. In January 1999, the United States Supreme Court declined to hear an appeal of the 5th Circuit's decision. Additional information relating to the Telecom Act is contained in the 1998 SBC Annual Report to Shareowners under the heading "Operating Environment and Trends of the Business" beginning on page 11, and is incorporated herein by reference pursuant to General Instruction G(2). Business Combinations Ameritech Corporation On May 11, 1998, SBC announced a definitive agreement to merge an SBC subsidiary with Ameritech Corporation (Ameritech) in a transaction in which each share of Ameritech common stock will be converted into and exchanged for 1.316 shares of SBC common stock (equivalent to approximately 1,450 million shares). After the merger, Ameritech will be a wholly-owned subsidiary of SBC. The transaction, which has been approved by the board of directors and shareowners of each company, is intended to be accounted for as a pooling of interests and to be a tax-free reorganization. The merger is subject to certain regulatory approvals including the FCC and state commissions in Ohio and Illinois. If approvals are granted, the transaction is expected to close in 1999. Additional information on this matter is contained in Note 3 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). Pacific Telesis Group On April 1, 1997, SBC and Pacific Telesis Group (PAC) completed the merger of an SBC subsidiary with PAC, in a transaction in which each outstanding share of PAC common stock was exchanged for 1.4629 shares of SBC common stock (equivalent to approximately 626 million shares). With the merger, PAC became a wholly-owned subsidiary of SBC. The transaction has been accounted for as a pooling of interests and a tax-free reorganization. Additional information on this matter is contained in Note 2 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). Southern New England Telecommunications Corporation On October 26, 1998, SBC and Southern New England Telecommunications Corporation (SNET) completed the merger of an SBC subsidiary with SNET, in a transaction in which each share of SNET common stock was exchanged for 1.7568 shares of SBC common stock (equivalent to approximately 120 million shares). SNET became a wholly-owned subsidiary of SBC effective with the merger and the transaction has been accounted for as a pooling of interests and a tax-free reorganization. Additional information on this matter is contained in Note 2 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). Post-merger initiatives Several strategic decisions resulted from the PAC and SNET merger integration processes. The decisions resulted from an extensive review of operations throughout the merged company and include significant integration of operations and consolidation of some administrative and support functions. Additional information on this matter is contained in Note 2 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). Reorganization SBC is centralizing several key functions that will support the operations of the Telephone Companies, including network planning, strategic marketing and procurement. It is also consolidating a number of corporate-wide support activities, including research and development, information technology, financial transaction processing and real estate management. The Telephone Companies will continue as separate legal entities. These initiatives continue to result in the creation of some jobs and the elimination and realignment of others, with many of the affected employees changing job responsibilities and in some cases assuming positions in other locations. SBC recognized charges during 1998 and 1997 in connection with the SNET and PAC merger initiatives. Charges arising out of the merger relating to relocation, retraining and other effects of consolidating certain operations are being recognized in the periods those charges are incurred. Additional information on these matters is contained in Note 2 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). BUSINESS OPERATIONS SBC is among the largest telecommunications companies in the United States, with approximately 37 million access lines and approximately 6.9 million wireless customers in the United States. SBC serves the nation's two most populous states, California and Texas. SBC service areas includes 8 of the nation's 10 largest metropolitan areas, 19 of the nation's 50 largest metropolitan areas. SBC has investments in telecommunications businesses in selected international markets, including Mexico, France, South Africa, Chile, South Korea, Switzerland, Israel and Taiwan. SBC's broad operations offer customers an expansive range of services and products, varying by market, including: local exchange services, wireless communications, long distance services, Internet services, telecommunications equipment, messaging, paging, and directory advertising. Services and products are provided through several subsidiaries. These services and products (which are described more fully below) include wireline and wireless telecommunications services, sales of advertising for and publication of yellow pages and white pages directories, sales of customer premises, private business exchange (PBX) and wireless equipment, enhanced services, Internet services, and cable television services. SBC's revenues are categorized for financial reporting purposes as landline local service (substantially all of which was provided by the Telephone Companies), wireless subscriber (provided by Southwestern Bell Mobile Systems, Inc. (Mobile Systems), Pacific Bell Mobile Services (PBMS), SNET Cellular, Inc. and SNET Mobility, Inc., collectively referred to as SBC Wireless), network access (provided by the Telephone Companies), long distance service (substantially all of which was provided by the Telephone Companies and SNET America, Inc. (SAI)), directory advertising (principally provided by Southwestern Bell Yellow Pages, Inc. (SWBYP), Pacific Bell Directory (PB Directory), and SNET Information Services, Inc. (SNETIS) and other (including equipment sales at SBC Wireless, the Telephone Companies, and SNET Diversified Group, Inc. nonregulated products and services and billing and collection services for interexchange carriers provided by the Telephone Companies, Internet services provided by Pacific Bell Internet (PBI), Southwestern Bell Internet Services (SBIS), and SNETIS, and cable television services provided by SNET Personal Vision, Inc. (SNET Personal Vision)). With the passage of the Telecom Act, SBC Wireless offers interLATA and intraLATA wireless long distance services. In 1996, two SBC subsidiaries, Southwestern Bell Communications Services, Inc. and Pacific Bell Communications, began offering wireline interLATA long distance services to customers in selected areas outside the Telephone Companies' authorized regions (out-region). The Telephone Companies provide intraLATA long distance services in-region. SAI provides interLATA long distance services primarily to customers in Connecticut, and is prohibited from completing calls to SBC's other in-region states. The following table sets forth for SBC the percentage of total operating revenues by any class of service which accounted for 10% or more of total operating revenues in any of the last three fiscal years. - ------------------------------------------------ ------------------------------- Percentage of Total Operating Revenues - ------------------------------------------------ ------------------------------- 1998 1997 1996 - ------------------------------------------------ ---------- --------- ---------- Landline local service 39% 39% 38% Wireless subscriber 13% 13% 12% Network access 23% 23% 25% Long distance 8% 9% 10% - ------------------------------------------------ ---------- --------- ---------- Landline local services involve the transport of wireline telecommunications traffic between telephones and other customer premises equipment (CPE) located within the same local service calling area. Landline local services include: basic local exchange service, certain extended area service, dedicated private line services for voice and special services, directory assistance and various vertical services, including custom calling services, call control options, messaging and Caller ID services. Wireless subscriber services involve the transport of wireless local area traffic between wireless telephones and other CPE, wireless long distance, and roaming services. Until the passage of the Telecom Act, SBC's long distance services involved the transport of intraLATA telecommunications traffic, except for certain wireless service areas that cover more than one LATA, for which SBC had obtained MFJ waivers. Beginning in 1996, SBC began providing both interLATA and intraLATA long distance services to its wireless customers, as well as wireline interLATA long distance services in selected out-region areas according to the rules of the Telecom Act. With completion of the SNET merger in 1998, SBC now also provides wireline interLATA long distance to its in-region customers in Connecticut. Long distance services also include other services such as Wide Area Telecommunications Service (WATS or 800 services) and other special services. Network access services connect a subscriber's telephone or other equipment to the transmission facilities of other carriers that provide long distance (principally interLATA) and other communications services. Network access services are either switched, which use a switched communications path between the carrier and the customer, or special, which use a direct nonswitched path. Operating Segments In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (FAS 131), which establishes standards for the way that public business enterprises report information about operating segments in quarterly and annual financial statements. FAS 131 changes segment reporting from an industry segment basis to an operating segment basis defined based on how the business is managed. SBC adopted FAS 131 in the fourth quarter of 1998. Under the predecessor accounting standard, SBC operated in a single industry segment. Under FAS 131, SBC has four reportable segments: Wireline, Wireless, Directory and Other. The Wireline segment provides landline telecommunications services, including local, network access and long distance services, messaging and Internet services and sells customer premise and private business exchange equipment. The Wireless segment provides wireless telecommunications services, including local and long distance services, and sells wireless equipment. The Directory segment sells advertising for and publication of yellow pages and white pages directories and electronic publishing. The Other segment includes SBC's international investments and other domestic operating subsidiaries. Disclosures required by FAS 131 are included in Note 9 of the 1998 SBC Annual Report to Shareowners, and are incorporated herein by reference pursuant to General Instruction G(2). Wireline Wireline is SBC's largest operating segment, providing approximately 77% of SBC's operating revenues in 1998. The Telephone Companies provide landline telecommunications services to approximately 23.3 million residential and 13.4 million business access lines in the eight states in which they operate. During 1998 total access lines grew by 4%, of which 46% of the increase was due to growth in California and over 32% of the increase was due to growth in Texas. During 1998, the Telephone Companies continued to expand their offering of vertical services throughout their operating areas. These services include, among other things, Caller ID, a feature which displays the telephone number of the person calling and the caller's name in certain markets; Caller ID Call Waiting, a feature which displays the telephone number and caller's name in certain markets when the customer is on a call; Call Return, a feature that redials the number of the last incoming call; Call Blocker, a feature which allows customers to automatically reject calls from a designated list of telephone numbers; and voice messaging. Southwestern Bell Messaging Services, Inc. provides voice messaging services under the registered trademark CallNotes to residential and business customers. Pacific Bell Information Services, a subsidiary of PacBell, has several registered trademark products, which include residential voice messaging services (The Message Center), business messaging services (Pacific Bell Voice Mail), and business call management services (Pacific Bell Call Management). PBI, SBIS, and SNETIS provide Internet services in selected in-region metropolitan areas. Since 1996, the Telephone Companies have been offering certain local services on a "wholesale" basis to competitors, as well as providing elements of the Telephone Companies' networks on an "unbundled" basis for local competition. These services are being offered as specified by the Telecom Act and state actions and interconnection agreements. The Telecom Act and the regulations promulgated by federal and state agencies to implement it have resulted in SBC facing increased competition in significant portions of its business. At December 31, 1998, SBC provided wholesale services to approximately 800,000 access lines. Management cannot quantify the impact to SBC's business in 1999 from local exchange competition, as uncertainty exists as to the breadth and scope of competitors' offering of local exchange services to all portions of the market in-region, and as certain regulations, tariffs and negotiations governing such competition are not yet finalized. Customer Premises Equipment and Other Equipment Sales Equipment offerings at SWBell, PacBell, and SNET Diversified Group, Inc. range from single-line and cordless telephones to sophisticated digital PBX systems, all of which can be offered with the Telephone Companies' central office based solutions. PBX is a private telephone switching system, usually located on a customer's premises, which provides intra-premise telephone services as well as access to the public switched network. New Products As part of its continuing strategy to be among the leaders in the communications services industry, SBC is constantly developing new services and products. It currently is introducing four new data products. These data products include Asymmetrical Digital Subscriber Line (ADSL), Integrated Pathway, Managed Frame Relay and Dedicated Business Internet. All four of these new products are targeted primarily to meet the growing demand for data communications products resulting from the increased use of advanced information technology in the marketplace. ADSL enables customers to transfer over existing telephone lines, data, graphics, audio and video files at speeds up to 1.5 megabits per second. ADSL allows customers to simultaneously make a phone call and access information via the Internet or an office local area network. ADSL is the subject of a pending FCC review. Additional information on the pending FCC review of ADSL is contained in the 1998 SBC Annual Report to Shareowners on page 12, and is incorporated herein by reference pursuant to General Instruction G(2). National-Local Strategy Contingent upon completion of the Ameritech transaction, SBC plans to implement a "national-local" strategy, in which it will offer local services across the country in combination with major national and international operations. The strategy allows SBC to expand from a regional company to a company that provides services in "national-local" and global markets. SBC believes this expansion will better position it to compete head-to-head with incumbent local telephone companies, competitive local exchange carriers, data networks, long distance carriers and global competitors. In February 1999, SBC announced that Boston, Massachusetts; Miami, Florida; and Seattle, Washington will be the first markets in which SBC will compete under the "national-local" strategy. Wireless SBC Wireless offers a wide variety of wireless services in 19 of the top 50 metropolitan markets across the United States using both traditional cellular and new personal communication services (PCS) networks. Including both networks, at the end of 1998, SBC Wireless operations provided local wireless services to 6,851,000 customers throughout its wireless markets. In addition, since the enactment of the Telecom Act, SBC began offering wireless long distance services to its traditional cellular customers, and at year-end 1998 had been selected as the long distance carrier by approximately 4,601,000, or 78%, of its customers. SBC provides long distance services to all of its PCS wireless customers. SBC Wireless also has numerous "roaming agreements" with other wireless carriers which allows its subscribers to use their wireless service throughout the United States and Canada by accessing other carrier's networks where SBC Wireless does not operate networks or hold wireless licenses. SBC Wireless offers digital service, including advanced features in most of the metropolitan areas where it is licensed to provide wireless service. Mobile Systems first began providing commercial digital service in Chicago in July 1993. Digital service improves sound quality, provides a greater degree of privacy on individual calls, increases call-handling capacity of the networks, allows additional service offerings, and reduces exposure to billing fraud. Cellular At the end of 1998, wireless services were provided to 5,924,000 traditional cellular customers. SBC provides traditional cellular services in 5 of the nation's top 10 metropolitan areas, as follows: Washington, D.C.; Chicago, Illinois; Boston, Massachusetts; Dallas-Fort Worth, Texas; and Houston, Texas. Additionally, portions of the Connecticut wireless market fall within the New York consolidated metropolitan service area (MSA). SBC is licensed to provide service in 45 rural service areas (RSAs) and is currently providing service in all of these markets. Each RSA is contiguous to an existing metropolitan service area or another RSA operated by SBC, which allows for the expansion of service in a way that may add value to customers' service. SBC also operates one RSA in Arkansas under an interim operating authority granted by the FCC, and operates several MSAs and RSAs in Arkansas related to cellular networks and licenses received in exchange for certain SBC PCS licenses, discussed below. In January 1997, Mobile Systems began doing business within the five-state area as Southwestern Bell Wireless, Inc. Mobile Systems operates in out-region areas under the name of Cellular One by means of licenses from Cellular One Group, a partnership among affiliates of Mobile Systems, AT&T Wireless Services and Vanguard Cellular Systems, Inc. These areas include MSAs, such as Washington, D.C.; Chicago, Illinois; Albany, Buffalo, and Rochester, New York and Boston, Massachusetts; and RSAs in Illinois, Massachusetts, New York, Virginia and West Virginia. Cellular One offers, on a resale basis, wireline interLATA long distance service in all out-region markets where it provides local wireless service. In January 1997, Cellular One also began a trial offering wireline local service, on a resale basis, in Rochester, New York. SBC subsequently ended the Rochester trial and will no longer offer wireline local service there. SNET Cellular and its affiliates provide directly or indirectly retail and wholesale wireless services and telecommunications equipment in the states of Connecticut and Rhode Island, and portions of Massachusetts. Mobile Systems also markets wireless communications equipment in each of its service areas. On January 20, 1999, SBC announced it has agreed to acquire Comcast Cellular Corporation (Comcast Cellular), the wireless subsidiary of Comcast Corporation, in a transaction valued at $1.674 billion. Under the terms of the agreement, SBC will pay $400 million in cash and assume Comcast Cellular's current debt of $1.274 billion. The transaction will be accounted for through the purchase accounting method. Comcast Cellular offers analog and digital wireless services to more than 800,000 subscribers in Pennsylvania, Delaware, New Jersey and Illinois. The largest market in which Comcast Cellular operates is Philadelphia, Pennsylvania. SBC for several years has been operating the Illinois properties it is purchasing under a previous agreement between the two companies. The transaction, which is subject to regulatory approvals, is expected to be completed by the third quarter of 1999. PCS In 1993, the FCC adopted an order allocating radio spectrum and outlining the development of licenses for new PCS. PCS utilizes wireless telecommunications digital technology at a higher frequency radio spectrum than cellular, but using lower powered transmission equipment. Like cellular, it is designed to permit access to a variety of communications services regardless of subscriber location. SBC or affiliates hold PCS licenses in the Major Trading Areas of Los Angeles-San Diego, California; San Francisco-San Jose, California; and Tulsa, Oklahoma. The California licenses cover substantially all of California and Nevada. SBC is currently operating in all its major California-Nevada markets and Tulsa, Oklahoma. During 1996, SBC received several AT&T cellular networks in Arkansas, in exchange for PCS licenses previously held by SBC for Memphis, Tennessee and Little Rock, Arkansas and other considerations. PBMS was formed to offer PCS services across California and Nevada. The network incorporates the Global System for Mobile Communications standard, which is widely used internationally, and phones that it markets feature a built-in pager and answering machine. PBMS began trials in August 1996, began offering services in January 1997, and by mid-1997 provided widespread offerings of PCS services to all of California and Nevada. At the end of 1998, PBMS provided wireless services to 809,000 customers over its PCS networks. Mobile Systems also provided wireless services to 37,000 customers over its PCS networks in Tulsa, Oklahoma. In an FCC auction concluded in January 1997, SBC acquired the following additional PCS licenses for Basic Trading Areas that are within the five-state area: Springfield, Missouri; McAlester, Oklahoma; Joplin, Missouri; Pittsburgh, Kansas; Temple-Killeen, Texas; Waco, Texas; Tyler, Texas and Longview-Marshall, Texas. Directory SWBYP publishes more than 45 million books of white and yellow pages directories, representing approximately 342 directories, principally within the five-state area. PB Directory, the publisher of Pacific Bell SMART Yellow Pages, publishes 35 million books, representing approximately 114 directories in California and Nevada. SNETIS publishes over 4 million books of white and yellow pages directories, representing approximately 48 directories, principally throughout Connecticut and adjacent communities. SBC recognizes all directory advertising revenues and expenses in the month the related directory is published. SWBYP nine largest revenue-producing yellow pages directories are currently published in the second half of SBC's fiscal year, while PB Directory's publishing schedule is spread throughout the year for its directories. SWBYP directories are printed by R.R. Donnelley & Sons, PB Directory's directories are printed by World Color Press, and SNETIS directories are printed by Quebecor Printing. International International operations are included in the Other segment. Mexico A consortium consisting of SBC International, Inc.; a subsidiary of France Telecom; and Carso Global Telecom, S.A. de C.V. (Carso Global); and certain Mexican investors hold through a trust all of the outstanding AA Shares of Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's largest national telecommunications company. The AA shares held by the consortium represent approximately 90% of the full voting shares and 28% of the equity of Telmex. Carso Global holds a 44.9% interest in the consortium and the right to direct the trustee with respect to the election of a majority of the directors of Telmex, while SBC International and the France Telecom subsidiary each holds a 24.5% interest and the right to direct the trustee with respect to a minority of the directors. SBC International also owns approximately 4.3% of the L Shares, which have limited voting rights. As a result of repurchases of L Shares by Telmex since 1994, SBC International has sold portions of its Class L shares to Telmex in order to maintain its investment at below 10% of Telmex' total equity capitalization. As of February 1, 1999, SBC International's total interest in Telmex represents approximately 9.8% of the outstanding equity. In 1997, SBC issued approximately $396 million in 7 3/4% Exchangeable Notes, due March 2001, which may be redeemed upon maturity in either cash or Telmex L Shares, at SBC's option. At December 31, 1998, the outstanding notes represented 3.2% of Telmex' L Shares. Telmex provides wireline and wireless telecommunications services throughout Mexico. At the end of 1998, Telmex had 9.9 million access lines in service and provided cellular service to approximately 2.1 million subscribers. Telmex also provides interLATA telecommunications services in the United States jointly with Sprint Communications, LLC, and holds 49% of Grupo Televisa's cable television subsidiary, Cablevision. France In October 1994, SBC International formed a strategic alliance with Compagnie Generale des Eaux (CGE), a French diversified public company which in 1998 changed its name to Vivendi. Through this alliance, SBC International acquired an indirect 10% ownership of Societe Francaise du Radiotelephone S.A. (SFR), a nationwide cellular company in France, and minority ownership interests in other communications businesses controlled by CGE, and CGE obtained an effective 10% interest in SBC's wireless operations in Washington, D.C.-Baltimore, and surrounding rural markets. SBC and CGE both made contributions to the alliance. In 1997, SBC International contributed its indirect 10% ownership of SFR shares and an additional $240 million to acquire a 15% interest in Cegetel, S.A., a new French company formed by CGE to provide a broad base of telecommunications services throughout France. Operations on a limited scale, began in 1998. At the end of 1998, SFR had 4.2 million wireless subscribers and 602,000 long distance subscribers. Chile In February 1995, SBC International purchased 40% of VTR S.A. (VTR), a privately owned telecommunications holding company in Chile. Through the purchase of shares from a minority investor, offset by the subsequent sale in 1997 of a portion of those shares, SBC International's ownership has increased to 44%. VTR is 56% indirectly owned by Grupo Luksic, a large Chilean conglomerate. Through its subsidiaries, VTR provides local and cable television services in Chile. In December 1997, VTR sold its wireless service operations. At the end of 1998, local services were provided to approximately 141,000 access lines and cable television services were provided to approximately 384,000 subscribers. Agreements were reached in 1998 for the disposition of SBC International's remaining interest in VTR, subject to certain conditions. The transaction is expected to close in 1999. United Kingdom In October 1995, SBC International combined its United Kingdom cable television operations, which included Midlands Cable Communications and Northwest Cable Communications, with those of Telewest Communications, plc, a publicly held joint venture between Tele-Communications International, Inc. and MediaOne Group, Inc. (formerly U S WEST, Inc.) The resulting entity, Telewest Communications plc, merged with General Cable in 1998 to form the largest cable television operator in the United Kingdom and also provides local exchange services. Prior to the disposition in 1998 of its entire holdings in Telewest, SBC owned approximately 10% of the company. Additional information on this matter is contained in Note 7 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). Israel SBC International has investments in Israel through a 50% interest in Aurec Limited and a 22.7% interest in Amdocs Limited (Amdocs). Aurec has interests in companies involved in the publication of yellow page directories, outdoor advertising, insurance underwriting, long distance, network data solutions, and cable television. At the end of 1998, Golden Channels, an Aurec affiliate providing cable television in Israel, had passed 640,000 households and provided service to approximately 437,000 households, a penetration rate of approximately 68%. In 1996, a consortium in which SBC International participated received one of two licenses for international telecommunications service in Israel. Other consortium members are STET (Italy's national telephone company), the US/Israeli Aurec Group, and the Israeli Globescom and Kahn groups. Aurec holds an 8.25% interest in the Med-1 undersea cable linking Israel, Cypress and Italy. Amdocs is a leading provider of product-driven information systems solutions to major telecommunications companies in the United States and around the world. In June of 1998, Amdocs issued 18 million shares in an international initial public offering. The company began in 1982 as a joint venture between a subsidiary of SBC and an Israeli partner. SBC International owned 25.8% of the shares before the offering and 22.7% thereafter. This reduction in ownership reflects both dilution from the Initial Public Offering (IPO) and the sale of shares pursuant to an option granted by SBC International to the IPO underwriters. Australia In 1997, SBC International sold its directory interests in Australia to Telstra Corporation Limited, the principal provider of telecommunications services in Australia. South Africa In 1997, SBC International acquired an effective 18% stake in Telkom, S.A. Limited (Telkom), South Africa's state-owned local exchange, long distance, and cellular company. SBC International's partner in the acquisition is Telekom Malaysia, which acquired a 12% stake in Telkom. Telkom provides complete wireline and wireless telecommunications services within South Africa. At the end of 1998, Telkom had more than 4.9 million access lines in service. In addition, at the end of 1998, Vodacom Group (Pty) Ltd, in which Telkom has a 50% interest, provided cellular services to 1.5 million subscribers. In the third quarter 1998, SBC International sold its 15.5% interest in Mobile Telephone Networks (MTN), one of two South African national cellular companies, to the remaining shareholders of MTN. SBC International was required to divest its interest in MTN as part of its acquisition of Telkom. Switzerland In June 1997, SBC International purchased a 40% interest in diAx, a joint venture formed to provide long distance telephone service in Switzerland. SBC's partner in the joint venture is diAx Holdings, a consortium of Swiss utility and insurance companies. Service was launched in May 1998, and at the end of 1998, diAx provided services to 233,000 access lines (via equal access). In December 1997, SBC International formed a joint venture with diAx Holdings for the purpose of submitting a bid for a wireless license. SBC International's ownership interest in this joint venture, diAx Mobile, is 40%, with the remaining ownership interest being held by diAx Holdings. In April 1998, diAx Mobile was also awarded a wireless license by the Swiss government. Wireless service offerings began in late December 1998. The award of the license is currently in litigation, as an unsuccessful bidder for the license has challenged the award to diAx Mobile. China In December 1997, SBC International signed a Construction and Maintenance Agreement with China Telecom and twelve other telecommunications companies to construct a direct undersea cable link between the United States and China. The cable is expected to be completed by the year 2000. Japan In the third quarter of 1998, SBC signed an agreement to participate in building a state-of-the-art undersea communications pipeline directly linking Japan and the United States. SBC will be one of 12 initial parties with an ownership stake in the Japan-U.S. Cable Network and responsibility for oversight, maintenance and administration. The consortium has agreed to invest more than $1 billion in the network for the first phase of construction. The network should be up and running in mid-year 2000. South Korea SBC has wireless interests in South Korea where its affiliate provided wireless service to approximately 2.1 million subscribers at the end of 1998. Taiwan SBC International owns a 19.4% interest in a consortium that formed TransAsia Telecommunications, Inc., a new cellular service provider in the southern region of Taiwan. Service offerings commenced in January 1998, and at the end of 1998, TransAsia Telecommunications, Inc. provided cellular service to approximately 186,000 subscribers. East Asia Financial Risks Presently, SBC has limited investments in Eastern Asia and the Pacific Rim and therefore does not anticipate a significant financial impact from recent financial economic turmoil. DOMESTIC VIDEO SERVICES SBC also announced during 1997 that it is scaling back its limited direct investment in certain video services in the areas also served by PacBell and SWBell. As part of this curtailment, SBC halted construction on the Advanced Communications Network (ACN) in California. As part of an agreement with the ACN vendor, SBC paid the liabilities of the ACN trust that owns and finances ACN construction and incurred costs to shut down all construction previously conducted under the trust and received certain consideration from the vendor. SBC also curtailed several other video-related activities, including its broadband network video trials in Richardson, Texas and San Jose, California. SBC and its joint venture partners are winding up the Tele-TV joint venture in southern California. Media Ventures, Inc. (Media Ventures), another SBC subsidiary, owned two cable television systems serving the suburban Washington, D.C. area along with a partner, Prime Cable (Prime). Media Ventures became the general partner and retained an approximate 95% ownership interest in the Partnership until 1998. Prime contributed $20 million to the Partnership and managed the cable systems on behalf of the Partnership. SBC sold its Media Ventures' interest in the Partnership to Prime and other investors in the third quarter of 1998. In October 1998, SBC completed the sale of its interests in Prime Cable of Chicago, Inc. to Prime and other investors. A PAC subsidiary had acquired these interests prior to the merger with SBC. In the fourth quarter of 1998, SBC sold 90% of the stock of subsidiaries that operate a wireless video business in southern California to E.L. Acquisition, Inc., a subsidiary of Prime. During 1995, SBC, through SBC Interactive Media, Inc. (SBC Interactive), a wholly-owned subsidiary of SBC, became an equal partner in Americast, a venture with Ameritech Corporation, BellSouth Corporation, GTE, and The Walt Disney Company, to design, market and deliver video programming and interactive services. In 1996, SNET became a minority partner in this venture. In mid-1997, SBC Interactive notified the venture of its withdrawal of operations in territories served by SWBell. On October 7, 1997 the remaining partners in the venture attempted to initiate arbitration against SBC Interactive regarding the validity of its withdrawal. On October 15, 1997, SBC Interactive filed a declaratory judgement action in and sought a preliminary injunction from Delaware Chancery Court to halt the arbitration attempt. On December 24, 1997, the Chancery Court directed that the arbitration proceed, and on January 22, 1998, SBC appealed that ruling. This matter is still being litigated and is not material to the financial statements. SNET Personal Vision operates a cable television system in Connecticut, which began deploying cable service in the first quarter of 1997. At the end of 1998, SNET Personal Vision provided service to approximately 24,000 households. Additional information related to SBC's video operations is contained in Note 2 of the 1998 SBC Annual Report to Shareowners, and is incorporated herein by reference pursuant to General Instruction G(2). GOVERNMENT REGULATION In the in-region states, the Telephone Companies are subject to regulation by state commissions which have the power to regulate, in varying degrees, intrastate rates and services, including local, long distance and network access services. The Telephone Companies are also subject to the jurisdiction of the FCC with respect to interstate and international rates and services, including interstate access charges. Access charges are designed to compensate the Telephone Companies for the use of their facilities for the origination or termination of long distance and other communications by other carriers. Additional information relating to federal and state regulation of the Telephone Companies is contained in the 1998 SBC Annual Report to Shareowners under the heading "Regulatory Environment" on page 11, and is incorporated herein by reference pursuant to General Instruction G(2). SBC's cable systems are subject to federal and local regulation, including regulation by the FCC and local franchising authorities, concerning rates, service and programming access. IMPORTANCE, DURATION AND EFFECT OF LICENSES The FCC authorizes the licenses for multiple wireless carriers in each geographic market. The cellular licenses, of which there are only two in each geographic region have a standard duration of ten years. Upon application and a showing of compliance with FCC use and conduct standards, licenses may be renewed. Renewal applications were filed and granted for the following MSA markets during 1998: Bloomington-Normal, Illinois; Glen Falls, New York; Laredo, Texas; Little Rock-North Little Rock, Arkansas; Pittsfield, Massachusetts; and Pine Bluff, Arkansas. Renewal applications for eight RSA markets will be filed in the following states during 1999: Illinois; Missouri; New York; Oklahoma and Texas. Renewals of these licenses are anticipated to be granted in late 1999 or early 2000. Under the auction process of an FCC order outlining the development of PCS, licenses with durations of ten years were awarded in 51 major markets. SBC's licenses for Los Angeles-San Diego, California, San Francisco-San Jose, California and Tulsa, Oklahoma expire in 2005. These licenses, upon application and a showing of compliance with FCC use and conduct standards, may be renewed. Cable television systems generally are operated under nonexclusive permits or "franchises" granted by local governmental authorities. Each franchise is renewable upon a showing of compliance with established local and federal standards. SBC sold its suburban Washington, D.C. cable systems and all related franchises were transferred as part of the sale of the properties in Montgomery County, Maryland; Arlington County, Virginia; and the City of Gaithersburg, Maryland. During 1995, SBC received a franchise to operate a cable system in Richardson, Texas, which expires in September 2013 and had acquired a franchise agreement in the PAC merger with the city of San Jose, California. In 1998, SBC reached agreement with the cities of San Jose, California and Richardson, Texas to terminate the franchises that they had granted SBC and its affiliates for video trials. On September 6, 1996, SNET Personal Vision received an 11-year license that covers the state of Connecticut. A number of SBC subsidiaries hold FCC channel licenses for wireless video services. These subsidiaries also have numerous leases with Instructional Television Fixed Service channel licensees to use their excess channel capacity. The channels under these licenses and leases are primarily in southern California. MAJOR CUSTOMER No customer accounted for more than 10% of SBC's consolidated revenues in 1998, 1997 or 1996. COMPETITION Wireline and Wireless Information relating to wireline and wireless competition is contained in the 1998 SBC Annual Report to Shareowners under the heading "Competition" beginning on page 15, and is incorporated herein by reference pursuant to General Instruction G(2). International Information relating to international competition is contained in the 1998 SBC Annual Report to Shareowners under the heading "Competition" on page 15, and is incorporated herein by reference pursuant to General Instruction G(2). Directory Information relating to directory advertising and publishing competition is contained in the 1998 SBC Annual Report to Shareowners under the heading "Competition" on page 15, and is incorporated herein by reference pursuant to General Instruction G(2). Customer Premises Equipment, Wireless Equipment and Other Equipment Sales SBC faces significant competition from numerous companies in marketing its telecommunications equipment. RESEARCH AND DEVELOPMENT Certain company-sponsored basic and applied research was conducted at Bell Communications Research, Inc. (Bellcore). The Telephone Companies owned a two-seventh interest in Bellcore, with the remainder owned by the other four remaining RHCs. In November 1997, the RHCs sold Bellcore to a third party but continue to have a research agreement with Bellcore. The RHCs have retained the activities of Bellcore that coordinate the Federal Government's telecommunications requirements for national security and emergency preparedness. Applied research is also conducted at SBC Technology Resources, Inc. (TRI), a subsidiary of SBC. TRI provides research, technology planning and evaluation services to SBC and its subsidiaries. EMPLOYEES As of December 31, 1998, SBC and its subsidiaries employed 129,850 persons. Approximately two-thirds of the employees are represented by the Communications Workers of America (CWA). New agreements between the CWA and the Telephone Companies were reached in April 1998, and September 1998 for SNET, covering an estimated 80,000 employees through April 1, 2001. Among other items, the agreements specify an 11% increase in wages over the life of the contracts. A new three-year agreement (which covers an estimated 2,000 employees) was reached in 1998 between the CWA and SWBYPS, that is effective December 5, 1998 through December 7, 2001. In August 1998, PB Directory reached a new four-year agreement with the International Brotherhood of Electrical Workers, covering approximately 1,000 employees in northern and southern California. Among other items, both the SWBYPS and PB Directory agreements include an approximate 11% increase in compensation over the life of the contracts. The CWA also represents an estimated 3,000 employees in other subsidiaries of SBC. RECENT DEVELOPMENTS Reciprocal Compensation Ruling In February 1999, the FCC ruled that a substantial portion of Internet communications is interstate traffic and therefore subject to federal jurisdiction. The FCC noted that carriers were bound by existing interconnection contracts as interpreted by state commissions. The FCC will issue rules determining the extent, if any, such communications are subject to reciprocal compensation. The FCC also ruled that, in the context of interpreting particular interconnection agreements, the state commissions might determine that reciprocal compensation was appropriately based on the agreement of the parties or other factors. SBC believes that the FCC ruling should prevent state commissions from imposing reciprocal compensation on this traffic. Ameritech Ohio Agreement On February 23, 1999, SBC and Ameritech signed an agreement with the staff of the Public Utilities Commission of Ohio (PUCO), the Ohio Consumers' Counsel, the Edgemont Neighborhood Coalition and Parkview Areawide Seniors (a consumer group representing senior citizens in Northern Ohio) to recommend approval of the merger between SBC and Ameritech. Time Warner Telecom and CoreComm, competitive providers of local service in Ohio, have also signed the agreement as non-opposing stipulating parties. The agreement provides for certain commitments from SBC and Ameritech, including capping rates for basic local service until January 2002; maintaining a specified level of full-time equivalent employees in Ohio for two years; establishing and maintaining minimum customer service standards for two years subsequent to the merger close, including potential penalties for non-compliance with the minimum standards; providing residential unbundled loop discounts and making various charitable contributions within three years of the merger. The agreement requires approval by the PUCO before implementation. CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS Information set forth in this form contains forward-looking statements that are subject to risks and uncertainties. SBC claims the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. The following factors could cause SBC's future results to differ materially from those expressed in the forward-looking statements: (1) adverse economic changes in the markets served by SBC or changes in available technology; (2) the final outcome of various FCC rulemakings and judicial review, if any, of such rulemakings; (3) the final outcome of various state regulatory proceedings in SBC's eight-state area, and judicial review, if any, of such proceedings; and (4) the timing of entry and the extent of competition in the local and intraLATA toll markets in SBC's eight-state area. Readers are cautioned that other factors discussed in this form, although not enumerated here, also could materially impact SBC's future earnings. ITEM 2. PROPERTIES The properties of SBC do not lend themselves to description by character and location of principal units. At December 31, 1998, 93% of the property, plant and equipment of SBC was owned by the Wireline subsidiaries. Network access lines represented 42% of the Wireline subsidiaries' investment in telephone plant; central office equipment represented 40%; land and buildings represented 10%; other miscellaneous property, comprised principally of furniture and office equipment and vehicles and other work equipment, represented 5%; and information origination/termination equipment represented 3%. ITEM 3. LEGAL PROCEEDINGS Six putative class actions in Texas, Missouri, Oklahoma, and Kansas that involved the provision by SWBell of maintenance and trouble diagnosis services relating to telephone inside wire located on customer premises have been settled during 1998. These actions alleged that SWBell's sales practices in connection with these services violated antitrust, fraud and/or deceptive trade practices statutes. The trial court has approved the settlement, which is not expected to materially affect the financial results of SBC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of the shareowners of SBC was held on December 10, 1998, in San Antonio, Texas. Shareowners representing 1,535,760,506 shares of common stock were present in person or were represented at the meeting by proxy where two items were submitted for vote. Shareowners approved at the meeting the issuance of shares of common stock of SBC pursuant to the Agreement and Plan of Merger among Ameritech, SBC and an SBC subsidiary, dated as of May 10, 1998, pursuant to which Ameritech would become a wholly-owned subsidiary of SBC. The vote was 1,321,416,117 FOR and 21,533,264 AGAINST, with 12,326,431 ABSTAINING. Shareowners approved and adopted a proposal to amend the Bylaws of SBC to provide the maximum number of persons that may serve as directors on the Board of Directors of SBC be increased to 25 from 21. The vote was 1,465,067,133 FOR and 54,245,254 AGAINST, with 16,448,119 ABSTAINING. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position Held Since Edward E. Whitacre Jr. 57 Chairman and Chief Executive Officer 1/1990 J. Cliff Eason 51 President - SBC International 6/1997 Royce S. Caldwell 60 President - SBC Operations 7/1995 Cassandra C. Carr 54 Senior Executive Vice President - 10/1998 External Affairs James D. Ellis 55 Senior Executive Vice President and 3/1989 General Counsel Charles E. Foster 62 Group President - SBC 7/1995 Karen E. Jennings 48 Senior Vice President - Human Resources 10/1998 James S. Kahan 51 Senior Vice President - Corporate 7/1993 Development Donald E. Kiernan 58 Senior Vice President, Treasurer and 7/1993 Chief Financial Officer Stanley T. Sigman 51 President and Chief Executive Officer 4/1997 SBC Wireless Inc. All of the above executive officers have held high-level managerial positions with SBC or its subsidiaries for more than the past five years, except for Ms. Jennings, who has held high-level managerial positions since 1995. Prior to that, Ms. Jennings held responsible managerial positions with SBC. Executive officers are not appointed to a fixed term of office. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The number of shareowners of record as of December 31, 1998 and 1997 were 1,005,621 and 1,059,158. Other information required by this Item is included in the 1998 SBC Annual Report to Shareowners under the headings "Quarterly Financial Information" on page 37, "Selected Financial and Operating Data" on page 5, and "Stock Trading Information" on page 41, which are incorporated herein by reference pursuant to General Instruction G(2). ITEM 6. SELECTED FINANCIAL AND OPERATING DATA Information required by this Item is included in the 1998 SBC Annual Report to Shareowners under the heading "Selected Financial and Operating Data" on page 5 which is incorporated herein by reference pursuant to General Instruction G(2). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information required by this Item is included in the 1998 SBC Annual Report to Shareowners on page 6 through page 19, which is incorporated herein by reference pursuant to General Instruction G(2). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this Item is included in the 1998 SBC Annual Report to Shareowners under the heading "Market Risk" on page 17 through page 19, which is incorporated herein by reference pursuant to General Instruction G(2). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is included in the 1998 SBC Annual Report to Shareowners on page 20 through page 37, which is incorporated herein by reference pursuant to General Instruction G(2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in accountants or disagreements with accountants on any accounting or financial disclosure matters occurred during the period covered by this report. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure at the end of Part I of this report since the registrant did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. Other information required by this Item 10 is included in the registrant's definitive proxy statement, dated March 12, 1999, under the headings "Board of Directors" beginning on page 4 and "Section 16(a) Beneficial Ownership Reporting Compliance" beginning on page 31 which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is included in the registrant's definitive proxy statement, dated March 12, 1999, under the headings "Compensation of Directors" from page 13 through page 14, and "Compensation Committee Interlocks and Insider Participation", "Executive Compensation", "Pension Plans", and "Contracts with Management" from page 19 through page 31, which are incorporated herein by reference pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is included in the registrant's definitive proxy statement, dated March 12, 1999, under the heading "Common Stock Ownership of Directors and Officers" on page 15, which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is included in the registrant's definitive proxy statement, dated March 12, 1999, under the heading "Compensation of Directors" from page 13 through page 14 and "Contracts with Management" from page 30 through 31, which are incorporated herein by reference pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report: Page ---- (1) Report of Independent Auditors.......................... * Financial Statements covered by Report of Independent Auditors: Consolidated Statements of Income....................... * Consolidated Balance Sheets............................. * Consolidated Statements of Cash Flows................... * Consolidated Statements of Shareowners' Equity.......... * Notes to Consolidated Financial Statements.............. * *Incorporated herein by reference to the appropriate portions of the registrant's annual report to shareowners for the fiscal year ended December 31, 1998. (See Part II.) Page ---- (2) Financial Statement Schedules: II - Valuation and Qualifying Accounts.................. 26 Financial statement schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto, or because such schedules are not required or applicable. (3) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission (SEC), are incorporated herein by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610. Exhibit Number 2-a Agreement and Plan of Merger, among Pacific Telesis Group, SBC Communications Inc. and SBC Communications (NV) Inc., dated as of April 1, 1996. (Exhibit 2 to Form 8-K, dated April 1, 1996.) 2-b Agreement and Plan of Merger, among Southern New England Telecommunications Corporation, SBC Communications Inc., and SBC (CT), dated as of January 4, 1998. (Exhibit 2 to Form 8-K, dated January 4, 1998.) 2-c Agreement and Plan of Merger among Ameritech Corporation, SBC and SBC Delaware, Inc., dated as of May 10, 1998. (Exhibit 2 to Form 8-K, dated May 10, 1998.) 3-a Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on April 28, 1998. (Exhibit 3-a to Form 10-Q dated March 31, 1998.) 3-b Certificate of Designation, filed with the Secretary of State of Delaware on March 31, 1997. 3-c Bylaws dated June 26, 1998. 4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which defines the rights of holders of long-term debt of the registrant or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 4-b Support Agreement dated November 10, 1986, between SBC and SBC Communications Capital Corporation. (Exhibit 4-b to Registration Statement No. 33-11669.) 4-c Resolutions guaranteeing certain obligations of Pacific Telesis Group. (Exhibit 4-g to Form 10-K for 1997.) 10-a Short Term Incentive Plan. (Exhibit 10-a to Form 10-K for 1997.) 10-b Senior Management Long Term Incentive Plan. (Exhibit 10-b to Form 10-K for 1992.) 10-c Supplemental Life Insurance Plan. (Exhibit 10-c to Form 10-K for 1997.) 10-d Supplemental Retirement Income Plan. (Exhibit 10-d to Form 10-K for 1997.) 10-e Senior Management Deferred Compensation Plan (effective for Units of Participation Having a Unit Start Date Prior to January 1, 1988), revised July 30, 1993. (Exhibit 10.5 to Registration Statement No. 33-54795.) 10-f Senior Management Deferred Compensation Plan of 1988 (effective for Units of Participation Having a Unit Start Date of January 1, 1988 or later), revised July 30, 1993. (Exhibit 10.6 to Registration Statement No. 33-54795.) 10-g Senior Management Long Term Disability Plan. (Exhibit 10-f to Form 10-K for 1986.) 10-h Salary and Incentive Award Deferral Plan. (Exhibit 10-h to Form 10-K for 1997.) 10-i Financial Counseling Program. (Exhibit 10-i to Form 10-K for 1997.) 10-j Supplemental Health Plan. . (Exhibit 10-j to Form 10-K for 1997.) 10-k Retirement Plan for Non-Employee Directors. (Exhibit 10-k to Form 10-K for 1997.) 10-l Form of Indemnity Agreement, effective July 1, 1986, between SBC and its directors and officers. (Appendix 1 to Definitive Proxy Statement dated March 18, 1987.) 10-m Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Exhibit 10-p to Form 10-K for 1988.) 10-n Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Approved November 21, 1997). (Exhibit 10-n to Form 10-K for 1997.) 10-o Stock Savings Plan. (Exhibit 10-o to Form 10-K for 1997.) 10-p 1992 Stock Option Plan. (Exhibit 10-p to Form 10-K for 1997.) 10-q Officer Retirement Savings Plan. (Exhibit 10-q to Form 10-K for 1997.) 10-r 1996 Stock and Incentive Plan. 10-s Non-Employee Director Stock and Deferral Plan. (Exhibit 10-s to Form 10-K for 1997.) 10-t Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors. (Exhibit 10gg to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-t(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to Form 10-K for 1997.) 10-u Pacific Telesis Group Outside Directors' Deferred Stock Unit Plan. (Exhibit 10oo to Form 10-K for 1995 of Pacific Telesis Group (Reg. 1-8609).) 10-v Pacific Telesis Group 1996 Directors' Deferred Compensation Plan. (Exhibit 10qq to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-v(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to Form 10-K for 1997.) 10-w Pacific Telesis Group 1994 Stock Incentive Plan. (Attachment A to Pacific Telesis Group's 1994 Proxy Statement filed March 11, 1994, and amended March 14 and March 25, 1994.) 10-w(i) Resolutions amending the Plan, effective January 1, 1995. (Attachment A to Pacific Telesis Group's 1995 Proxy Statement, filed March 13, 1995.) 10-x Pacific Telesis Group Nonemployee Director Stock Option Plan. (Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed February 26, 1990.) 10-x(i) Resolutions amending the Plan, effective April 1, 1994. (Exhibit 10xx(i) to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 12 Computation of Ratios of Earnings to Fixed Charges. 13 Portions of SBC's Annual Report to shareowners for the fiscal year ended December 31, 1998. Only the information incorporated by reference into this Form 10-K is included in the exhibit. 21 Subsidiaries of SBC. 23-a Consent of Ernst & Young LLP. 23-b Consent of PricewaterhouseCoopers LLP. 24 Powers of Attorney. 27 Financial Data Schedule. 99-a Report of Independent Accountants PricewaterhouseCoopers LLP. 99-b Annual Report on Form 11-K for the SBC Savings Plan for the year 1998 to be filed under Form 10 K/A. 99-c Annual Report on Form 11-K for the SBC Savings and Security Plan for the year 1998 to be filed under Form 10-K/A. 99-d Annual report on Form 11-K for the Pacific Telesis Group Supplemental Retirement and Savings Plan for Nonsalaried Employees for the year 1998. 99-e Annual report on Form 11-K for the Pacific Telesis Group Supplemental Retirement and Savings Plan for Salaried and Nonsalaried Employees (LESOP) for the year 1998. 99-f Annual report on Form 11-K for the SNET Bargaining Unit Retirement Savings Plan for the year 1998. 99-g Annual report on Form 11-K for the SNET Management Retirement Savings Plan for the year 1998. SBC will furnish to shareowners upon request, and without charge, a copy of the annual report to shareowners and the proxy statement, portions of which are incorporated by reference in the Form 10-K. SBC will furnish any other exhibit at cost. (b) Reports on Form 8-K: On October 15, 1998, SBC filed a Form 8-K, including an Item 5. Other Events, and an Item 7. Financial Statements and Exhibits. In the report, SBC disclosed a press release discussing its third quarter 1998 earnings and selected financial information for the periods ended September 30, 1998 and 1997. On October 26, 1998, SBC filed a Form 8-K, including an Item 5. Other Events, and an Item 7. Exhibits. In the report, SBC disclosed that it had completed the merger with Southern New England Telecommunications Corporation. On October 30, 1998, SBC filed a Form 8-K, including an Item 5. Other Events. In the report, SBC disclosed that its subsidiary, Pacific Bell announced on October 29, 1998 it was commencing a fixed spread repurchase offer for any and all of its outstanding 8.50% debentures due August 15, 2031; 7.75% debentures due September 15, 2032; and 7.50% debentures due February 1, 2033. On November 19, 1998, SBC filed a Form 8-K, including an Item 7. Financial Statements and Exhibits. In the report, SBC disclosed unaudited financial statements to reflect the proposed business combination of SBC and Ameritech Corporation as and for the nine months ended September 30, 1998. 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 1998.............................. $ 430 513 278 749 $ 472 Year 1997.............................. $ 339 566 388 863 $ 430 Year 1996.............................. $ 303 438 254 656 $ 339 (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 1998.............................. $ 1,047 136 1 443(a) $ 741 Year 1997.............................. $ 638 410 5 6 $ 1,047 Year 1996.............................. $ 554 139 2 57(b) $ 638 (a) Primarily related to the disposition of SBC Media Ventures, Inc. and an impairment of an investment in wireless video. (b) Primarily related to the disposition of Associated Directory Services, Inc.
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) Balance at Charged Charged Balance Beginning of to Costs and to Other Deductions at End of Description Period Expenses Accounts -Note (a) Period - --------------------------------------------------------------------------------------------------------------------- Year 1998.............................. $ 7 - - 7 $ - Year 1997.............................. $ 142 - - 135 $ 7 Year 1996.............................. $ 337 - - 195 $ 142 (a) The 1996 amount reflects $(64) of costs for enhanced retirement benefits paid from pension fund assets which do not require current outlays of SBC's funds. This 1996 reversal of $64 resulted from revised estimates of these retirement costs. The 1996 amount also includes non-cash net pension and postretirement settlement gain charged against the restructuring reserve of $66.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 12th day of March, 1999. SBC COMMUNICATIONS INC. By /s/ Donald E. Kiernan (Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer: Edward E. Whitacre, Jr.* Chairman and Chief Executive Officer Principal Financial and Accounting Officer: Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer /s/ Donald E. Kiernan Directors: (Donald E. Kiernan, as attorney-in-fact and on his own behalf as Principal Edward E. Whitacre, Jr.* Financial Officer and Principal Clarence C. Barksdale* Accounting Officer) James E. Barnes* August A. Busch III* Royce S. Caldwell* March 12, 1999 Ruben R. Cardenas* William P. Clark* Martin K. Eby, Jr.* Herman E. Gallegos* Jess T. Hay* Bobby R. Inman* Charles F. Knight* Mary S. Metz* Haskell M. Monroe, Jr.* Toni Rembe* S. Donley Ritchey* Joyce M. Roche'* Richard M. Rosenberg* Carlos Slim Helu'* Patricia P. Upton* * by power of attorney EXHIBIT INDEX Exhibits identified in parentheses below, on file with the Securities and Exchange Commission (SEC), are incorporated herein by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610. Exhibit Number 2-a Agreement and Plan of Merger, among Pacific Telesis Group, SBC Communications Inc. and SBC Communications (NV) Inc., dated as of April 1, 1996. (Exhibit 2 to Form 8-K, dated April 1, 1996.) 2-b Agreement and Plan of Merger, among Southern New England Telecommunications Corporation, SBC Communications Inc., and SBC (CT), dated as of January 4, 1998. (Exhibit 2 to Form 8-K, dated January 4, 1998.) 2-c Agreement and Plan of Merger among Ameritech Corporation, SBC and SBC Delaware, Inc., dated as of May 10, 1998. (Exhibit 2 to Form 8-K, dated May 10, 1998.) 3-a Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on April 28, 1998. (Exhibit 3-a to Form 10-Q dated March 31, 1998.) 3-b Certificate of Designation, filed with the Secretary of State of Delaware on March 31, 1997. 3-c Bylaws dated June 26, 1998. 4-a Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which defines the rights of holders of long-term debt of the registrant or any of its consolidated subsidiaries is filed herewith. Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. 4-b Support Agreement dated November 10, 1986, between SBC and SBC Communications Capital Corporation. (Exhibit 4-b to Registration Statement No. 33-11669.) 4-c Resolutions guaranteeing certain obligations of Pacific Telesis Group. (Exhibit 4-g to Form 10-K for 1997.) 10-a Short Term Incentive Plan. (Exhibit 10-a to Form 10-K for 1997.) 10-b Senior Management Long Term Incentive Plan. (Exhibit 10-b to Form 10-K for 1992.) 10-c Supplemental Life Insurance Plan. (Exhibit 10-c to Form 10-K for 1997.) 10-d Supplemental Retirement Income Plan. (Exhibit 10-d to Form 10-K for 1997.) 10-e Senior Management Deferred Compensation Plan (effective for Units of Participation Having a Unit Start Date Prior to January 1, 1988), revised July 30, 1993. (Exhibit 10.5 to Registration Statement No. 33-54795.) 10-f Senior Management Deferred Compensation Plan of 1988 (effective for Units of Participation Having a Unit Start Date of January 1, 1988 or later), revised July 30, 1993. (Exhibit 10.6 to Registration Statement No. 33-54795.) 10-g Senior Management Long Term Disability Plan. (Exhibit 10-f to Form 10-K for 1986.) 10-h Salary and Incentive Award Deferral Plan. (Exhibit 10-h to Form 10-K for 1997.) 10-i Financial Counseling Program. (Exhibit 10-i to Form 10-K for 1997.) 10-j Supplemental Health Plan. . (Exhibit 10-j to Form 10-K for 1997.) 10-k Retirement Plan for Non-Employee Directors. (Exhibit 10-k to Form 10-K for 1997.) 10-l Form of Indemnity Agreement, effective July 1, 1986, between SBC and its directors and officers. (Appendix 1 to Definitive Proxy Statement dated March 18, 1987.) 10-m Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Exhibit 10-p to Form 10-K for 1988.) 10-n Forms of Change of Control Severance Agreements for officers of SBC and certain officers of SBC's subsidiaries (Approved November 21, 1997). (Exhibit 10-n to Form 10-K for 1997.) 10-o Stock Savings Plan. (Exhibit 10-o to Form 10-K for 1997.) 10-p 1992 Stock Option Plan. (Exhibit 10-p to Form 10-K for 1997.) 10-q Officer Retirement Savings Plan. (Exhibit 10-q to Form 10-K for 1997.) 10-r 1996 Stock and Incentive Plan. 10-s Non-Employee Director Stock and Deferral Plan. (Exhibit 10-s to Form 10-K for 1997.) 10-t Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors. (Exhibit 10gg to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-t(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to Form 10-K for 1997.) 10-u Pacific Telesis Group Outside Directors' Deferred Stock Unit Plan. (Exhibit 10oo to Form 10-K for 1995 of Pacific Telesis Group (Reg. 1-8609).) 10-v Pacific Telesis Group 1996 Directors' Deferred Compensation Plan. (Exhibit 10qq to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 10-v(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit 10-v(i) to Form 10-K for 1997.) 10-w Pacific Telesis Group 1994 Stock Incentive Plan. (Attachment A to Pacific Telesis Group's 1994 Proxy Statement filed March 11, 1994, and amended March 14 and March 25, 1994.) 10-w(i) Resolutions amending the Plan, effective January 1, 1995. (Attachment A to Pacific Telesis Group's 1995 Proxy Statement, filed March 13, 1995.) 10-x Pacific Telesis Group Nonemployee Director Stock Option Plan. (Exhibit A to Pacific Telesis Group's 1990 Proxy Statement filed February 26, 1990.) 10-x(i) Resolutions amending the Plan, effective April 1, 1994. (Exhibit 10xx(i) to Form 10-K for 1996 of Pacific Telesis Group (Reg. 1-8609).) 12 Computation of Ratios of Earnings to Fixed Charges. 13 Portions of SBC's Annual Report to shareowners for the fiscal year ended December 31, 1998. Only the information incorporated by reference into this Form 10-K is included in the exhibit. 21 Subsidiaries of SBC. 23-a Consent of Ernst & Young LLP. 23-b Consent of PricewaterhouseCoopers LLP. 24 Powers of Attorney. 27 Financial Data Schedule. 99-a Report of Independent Accountants PricewaterhouseCoopers LLP. 99-b Annual Report on Form 11-K for the SBC Savings Plan for the year 1998 to be filed under Form 10 K/A. 99-c Annual Report on Form 11-K for the SBC Savings and Security Plan for the year 1998 to be filed under Form 10-K/A. 99-d Annual report on Form 11-K for the Pacific Telesis Group Supplemental Retirement and Savings Plan for Nonsalaried Employees for the year 1998. 99-e Annual report on Form 11-K for the Pacific Telesis Group Supplemental Retirement and Savings Plan for Salaried and Nonsalaried Employees (LESOP) for the year 1998. 99-f Annual report on Form 11-K for the SNET Bargaining Unit Retirement Savings Plan for the year 1998. 99-g Annual report on Form 11-K for the SNET Management Retirement Savings Plan for the year 1998. EX-3.(II) 2 BYLAWS DATED JUNE 26, 1998 Exhibit 3-c As amended June 26, 1998 SBC COMMUNICATIONS INC. Incorporated under the Laws of the State of Delaware, October 5, 1983 Bylaws Article I Stockholders Section 1. Annual Meeting An annual meeting of the stockholders, for the election of Directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall fix each year. Section 2. Special Meeting Special meetings of the stockholders may be called at any time, either by the Board of Directors or by the Chairman of the Board, and the Chairman of the Board shall call a special meeting whenever requested in writing to do so by stockholders representing two-thirds of the shares of the corporation, then outstanding, and entitled to vote at such meeting. This request must specify the time, place and object of the proposed meeting. Section 3. Notice of Meetings Written notice of all meetings of the stockholders shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held. The notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the corporation. Any previously scheduled meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. When a meeting is adjourned to another place, date, or time, written notice need not be given of the meeting when reconvened, if the place, date, and time thereof are announced at the meeting at which the adjournment is taken. If the date of the meeting to be reconvened is more than thirty (30) days after the date for which notice of the meeting was originally given or if a new record date is fixed for the meeting, written notice of the place, date and time of the meeting to be reconvened shall be given in conformity herewith. At any reconvened meeting, any business may be transacted that might have been transacted at the original meeting. Section 4. Quorum At any meeting of the stockholders, the holders of forty percent (40%) of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for the transaction of business. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of the stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. Section 5. Organization The Chairman of the Board, or a Director or officer as the Chairman of the Board may designate, shall act as chairman of the stockholders' meeting. The chairman of the meeting shall designate an officer to act as a secretary for the meeting in the absence of the corporation's Secretary. Section 6. Proxies and Voting At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy. Each holder of common stock shall have one vote for every share of stock that is registered in the stockholder's name on the record date for the meeting. All voting may be by a voice vote, provided that upon demand of a stockholder entitled to vote in person or by proxy, a recorded vote of all shares of stock at the meeting shall be taken. Directors shall be elected by a plurality of the votes cast. All other matters shall be determined by a majority of the votes cast, unless a greater number is required by law or the Certificate of Incorporation for the action proposed. Section 7. Nomination of Directors Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors. Nomination of persons for election to the Board of Directors may be made at any annual meeting of stockholders (a) by or at the direction of the Board of Directors or any duly authorized committee thereof or (b) by any stockholder of the corporation entitled to vote for the election of Directors at the annual meeting. In addition to any other applicable requirements, a nomination made by a stockholder shall be pursuant to timely notice in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the date of the annual meeting; provided, however, that in the event that less than seventy (70) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder must be received not later than ten (10) days following the day on which notice or public disclosure of the date of the annual meeting was mailed or made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as Director (i) the name, age, business address, and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations of proxies for election of Directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by such stockholder, and (iii) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitation of proxies for the election of Directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a Director if elected. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this Section 7. If the Chairman determines that a nomination was not made in accordance with the foregoing procedure, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. Section 8. Conduct of Annual Meeting No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (c) otherwise properly brought before the meeting by a stockholder as of the record date for the determination of stockholders entitled to vote at such annual meeting. In addition to any other applicable requirements for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the date of the annual meeting; provided, however, that in the event that less than seventy (70) days' notice or prior public disclosure of the date of the annual meeting is given or made to the stockholder, notice by the stockholder must be received not later than the close of business on the tenth day following the day in which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, stockholder's notice to the Secretary must set forth, as to each matter such stockholder proposes to bring before the annual meeting, (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record of such stockholder, and (iv) any material interest of the stockholder in such business. No business shall be conducted at the annual meeting of stockholders except in accordance with the procedures set forth in this Section 8; provided, however, that nothing in this Section 8 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. If the Chairman determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not brought properly before the meeting and such business shall not be transacted. Article II Board of Directors Section 1. Number and Terms of Office The business and affairs of the corporation shall be under the direction of a Board of Directors. The number of Directors shall be not more than twenty-five (25), as determined by a majority vote of the total number of Directors then serving in office, provided, however, that such maximum number of Directors may be reduced (but not thereafter raised) to a maximum number of not less than twenty-one (21) Directors by a majority vote of the total number of Directors then serving in office. Directors shall be divided into three classes designated as Group A, Group B, and Group C. The three classes of Directors shall each consist of an equal number of Directors or a number of Directors as nearly equal as possible. When the total number of Directors is divided by three and one remains, the Director remaining shall be assigned to Group A. When the total number of Directors is divided by three and two remain, they shall be assigned one to Group A and one to Group B. The number of Directors in any one class may not exceed the number of Directors in any other class by more than one, except as may result from the phasing-in of a decrease in Directors under Section 2 of this Article II. The Board of Directors appointed by the incorporators shall serve until the first stockholders' meeting. At the first meeting of stockholders after organization of the corporation, Directors to serve in Group A shall be elected to a term of one year; Directors to serve in Group B shall be elected to a term of two years; and Directors to serve in Group C shall be elected to a full term of three years. Thereafter, at each annual meeting of the stockholders, Directors shall be elected to a full term of three years to succeed those in the Director group whose terms expire at that annual meeting. Section 2. Increases and Decreases in Directors The Board of Directors may increase or decrease the number of Directors, subject to the maximum limits provided in Section 1 of this Article II, by a vote of a majority of the total number of Directors. Any vacancies created by an increase in the number of Directors shall be filled as provided in Section 3 of this Article II and be distributed among the Director groups in accordance with Section 1 of this Article II. Any decrease in the authorized number of Directors shall be phased in by reducing the number of Directors in the first Director group whose terms expire subsequent to the decrease to the number required to be in that group by Section 1 of this Article II at the end of the phasing-in period, and by similarly reducing the number of Directors in the other Director groups upon expiration of their terms, so that when the terms of Directors in all three Director groups have successively expired subsequent to the decrease, each Director group shall have the distribution of Directors required by Section 1 of this Article II of these Bylaws. Section 3. Vacancies If the position of any Director is or becomes vacant, a majority of the Directors remaining in office may appoint a successor to serve the full or remaining term, as the case may be, of the other Directors in the group in which the vacancy occurred or was created. Section 4. Regular Meetings Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall be established by the Board of Directors. A notice of each regular meeting shall not be required. Section 5. Special Meetings Special meetings of the Board of Directors may be called by one-third of the Directors or by the Chairman of the Board and shall be held at such place, on such date, and at such time as the Directors calling the meeting or the Chairman of the Board shall fix. Notice of a special meeting shall be given to each Director in any of the following ways: in person, by telephone or by delivery of a written notice or facsimile communication to the Director's business or residence. Notice given in writing or by facsimile communication to the Director's business or residence must be delivered at least twenty-four (24) hours before such meeting. Notice given by telephone or in person shall be given at least twelve (12) hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting. A written waiver of any notice, signed by a Director, whether before or after the time of the event for which notice is to be given, shall be equivalent to the notice required to be given to such person. Section 6. Quorum At any meeting of the Board of Directors, a majority of the total number of the Directors shall constitute a quorum. Section 7. Committees of the Board of Directors The corporation elects to be governed by the provisions of Section 141(c)(2) of the General Corporation of the State of Delaware, as amended effective July 1, 1996. The Board of Directors may from time to time designate committees of the Board of Directors, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board of Directors and shall elect a Director or Directors to serve as the member or members, designating, if it desires, other Directors as alternate members who may replace any absent or disqualified members at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors as permitted by law. In the absence or disqualification of any member of any committee and any alternate member designated to replace such member, the members of the committee present at the meeting and not disqualified from voting may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Each committee may determine procedural rules for the conduct of its meetings and business, and shall act in accordance therewith, unless otherwise provided by the Board of Directors in the resolution establishing the committee. Article III Officers of the Company Section 1. Generally The officers of the corporation shall consist of a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, a Treasurer, and a Vice President-Chief Financial Officer appointed by the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, and such other officers and agents as the Board of Directors may desire. Officers shall be appointed by the Board of Directors at its first meeting after every annual meeting of stockholders. Each officer or agent appointed by the Board of Directors shall hold office until a successor is elected and qualified or until such person's earlier resignation or removal. Any number of offices may be held by the same person. Section 2. Duties of the Chairman of the Board The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors. Unless otherwise directed by the Board of Directors, the Chairman of the Board, or such other officer or agent as the Chairman of the Board may designate, shall have authority to vote and otherwise act on behalf of the corporation, in person or by proxy, at any meeting of stockholders, or with respect to any action of stockholders of any other corporation in which this corporation may hold securities, and otherwise to exercise any and all rights and powers that this corporation may possess by reason of its ownership of securities in any other corporation. Section 3. Duties of the President The President shall perform the duties as usually pertain to the office and such other duties as may from time to time be assigned. Section 4. Duties of Vice Presidents Each Vice President shall perform the duties as usually pertain to the office to which appointed and such other duties as may from time to time be assigned. Section 5. Duties of Secretary and Assistant Secretaries The Secretary shall make a record of the proceedings of all meetings of the stockholders, Board of Directors and any committee of Directors, in books to be kept for that purpose. The Secretary shall also give and publish all necessary notices of all meetings, have custody of the corporate seal and affix it when authorized, and preserve and keep all general contracts, papers and documents. In general, the Secretary shall perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned. Each Assistant Secretary shall perform such duties of the Secretary as may from time to time be assigned. Section 6. Duties of Treasurer and Assistant Treasurers The Treasurer shall have charge of all monies, funds and securities which may come into the Treasurer's possession, maintain deposits of the corporation's monies and funds in such depositories as the Board of Directors, the Chairman of the Board or the President shall approve, make disbursements of such monies and funds under direction of the Board of Directors, the Chairman of the Board, or the President, keep an account of all receipts and disbursements, and make such reports as may be required. The Treasurer shall also maintain a record of the outstanding shares of stock in the corporation, a stock transfer record and a list of the stockholders of the corporation. In general, the Treasurer shall perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned. Each Assistant Treasurer shall perform such duties of the Treasurer as may from time to time be assigned. Section 7. Duties of the Vice President-Chief Financial Officer The Vice President-Chief Financial Officer shall be the principal officer in charge of the accounts of the corporation and shall perform all duties incident to the office of Vice President-Chief Financial Officer and such other duties as from time to time may be assigned. Section 8. Delegation of Authority The Board of Directors may from time to time assign or delegate the powers, authorities or duties of the Chairman of the Board, the President or any officer or agent to any other officers or agents, notwithstanding any provision hereof. Article IV Indemnification The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action or suit by or in the right of the corporation) by reason of the fact that such person is or was a Director, officer or employee of the corporation, or, while such person is or was a Director, officer or employee of the corporation, such person is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit, or proceeding, but in each case only if and to the extent permitted under applicable state or federal law. The indemnification provided herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled, and shall continue as to a person who has ceased to be a Director, officer, employee, or agent, and shall inure to the benefit of the heirs and personal representatives of such a person. Article V Stock Section 1. Stock Certificates; Uncertificated Shares The shares of the corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the Chairman or Vice-Chairman of the Board of Directors, or the President or Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Section 2. Transfers of Stock Transfers of stock shall be made only on the stock transfer record of the corporation and upon surrender of the certificate previously issued therefor which is outstanding and not canceled, except in the case of uncertificated shares. Section 3. Transfer on Death Directions At the request of a stockholder residing in a state that permits transfer on death directions by law, the Treasurer shall record on the stockholder's certificate, or, in the case of uncertificated shares, upon the account statements evidencing the shares, a direction to transfer the stockholder's interest in the corporation to a person designated by the stockholder on death of the stockholder. The Treasurer shall execute such direction upon proof of death of the stockholder, surrender of the outstanding certificate with the direction written thereon, and under such regulations as may be prescribed by the Treasurer. Article VI Business Combinations Section 1. Vote Required for Certain Business Combinations A. In addition to any vote of stockholders required by law or these Bylaws, and except as otherwise expressly provided in Section 2 of this Article VI, any Business Combination (as hereinafter defined) shall require the affirmative vote of the holders of at least 66_ percent of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of Directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The term "Business Combination" shall mean: i. Any merger or consolidation of the corporation or any subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or ii. Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in either one or in a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the corporation or any subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $10,000,000 or more; or iii. The issuance or transfer by the corporation or any subsidiary (in either one or in a series of transactions) of any securities of the corporation or any subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $10,000,000 or more; or iv. The adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or v. Any reclassification of securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the corporation or any subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. Section 2. Exceptions to Vote Required by Section 1 The provisions of Section 1 of this Article VI shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Bylaws, if: A. The Business Combination is approved by a majority of the Continuing Directors (as hereinafter defined); or B. All of the following conditions are met: i. The aggregate amount of the cash and the Fair Market Value of any consideration other than cash as of the date of the consummation of the Business Combination to be received per share by holders of common stock in such Business Combination or by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest amount determined under sub-clauses (a), (b), and (c) below: a. The highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; and b. The Fair Market Value per share of common stock on the day after the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder, whichever is higher; and c. The price per share equal to the Fair Market Value per share of common stock determined pursuant to paragraph B(i)(b) above, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock it acquired within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of common stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of common stock; and ii. The consideration to be received by holders of a particular class of outstanding Voting Stock shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form of consideration used by the Interested Stockholder to acquire the largest number of shares of such class of Voting Stock previously acquired by it; and iii. After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: a. Except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding preferred stock; and b. There shall have been (1) no reduction in the annual rate of dividends paid on the common stock (except as necessary to reflect any subdivision of the common stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the common stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and c. Such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which resulted in such Interested Stockholder becoming an Interested Stockholder; and iv. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to the stockholders of the corporation at least thirty (30) days prior to the consummation of such Business Combination, whether or not such proxy or information statement is required pursuant thereto. Section 3. Definitions For the purposes of this Article VI: A. A "person" shall mean any individual, firm, corporation or other entity. B. "Interested Stockholder" shall mean any person (other than the corporation or any subsidiary (as hereinafter defined) and other than any profit sharing, thrift, employee stock ownership, retirement or other employee benefit plan of the corporation or any subsidiary of any trustee of or fiduciary with respect to any such plan when acting in such capacity) who or which: i. Is the beneficial owner (as hereinafter defined), directly or indirectly, of more than 10 percent (10%) of any shares of the Voting Stock of the corporation; or ii. Is an Affiliate (as hereinafter defined) of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10 percent (10%) or more of any shares of the Voting Stock of the corporation; or iii. Is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. C. A person shall be deemed a "beneficial owner" of any shares of Voting Stock: i. Which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or ii. Which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or iii. Which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. D. "Affiliate" or "Associate" shall have the same meanings set forth for such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on March 1, 1983. E. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph B of this Section 3, the term "subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the corporation. F. "Continuing Director" means any member of the Board of Directors of the corporation who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder and any successor of a Continuing Director who is unaffiliated with the Interested Stockholder and is recommended or elected to succeed a Continuing Director by a majority of Continuing Directors then on the Board. G. "Fair Market Value" means: (1) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc., Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the majority of the Continuing Directors in good faith; and (2) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors in good faith. H. In the event of any Business Combination in which the corporation survives, the phrase "any consideration other than cash" as used in paragraph B(i) of Section 2 of this Article VI shall include the shares of common stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. Section 4. Certain Determinations The Continuing Directors of the corporation shall have the power and duty to determine for the purposes of this Article VI, on the basis of information known to them after reasonable inquiry: (a) whether a person is an Interested Stockholder; (b) the number of shares of Voting Stock beneficially owned by any person; (c) whether a person is an Affiliate or Associate of another person; and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the corporation or any subsidiary in any Business Combination has, an aggregate Fair Market Value of $10,000,000 or more. Section 5. No Effect on Fiduciary Obligations of Interested Stockholders Nothing contained in this Article VI shall be construed to relieve any Interested Stockholder from any fiduciary obligation otherwise imposed by law. Article VII Miscellaneous Section 1. Facsimile Signatures In addition to the provision for the use of facsimile signatures on stock certificates as provided in Section 1 of Article V, facsimile signatures of any officer or officers of the corporation may be used whenever and as authorized by the Board of Directors. Section 2. Corporate Seal The Board of Directors shall provide a suitable seal for the corporation that contains the name of the corporation and the state of incorporation, which seal shall be kept by the Secretary. Section 3. Fiscal Year The fiscal year of the corporation shall be identical with the calendar year unless otherwise established by the Board of Directors. Section 4. Time Periods In applying any provision of these Bylaws which requires that an act be done or not be done in a specified number of days prior to an event, or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used. The day of the doing of the act shall be excluded and the day of the event shall be included. Article VIII Amendments These Bylaws may be amended or repealed in accordance with the Certificate of Incorporation by the Board of Directors at any meeting or by the stockholders at any meeting. EX-10 3 1996 STOCK AND INCENTIVE PLAN 1996 Stock & Incentive Plan Final Exhibit 10-r [SBC LOGO] SBC Communications Inc. 1996 STOCK AND INCENTIVE PLAN Plan Effective: January 1, 1996 As amended through: June 2, 1998 TABLE OF CONTENTS Article 1 Establishment and Purpose............................................1 1.1 Establishment of the Plan...............................................1 1.2 Purpose of the Plan.....................................................1 1.3 Effective Date of the Plan..............................................1 Article 2 Definitions..........................................................1 Article 3 Administration.......................................................5 3.1 The Committee...........................................................5 3.2 Authority of the Committee..............................................6 Article 4 Shares Subject to the Plan...........................................6 4.1 Number of Shares........................................................6 4.2 Lapsed Awards...........................................................7 4.3 Adjustments in Authorized Plan Shares...................................7 Article 5 Eligibility and Participation........................................7 5.1 Eligibility.............................................................7 5.2 Actual Participation....................................................8 Article 6 Stock Options........................................................8 6.1 Grant of Options........................................................8 6.2 Form of Issuance........................................................8 6.3 Exercise Price..........................................................9 6.4 Duration of Options.....................................................9 6.5 Vesting of Options......................................................9 6.6 Exercise of Options.....................................................9 6.7 Payment.................................................................9 6.8 Termination of Employment..............................................11 6.9 Employee Transfers.....................................................12 6.10 Restrictions on Exercise and Transfer of Options.......................12 6.11 Competition............................................................12 Article 7 Restricted Stock....................................................13 7.1 Grant of Restricted Stock..............................................13 7.2 Restricted Stock Agreement.............................................13 7.3 Transferability........................................................13 7.4 Other Restrictions.....................................................13 7.5 Removal of Restrictions................................................14 7.6 Voting Rights, Dividends and Other Distributions.......................14 7.7 Termination of Employment Due to Death or Disability...................14 7.8 Termination of Employment for Other Reasons............................14 7.9 Employee Transfers.....................................................14 7.10 Other Grants...........................................................15 Article 8 Performance Units and Performance Shares............................15 8.1 Grants of Performance Units and Performance Shares.....................15 8.2 Value of Performance Shares and Units..................................15 8.3 Performance Period.....................................................16 8.4 Performance Goals......................................................16 8.5 Dividend Equivalents on Performance Shares.............................18 8.6 Form and Timing of Payment of Performance Units and Performance Shares.18 8.7 Termination of Employment Due to Death, Disability, or Retirement......19 8.8 Termination of Employment for Other Reasons............................19 8.9 Termination of Employment for Cause....................................19 8.10 Nontransferability.....................................................19 Article 9 Beneficiary Designation.............................................20 Article 10 Deferrals..........................................................20 10.1 Deferrals..............................................................20 10.2 Deferral of Performance Unit and Performance Share Distributions.......20 Article 11 Employee Matters...................................................21 11.1 Employment Not Guaranteed..............................................21 11.2 Participation..........................................................21 11.3 Claims and Appeals.....................................................21 Article 12 Change in Control..................................................22 Article 13 Amendment, Modification, and Termination...........................22 13.1 Amendment, Modification, and Termination...............................22 13.2 Awards Previously Granted..............................................22 Article 14 Withholding........................................................22 14.1 Tax Withholding........................................................22 14.2 Share Withholding......................................................23 Article 15 Successors.........................................................23 Article 16 Legal Construction.................................................23 16.1 Gender and Number......................................................23 16.2 Severability...........................................................23 16.3 Requirements of Law....................................................24 16.4 Securities Law Compliance..............................................24 16.5 Governing Law..........................................................24 SBC Communications Inc. 1996 Stock and Incentive Plan Article 1 Establishment and Purpose. 1.1 Establishment of the Plan. SBC Communications Inc., a Delaware corporation (the "Company" or "SBC"), hereby establishes an incentive compensation plan (the "Plan"), as set forth in this document. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of the Company's shareowners, and by providing Participants with an incentive for outstanding performance. The Plan is further intended to attract and retain the services of Participants upon whose judgment, interest, and special efforts the successful operation of SBC and its subsidiaries is dependent. 1.3 Effective Date of the Plan. The Plan shall become effective on January 1, 1996; however, grants may be made before that time subject to becoming effective on or after that date. During the first year this Plan is effective, Awards shall be issued only to the extent the potential payout of Shares shall not exceed 10% of the Shares approved for issuance under this Plan. Article 2 Definitions. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: (a) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock, Performance Units, or Performance Shares. (b) "Award Agreement" means an agreement which may be entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan. (c) "Board" or "Board of Directors" means the SBC Board of Directors. (d) "Cause" shall mean willful and gross misconduct on the part of an Employee that is materially and demonstrably detrimental to the Company or any Subsidiary as determined by the Committee in its sole discretion. (e) "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities, or (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new Director whose election by the Board of Directors or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareowners of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least eighty percent (80%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" means the committee or committees, as specified in Article 3, appointed by the Board to administer the Plan with respect to grants of Awards. (h) "Director" means any individual who is a member of the SBC Board of Directors. (i) "Disability" shall mean the Participant's inability to perform the Participant's normal Employment functions due to any medically determinable physical or mental disability, which can last or has lasted 12 months or is expected to result in death. (j) "Employee" means any management employee of the Company or of one of the Company's Subsidiaries. "Employment" means the employment of an Employee by the Company or one of its Subsidiaries. Directors who are not otherwise employed by the Company shall not be considered Employees under this Plan. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto. (l) "Exercise Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee. (m) "Fair Market Value" shall mean the closing price of Shares on the relevant date, or (if there were no sales on such date) the next preceding trading date, all as reported in the New York Stock Exchange Composite Trading listings, or in a similar report selected by the Committee. A trading day is any day that the Stock is traded on the New York Stock Exchange. (n) "Incentive Stock Option" or "ISO" means an option to purchase Shares from SBC, granted under this Plan, which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (o) "Insider" shall mean an Employee who is, on the relevant date, an officer, director, or ten percent (10%) beneficial owner of the Company, as those terms are defined under Section 16 of the Exchange Act. (p) "Key Executive Officer Short Term Award" means a Performance Unit expressed in dollars. (q) "Nonqualified Stock Option" or "NQSO" means the option to purchase Shares from SBC, granted under this Plan, which is not intended to be an Incentive Stock Option. (r) "Option" or "Stock Option" shall mean an Incentive Stock Option or a Nonqualified Stock Option, and shall include a Restoration Option. (s) "Participant" means a person who holds an outstanding Award granted under the Plan. (t) "Performance Unit" and "Performance Share" shall each mean an Award granted to an Employee pursuant to Article 8 herein. (u) "Plan" means this 1996 Stock and Incentive Plan. The Plan may also be referred to as the "SBC 1996 Stock and Incentive Plan" or as the "SBC Communications Inc. 1996 Stock and Incentive Plan." (v) "Restricted Stock" means an Award of Stock granted to an Employee pursuant to Article 7 herein. (w) "Restriction Period" means the period during which Shares of Restricted Stock are subject to restrictions or conditions under Article 7. (x) "Retirement" or to "Retire" shall mean the termination of a Participant's employment with the Company or one of its Subsidiaries, for any reason other than death, Disability or for Cause, on or after the earlier of the following dates, or as otherwise provided by the Committee: (1) the date the Participant would be eligible to retire with an immediate pension under the rules of the SBC Supplemental Retirement Income Plan, whether or not actually a participant in such plan; or (2) the date the Participant has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997, except as otherwise indicated below: Net Credited Service Age 10 Years of more 65 or older 20 years or more 55 or older 25 years or more 50 or older 30 years or more Any age With respect to a Participant who is granted an EMP Service Pension under and pursuant to the provisions of the SBC Pension Benefit Plan - Nonbargained Program upon termination of employment, the terms "Retirement" or to "Retire" shall include such Participant's termination of employment. (y) "Rotational Work Assignment Company ("RWAC") shall mean any entity with which SBC Communications Inc. or any of its Subsidiaries may enter into an agreement to provide an employee for a rotational work assignment. (z) "Shares" or "Stock" means the shares of common stock of the Company. (aa) "Subsidiary" shall mean any corporation in which the Company owns directly, or indirectly through subsidiaries, more than fifty percent (50%) of the total combined voting power of all classes of Stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns more than fifty percent (50%) of the combined equity thereof. (bb) "Window Period" means the period beginning on the third business day following the date of public release of the Company's quarterly sales and earnings information, and ending on the twelfth business day following such date. Article 3 Administration. 3.1 The Committee. Administration of the Plan shall be bifurcated as follows: (a) With respect to Insiders, the Plan and all Awards hereunder shall be administered only by the Human Resources Committee of the Board or such other Committee as may be appointed by the Board for this purpose (the "Disinterested Committee"), where each Director on such Disinterested Committee is a "Disinterested Person" (or any successor designation for determining who may administer plans, transactions or awards exempt under Section 16(b) of the Exchange Act), as that term is used in Rule 16b-3 under the Exchange Act, as that rule may be modified from time to time. (b) The Disinterested Committee and such other Committee as the Board may create, if any, specifically to administer the Plan with respect to non-Insiders (the "Non-Insider Committee") shall each have full authority to administer the Plan and all Awards hereunder with respect to all persons who are not Insiders, except as otherwise provided herein or by the Board. Either Committee may be replaced by the Board at any time. 3.2 Authority of the Committee. The Committee shall have full power except as limited by law and subject to the provisions herein, to select the recipients of Awards, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend, or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 13 herein) to amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. No Award other than Restoration Options may be made under the Plan after December 31, 2010. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive, and binding on all persons, including the Company, its stockholders, Employees, Participants, and their estates and beneficiaries. Subject to the terms of this Plan, the Committee is authorized, and shall not be limited in its discretion, to use any of the Performance Criteria specified herein in its determination of Awards under this Plan. Article 4 Shares Subject to the Plan. 4.1 Number of Shares. Subject to adjustment as provided in Section 4.3 herein, the number of Shares available for grant under the Plan shall not exceed 30 million Shares of Stock. No more than 10% of the Shares approved for issuance under this Plan may be Shares of Restricted Stock. No more than 40% of the Shares approved for issuance under this Plan may be issued to Participants as a result of Performance Share or Restricted Stock Awards. The Shares granted under this Plan may be either authorized but unissued or reacquired Shares. The Disinterested Committee shall have full discretion to determine the manner in which Shares available for grant are counted in this Plan. Without limiting the discretion of the Committee under this section, unless otherwise provided by the Committee, the following rules will apply for purposes of the determination of the number of Shares available for grant under the Plan or compliance with the foregoing limits: (a) The grant of a Stock Option or a Restricted Stock Award shall reduce the Shares available for grant under the Plan by the number of Shares subject to such Award. However, to the extent the Participant uses previously owned Shares to pay the Exercise Price or any taxes, or Shares are withheld to pay taxes, these Shares shall be available for regrant under the Plan. (b) With respect to Performance Shares, the number of Performance Shares granted under the Plan shall be deducted from the number of Shares available for grant under the Plan. The number of Performance Shares which cannot be, or are not, converted into Shares and distributed (including deferrals) to the Participant (after any applicable tax withholding) following the end of the Performance Period shall increase the number of Shares available for regrant under the Plan by an equal amount. (c) With respect to Performance Units representing a fixed dollar amount that may only be settled in cash, the Performance Units Award shall not affect the number of Shares available under the Plan. 4.2 Lapsed Awards. If any Award granted under this Plan is canceled, terminates, expires, or lapses for any reason, Shares subject to such Award shall be again available for the grant of an Award under the Plan. 4.3 Adjustments in Authorized Plan Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, Stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, an adjustment shall be made in the number and class of Shares which may be delivered under the Plan (including individual limits), and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and/or the number of outstanding Options, Shares of Restricted Stock, and Performance Shares constituting outstanding Awards, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights. Article 5 Eligibility and Participation. 5.1 Eligibility. All management Employees are eligible to participate in this Plan. 5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No Employee is entitled to receive an Award unless selected by the Committee. Article 6 Stock Options. 6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Employees at any time and from time to time, and under such terms and conditions, as shall be determined by the Committee. The Committee shall have discretion in determining the number of Shares subject to Options granted to each Employee; provided, however, that the maximum number of Shares subject to Options which may be granted to any single Employee during any calendar year shall not exceed 2% of the Shares approved for issuance under this Plan. The Committee may grant ISOs, NQSOs, or a combination thereof; provided, however, that no ISO may be issued after January 1, 2006. The Committee may authorize the automatic grant of additional Options ("Restoration Options") when a Participant exercises already outstanding Options, or options granted under a prior option plan of the Company, on such terms and conditions as it shall determine. Unless otherwise provided by the Committee, the number of Restoration Options granted to a Participant with respect to the exercise of an option (including an Option under this Plan) shall not exceed the number of Shares delivered by the Participant in payment of the Exercise Price of such option, and/or in payment of any tax withholding resulting from such exercise, and any Shares which are withheld to satisfy withholding tax liability arising out of such exercise. A Restoration Option shall have an Exercise Price of not less than 100% of the per Share Fair Market Value on the date of grant of such Restoration Option, and shall be subject to all the terms and conditions of the original grant, including the expiration date, and such other terms and conditions as the Committee in its sole discretion shall determine. 6.2 Form of Issuance. Each Option grant may be issued in the form of an Award Agreement and/or may be recorded on the books and records of the Company for the account of the Participant. If an Option is not issued in the form of an Award Agreement, then the Option shall be deemed granted as determined by the Committee. The terms and conditions of an Option shall be set forth in the Award Agreement, in the notice of the issuance of the grant, or in such other documents as the Committee shall determine. Such terms and conditions shall include the Exercise Price, the duration of the Option, the number of Shares to which an Option pertains (unless otherwise provided by the Committee, each Option may be exercised to purchase one Share), and such other provisions as the Committee shall determine, including, but not limited to whether the Option is intended to be an ISO or a NQSO. 6.3 Exercise Price. Unless a greater Exercise Price is determined by the Committee, the Exercise Price for each Option Awarded under this Plan shall be equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. 6.4 Duration of Options. Each Option shall expire at such time as the Committee shall determine at the time of grant (which duration may be extended by the Committee); provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 6.5 Vesting of Options. Options shall vest at such times and under such terms and conditions as determined by the Committee; provided, however, unless a later vesting period is provided by the Committee at or before the grant of an Option, one-third of the Options will vest on each of the first three anniversaries of the grant; if one Option remains after equally dividing the grant by three, it will vest on the first anniversary of the grant, if two Options remain, then one will vest on each of the first two anniversaries. The Committee shall have the right to accelerate the vesting of any Option; however, the Chairman of the Board or the Senior Vice President-Human Resources, or their respective successors, or such other persons designated by the Committee, shall have the authority to accelerate the vesting of Options for any Participant who is not an Insider. 6.6 Exercise of Options. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. Options shall be exercised by providing notice to the designated agent selected by the Company (if no such agent has been designated, then to the Company), in the manner and form determined by the Company, which notice shall be irrevocable, setting forth the exact number of Shares with respect to which the Option is being exercised and including with such notice payment of the Exercise Price. When Options have been transferred, the Company or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option. No Option may be exercised with respect to a fraction of a Share. 6.7 Payment. The Exercise Price shall be paid in full at the time of exercise. No Shares shall be issued or transferred until full payment has been received therefor. Payment may be made: (a) in cash, or (b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as the Committee or the Company may impose from time to time, and further subject to suspension or termination of this provision by the Committee or Company at any time, by: (i) delivery of Shares of Stock owned by the Participant in partial (if in partial payment, then together with cash) or full payment; provided, however, as a condition to paying any part of the Exercise Price in Stock, at the time of exercise of the Option, the Participant must establish to the satisfaction of the Company that the Stock tendered to the Company must have been held by the Participant for a minimum of six (6) months preceding the tender; or (ii) if the Company has designated a stockbroker to act as the Company's agent to process Option exercises, issuance of an exercise notice together with instructions to such stockbroker irrevocably instructing the stockbroker: (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a limit order) a sufficient portion of the Shares to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to the Company. In the event the stockbroker sells any Shares on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and the Company disclaims any responsibility for the actions of the stockbroker in making any such sales. No Stock shall be issued until the settlement date and until the proceeds (equal to the Option Price and tax withholding) are paid to the Company. If payment is made by the delivery of Shares of Stock, the value of the Shares delivered shall be equal to the Fair Market Value of the Shares on the day preceding the date of exercise of the Option. Restricted Stock may not be used to pay the Option Price. 6.8 Termination of Employment. Unless otherwise provided by the Committee, the following limitations on exercise of Options shall apply upon termination of Employment: (a) Termination by Death or Disability. In the event the Employment of a Participant shall terminate by reason of death or Disability, all outstanding Options granted to that Participant shall immediately vest as of the date of termination of Employment and may be exercised, if at all, no more than three (3) years from the date of the termination of Employment, unless the Options, by their terms, expire earlier. However, in the event the Participant was eligible to Retire at the time of termination of Employment, notwithstanding the foregoing, the Options may be exercised, if at all, no more than five (5) years from the date of the termination of Employment, unless the Options, by their terms, expire earlier. (b) Termination for Cause. If the Employment of a Participant shall be terminated by the Company for Cause, all outstanding Options held by the Participant shall immediately be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options. (c) Retirement or Other Termination of Employment. If the Employment of a Participant shall terminate for any reason other than the reasons set forth in (a) or (b), above, all outstanding Options which are vested as of the effective date of termination of Employment may be exercised, if at all, no more than five (5) years from the date of termination of Employment if the Participant is eligible to Retire, or one (1) year from the date of the termination of Employment if the Participant is not eligible to Retire, as the case may be, unless in either case the Options, by their terms, expire earlier. In the event of the death of the Participant after termination of Employment, this paragraph (c) shall still apply and not paragraph (a), above. (d) Options not Vested at Termination. Except as provided in paragraph (a), above, all Options held by the Participant which are not vested on or before the effective date of termination of Employment shall immediately be forfeited to the Company (and shall once again become available for grant under the Plan). (e) Notwithstanding the foregoing, the Committee may, in its sole discretion, establish different terms and conditions pertaining to the effect of termination of Employment, but no such modification shall shorten the terms of Options issued prior to such modification. 6.9 Employee Transfers. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) or between the Company or a Subsidiary and a RWAC, to the extent the period of employment at a RWAC is equal to or less than five (5) years, shall not be deemed a termination of Employment. Provided, however, for purposes of this Article 6, termination of employment with a RWAC without a concurrent transfer to the Company or any of its Subsidiaries shall be deemed a termination of Employment as that term is used herein. Similarly, termination of an entity's status as a Subsidiary or as a RWAC shall be deemed a termination of Employment of any Participants employed by such Subsidiary or RWAC. 6.10 Restrictions on Exercise and Transfer of Options. Unless otherwise provided by the Committee: (a) During the Participant's lifetime, the Participant's Options shall be exercisable only by the Participant or by the Participant's guardian or legal representative. After the death of the Participant, except as otherwise provided by SBC's Rules for Employee Beneficiary Designations, an Option shall only be exercised by the holder thereof (including, but not limited to, an executor or administrator of a decedent's estate) or his or her guardian or legal representative. (b) No Option shall be transferable except: (i) in the case of the Participant, only upon the Participant's death and in accordance with the SBC Rules for Employee Beneficiary Designations; and (ii) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution. 6.11 Competition. Notwithstanding anything in this Article 6 to the contrary, prior to a Change in Control, in the event the Committee determines, in its sole discretion, that a Participant is engaging in competitive activity with the Company, any Subsidiary, or any business in which any of the foregoing have a substantial interest (the "SBC Businesses"), the Committee may cancel any Option granted to such Participant, whether or not vested, in whole or in part. Such cancellation shall be effective as of the date specified by the Committee. Competitive activity shall mean any business or activity in the same geographical market where a substantially similar business activity is being carried on by an SBC Business, including, but not limited to, representing or providing consulting services to any person or entity that is engaged in competition with an SBC Business or that takes a position adverse to an SBC Business. However, competitive activity shall not include, among other things, owning a nonsubstantial interest as a shareholder in a competing business. The determination of whether a Participant has engaged in competitive activity with the Company shall be determined by the Committee in good faith and in its sole discretion. Article 7 Restricted Stock. 7.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees in such amounts and upon such terms and conditions as the Committee shall determine. In addition to any other terms and conditions imposed by the Committee, vesting of Restricted Stock may be conditioned upon the attainment of Performance Goals based on Performance Criteria in the same manner as provided in Section 8.4, herein, with respect to Performance Shares. No Employee may receive, in any calendar year, in the form of Restricted Stock more than one-third of 1% of the Shares approved for issuance under this Plan. 7.2 Restricted Stock Agreement. The Committee may require, as a condition to an Award, that a recipient of a Restricted Stock Award enter into a Restricted Stock Award Agreement, setting forth the terms and conditions of the Award. In lieu of a Restricted Stock Award Agreement, the Committee may provide the terms and conditions of an Award in a notice to the Participant of the Award, on the Stock certificate representing the Restricted Stock, in the resolution approving the Award, or in such other manner as it deems appropriate. 7.3 Transferability. Except as otherwise provided in this Article 7, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Restriction Period established by the Committee, which shall not be less than a period of three years. 7.4 Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock and/or restrictions under applicable Federal or state securities laws; and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. The Company shall also have the right to retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. 7.5 Removal of Restrictions. Except as otherwise provided in this Article 7, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Restriction Period and completion of all conditions to vesting, if any. However, unless otherwise provided by the Committee, the Committee, in its sole discretion, shall have the right to immediately waive all or part of the restrictions and conditions with regard to all or part of the Shares held by any Participant at any time. 7.6 Voting Rights, Dividends and Other Distributions. During the Restriction Period, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights and shall receive all regular cash dividends paid with respect to such Shares. Except as provided in the following sentence, in the sole discretion of the Committee, other cash dividends and other distributions paid to Participants with respect to Shares of Restricted Stock may be subject to the same restrictions and conditions as the Shares of Restricted Stock with respect to which they were paid. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions and conditions as the Shares of Restricted Stock with respect to which they were paid. 7.7 Termination of Employment Due to Death or Disability. In the event the Employment of a Participant shall terminate by reason of death or Disability, all Restriction Periods and all restrictions imposed on outstanding Shares of Restricted Stock held by the Participant shall immediately lapse and the Restricted Stock shall immediately become fully vested as of the date of termination of Employment. 7.8 Termination of Employment for Other Reasons. If the Employment of a Participant shall terminate for any reason other than those specifically set forth in Section 7.7 herein, all Shares of Restricted Stock held by the Participant which are not vested as of the effective date of termination of Employment immediately shall be forfeited and returned to the Company. 7.9 Employee Transfers. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) or between the Company or a Subsidiary and a RWAC, to the extent the period of employment at a RWAC is equal to or less than five (5) years, shall not be deemed a termination of Employment. Provided, however, for purposes of this Article, termination of employment with a RWAC without a concurrent transfer to the Company or any of its Subsidiaries shall be deemed a termination of Employment as that term is used herein. Similarly, termination of an entity's status as a Subsidiary or as a RWAC shall be deemed a termination of Employment of any Participants employed by such Subsidiary or RWAC. 7.10 Other Grants. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may make grants of cash or other property to eligible Employees in such amounts and upon such terms and conditions as the Committee shall determine. If the grant is in the form of stock or shares in a company other than SBC: (a) the award shall be subject to tax withholding in accordance with Article 14, hereof, in the same manner as Stock, and (b) for purposes of deferrals under Article 10, hereof, the award shall be treated as Shares except that any dividends or dividend equivalents thereon shall be paid out unless otherwise provided by the Committee, which may, among other things, provide that the dividends or dividend equivalents be deferred in the same manner as a cash award. Article 8 Performance Units and Performance Shares. 8.1 Grants of Performance Units and Performance Shares. Subject to the terms of the Plan, Performance Shares and Performance Units may be granted to eligible Employees at any time and from time to time, as determined by the Committee. The Committee shall have complete discretion in determining the number of Performance Units and/or Performance Shares Awarded to each Participant. 8.2 Value of Performance Shares and Units. (a) A Performance Share is equivalent in value to a Share of Stock. In any calendar year, no individual may be Awarded Performance Shares having a potential payout of Shares of Stock exceeding two-thirds of 1% of the Shares approved for issuance under this Plan. (b) A Performance Unit shall be equal in value to a fixed dollar amount determined by the Committee. In any calendar year, no individual may be Awarded Performance Units having a potential payout equivalent exceeding the Fair Market Value of two-thirds of 1% of the Shares approved for issuance under this Plan. The number of Shares equivalent to the potential payout of a Performance Unit shall be determined by dividing the maximum cash payout of the Award by the Fair Market Value per Share on the effective date of the grant. In the event the Committee denominates a Performance Unit Award in dollars instead of Performance Units, the Award may be referred to as a Key Executive Officer Short Term Award. In all other respects, the Key Executive Officer Short Term Award will be treated in the same manner as Performance Units under this Plan. 8.3 Performance Period. The Performance Period for Performance Shares and Performance Units is the period over which the Performance Goals are measured. The Performance Period is set by the Committee for each Award; however, in no event shall an Award have a Performance Period of less than one year. 8.4 Performance Goals. For each Award of Performance Shares or Performance Units, the Committee shall establish performance objectives ("Performance Goals") for the Company, its Subsidiaries, and/or divisions of any of foregoing, based on the Performance Criteria and other factors set forth in (a) through (d), below. Performance Goals shall include payout tables, formulas or other standards to be used in determining the extent to which the Performance Goals are met, and, if met, the number of Performance Shares and/or Performance Units which would be converted into Stock and/or cash (or the rate of such conversion) and distributed to Participants in accordance with Section 8.6. All Performance Shares and Performance Units which may not be converted under the Performance Goals or which are reduced by the Committee under Section 8.6 or which may not be converted for any other reason after the end of the Performance Period shall be canceled at the time they would otherwise be distributable. When the Committee desires an Award to qualify under Section 162(m) of the Code, as amended, the Committee shall establish the Performance Goals for the respective Performance Shares and Performance Units prior to or within 90 days of the beginning of the service relating to such Performance Goal, and not later than after 25% of such period of service has elapsed. For all other Awards, the Performance Goals must be established before the end of the respective Performance Period. (a) The Performance Criteria which the Committee is authorized to use, in its sole discretion, are any of the following criteria or any combination thereof: (1) Financial performance of the Company (on a consolidated basis), of one or more of its Subsidiaries, and/or a division of any of the foregoing. Such financial performance may be based on net income and/or Value Added (after-tax cash operating profit less depreciation and less a capital charge). (2) Service performance of the Company (on a consolidated basis), of one or more of its Subsidiaries, and/or of a division of any of the foregoing. Such service performance may be based upon measured customer perceptions of service quality. (3) The Company's Stock price; return on shareholders' equity; total shareholder return (Stock price appreciation plus dividends, assuming the reinvestment of dividends); and/or earnings per share. (4) With respect to the Company (on a consolidated basis), to one or more of its Subsidiaries, and/or to a division of any of the foregoing: sales; costs; market share of a product or service; return on net assets; return on assets; return on capital; profit margin; and/or operating revenues, expenses or earnings. (b) If the performance of more than one Subsidiary is being measured to determine the attainment of performance goals, then a weighted average of the Subsidiaries' results shall be used, as determined by the Committee, including, but not limited to, basing such weighting upon the revenues, assets or net income for each Subsidiary for any year prior to the Performance Period or by using budgets to weight such Subsidiaries. (c) Except to the extent otherwise provided by the Committee in full or in part, if any of the following events occur during a Performance Period and would directly affect the determination of whether or the extent to which Performance Goals are met, they shall be disregarded in any such computation: changes in accounting principles; extraordinary items; changes in tax laws affecting net income and/or Value Added; natural disasters, including floods, hurricanes, and earthquakes; and intentionally inflicted damage to property which directly or indirectly damages the property of the Company or its Subsidiaries. No such adjustment shall be made to the extent such adjustment would cause the Performance Shares or Performance Units to fail to satisfy the performance based exemption of Section 162(m) of the Code. 8.5 Dividend Equivalents on Performance Shares. Unless reduced or eliminated by the Committee, a cash payment in an amount equal to the dividend payable on one Share will be made to each Participant for each Performance Share which on the record date for the dividend had been awarded to the Participant and not converted, distributed (or deferred) or canceled. 8.6 Form and Timing of Payment of Performance Units and Performance Shares. As soon as practicable after the applicable Performance Period has ended and all other conditions (other than Committee actions) to conversion and distribution of a Performance Share and/or Performance Unit Award have been satisfied (or, if applicable, at such other time determined by the Committee at or before the establishment of the Performance Goals for such Performance Period), the Committee shall determine whether and the extent to which the Performance Goals were met for the applicable Performance Units and Performance Shares. If Performance Goals have been met, then the number of Performance Units and Performance Shares to be converted into Stock and/or cash and distributed to the Participants shall be determined in accordance with the Performance Goals for such Awards, subject to any limits imposed by the Committee. Unless the Participant has elected to defer all or part of his Performance Units or Performance Shares as provided in Article 10, herein, payment of Performance Units and Performance Shares shall be made in a single lump sum, as soon as reasonably administratively possible following the determination of the number of Shares or amount of cash to which the Participant is entitled. Performance Units will be distributed to Participants in the form of cash. Performance Shares will be distributed to Participants in the form of 50% Stock and 50% Cash, or at the Participant's election, 100% Stock or 100% Cash. In the event the Participant is no longer an Employee at the time of the distribution, then the distribution shall be 100% in cash, provided the Participant may elect to take 50% or 100% in Stock. At any time prior to the distribution of the Performance Shares and/or Performance Units (or if distribution has been deferred, then prior to the time the Awards would have been distributed), unless otherwise provided by the Committee, the Committee shall have the authority to reduce or eliminate the number of Performance Units or Performance Shares to be converted and distributed or to mandate the form in which the Award shall be paid (i.e., in cash, in Stock or both, in any proportions determined by the Committee). Unless otherwise provided by the Committee, any election to take a greater amount of cash or Stock with respect to Performance Shares must be made in the calendar year prior to the calendar year in which the Performance Shares are distributed (or if distribution has been deferred, then in the year prior to the year the Performance Shares would have been distributed absent such deferral). In addition, if required in order to exempt the transaction from the provisions of Section 16(b) of the Exchange Act, any election by an Insider to take a greater amount in cash must be made during a Window Period and shall be subject to Committee approval. For the purpose of converting Performance Shares into cash and distributing the same to the holders thereof (or for determining the amount of cash to be deferred), the value of a Performance Share shall be the average of the Fair Market Values of Shares for the period of five (5) trading days ending on the valuation date. The valuation date shall be the first business day of the second month in the year of distribution (or the year it would have been distributed were it not deferred), except that in the case of distributions due to death or Disability, the valuation date shall be the first business day of the month in which the Committee determines the distribution. Performance Shares to be distributed in the form of Stock will be converted at the rate of one (1) Share of Stock per Performance Share. 8.7 Termination of Employment Due to Death, Disability, or Retirement. If the Employment of a Participant shall terminate by reason of death or Disability, the Participant shall receive a lump sum payout of all outstanding Performance Units and Performance Shares calculated as if all unfinished Performance Periods had ended with 100% of the Performance Goals achieved, payable in the year following the date of termination of Employment. In the event of Retirement, the full Performance Units and Performance Shares shall be converted and distributed based on and subject to the achievement of the Performance Goals and in accordance with all other terms of the Award and this Plan. 8.8 Termination of Employment for Other Reasons. If the Employment of a Participant shall terminate for other than a reason set forth in Section 8.7 (and other than for Cause), the number of Performance Units and Performance Shares to be converted and distributed shall be converted and distributed based upon the achievement of the Performance Goals and in accordance with all other terms of the Award and the Plan; however, the Participant may receive no more than a prorated payout of all Performance Units and Performance Shares, based on the portions of the respective Performance Periods that have been completed. 8.9 Termination of Employment for Cause. In the event that a Participant's Employment shall be terminated by the Company for Cause, all Performance Units and Performance Shares shall be forfeited by the Participant to the Company. 8.10 Nontransferability. Performance Units and Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than in accordance with the SBC Rules for Employee Beneficiary Designations. Article 9 Beneficiary Designation. In the event of the death of a Participant, distributions or Awards under this Plan, other than Restricted Stock, shall pass in accordance with the SBC Rules for Employee Beneficiary Designations. Article 10 Deferrals. 10.1 Deferrals. Unless otherwise provided by the Committee, a Participant may defer all or part of the Stock or cash to be received upon conversion and distribution of Performance Units or Performance Shares. In the event of the termination of Employment of a Participant prior to becoming eligible for Retirement, no deferrals under this Article shall be permitted and any previously deferred Performance Shares or Performance Units, and earnings thereon, shall be distributed as soon as administratively possible. 10.2 Deferral of Performance Unit and Performance Share Distributions. Prior to the calendar year in which Performance Units or Performance Shares are to be distributed (or if deferred, prior to the calendar year the Awards would have been distributed), Participants may elect to defer the receipt of a Performance Unit or Performance Share distribution upon such terms as the Committee deems appropriate. Unless otherwise provided by the Committee, Participants may elect to defer receipt of all or part of a Performance Unit or Performance Share for distribution in a lump sum in February of any calendar year following the year in which the Awards would otherwise be distributed, or to be distributed in up to 15 annual installments (each installment shall be equal to the total Shares or cash in the Award divided by the number of remaining installments), payable each calendar year in the month determined by the Participant, beginning as soon as administratively possible after Retirement or in a later month in the calendar year of Retirement, or in the calendar year immediately thereafter. (a) Deferred amounts which would otherwise have been distributed in cash shall be credited to the Participant's account and shall bear interest from the date the Awards would otherwise have been paid. The interest will be credited quarterly to the account at the declared rate determined by the Company from time to time, which shall not be less than one-fourth of the annual Moody's Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody's Investor Service, Inc., (or successor thereto) for the month of September before the calendar year in question. (b) Deferred amounts which would otherwise have been distributed in Shares by the Company shall be credited to the Participant's account as deferred Shares. The Participant's account shall also be credited on each dividend payment date for Shares with an amount equivalent to the dividend payable on the number of Shares equal to the number of deferred Shares in the Participant's account on the record date for such dividend. Such amount shall then be converted to a number of additional deferred Shares determined by dividing such amount by the price of Shares, as determined in the following sentence. The price of Shares related to any dividend payment date shall be the average of the Fair Market Values of Shares for the period of five (5) trading days ending on such dividend payment date, or the period of five (5) trading days immediately preceding such dividend payment date if the New York Stock Exchange is closed on the dividend payment date. (c) At any time during the calendar year prior to the calendar year during which an Award deferred under the provisions of this Article 10 is scheduled for distribution, a Participant may further defer the commencement of the distribution of such Award to a subsequent calendar year and upon such further deferral, change the number of installments applicable to the distribution of the Award. Amounts that are further deferred pursuant to this Article 10 shall continue to be subject to all provisions of this Plan including further distribution modifications as provided herein. Article 11. Employee Matters. 11.1 Employment Not Guaranteed. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's Employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or one of its Subsidiaries. 11.2 Participation. No Employee shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. 11.3 Claims and Appeals. Any claim under the Plan by a Participant or anyone claiming through a Participant shall be presented to the Committee. Any person whose claim under the Plan has been denied may, within sixty (60) days after receipt of notice of denial, submit to the Committee, a written request for review of the decision denying the claim. The Committee shall determine conclusively for all parties all questions arising in the administration of the Plan. Article 12 Change in Control. Upon the occurrence of a Change in Control: (a) Any and all Options granted hereunder immediately shall become vested and exercisable; (b) Any Restriction Periods and all restrictions imposed on Restricted Shares shall lapse and they shall immediately become fully vested; (c) The 100% Performance Goal for all Performance Units and Performance Shares relating to incomplete Performance Periods shall be deemed to have been fully achieved and shall be converted and distributed in accordance with all other terms of the Award and this Plan; provided, however, notwithstanding anything to the contrary in this Plan, no outstanding Performance Unit or Performance Share may be reduced. Article 13. Amendment, Modification, and Termination. 13.1 Amendment, Modification, and Termination. The Board may at any time suspend or terminate the Plan in whole or in part; the Disinterested Committee may at any time and from time to time, alter or amend the Plan in whole or in part. 13.2 Awards Previously Granted. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. Article 14 Withholding. 14.1 Tax Withholding. The Company shall deduct or withhold an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's employment tax obligations) required by law to be withheld with respect to any taxable event arising or as a result of this Plan ("Withholding Taxes"). 14.2 Share Withholding. With respect to withholding required upon the exercise of Options, upon the lapse of restrictions on Restricted Stock, upon the distribution of Performance Shares in the form of Stock, or upon any other taxable event hereunder involving the transfer of Stock to a Participant, the Company shall withhold Stock having a Fair Market Value on the date the tax is to be determined in an amount equal to the Withholding Taxes on such Stock. Any fractional Share of Stock payable to a Participant shall be withheld as additional Federal withholding, or, at the option of the Company, paid in cash to the Participant. Unless otherwise determined by the Committee, when the method of payment for the Exercise Price is from the sale by a stockbroker pursuant to Section 6.7(b)(ii), herein, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds. For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the Fair Market Value of the Stock. Prior to the end of any Performance Period a Participant may elect to have a greater amount of Stock withheld from the distribution of Performance Shares to pay withholding taxes; provided, however, the Committee may prohibit or limit any individual election or all such elections at any time. In addition, if required in order to exempt the transaction from the provisions of Section 16(b) of the Exchange Act, any such election by an Insider must be made during a Window Period and shall be subject to Committee approval. Article 15 Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. Article 16 Legal Construction. 16.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 16.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 16.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.4 Securities Law Compliance. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions or Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the plan or action by the Committee fails to comply with a condition of Rule 16b-3 or its successors, it shall not apply to the Insiders or transactions thereby. 16.5 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Texas. EX-12 4 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, -------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------- Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Accounting Changes* $ 6,318 $ 2,558 $ 5,283 $ 4,670 $ 4,403 Add: Interest Expense 993 1,043 901 1,043 1,010 Dividends on Preferred Securities 80 80 60 - - 1/3 Rental Expense 147 129 115 85 93 ------------ ----------- ----------- ----------- ----------- Adjusted Earnings $ 7,538 $ 3,810 $ 6,359 $ 5,798 $ 5,506 ============ =========== =========== =========== =========== Total Interest Charges $ 1,052 $ 1,168 $ 1,043 $ 1,048 $ 1,010 Dividends on Preferred Securities 80 80 60 - - 1/3 Rental Expense 147 129 115 85 93 ------------ ----------- ----------- ----------- ----------- Adjusted Fixed Charges $ 1,279 $ 1,377 $ 1,218 $ 1,133 $ 1,103 ============ =========== =========== =========== =========== Ratio of Earnings to Fixed Charges 5.89 2.77 5.22 5.12 4.99 * Undistributed earnings on investments accounted for under the equity method have been excluded.
EX-13 5 PORTIONS OF SBC'S 1998 ANNUAL REPORT Selected Financial and Operating Data Dollars in millions except per share amounts - -------------------------------------------------------------------------------- At December 31 or for the year ended: 1998 1 1997 2 1996 1995 1994 - -------------------------------------------------------------------------------- Financial Data - -------------------------------------------------------------------------------- Operating revenues $ 28,777$ 26,681 $ 25,202 $ 23,356 $ 22,555 - -------------------------------------------------------------------------------- Operating expenses $ 21,891$ 23,103 $ 18,976 $ 17,878 $ 17,216 - -------------------------------------------------------------------------------- Operating income $ 6,886 $ 3,578 $ 6,226 $ 5,478 $ 5,339 - -------------------------------------------------------------------------------- Interest expense $ 993 $ 1,043 $ 901 $ 1,043 $ 1,010 - -------------------------------------------------------------------------------- Equity in net income of affiliates $ 236 $ 201 $ 207 $ 120 $ 226 - -------------------------------------------------------------------------------- Income taxes $ 2,306 $ 984 $ 2,070 $ 1,632 $ 1,575 - -------------------------------------------------------------------------------- Income from continuing operations before extraordinary loss and cumulative effect of accounting changes 3 $ 4,068 $ 1,674 $ 3,387 $ 3,132 $ 2,962 - -------------------------------------------------------------------------------- Net income (loss) $ 4,023 $ 1,674 $ 3,477 $ (3,577)$ 2,985 ================================================================================ Earnings per common share: Income from continuing operations before extraordinary loss and cumulative effect of accounting changes 3 $ 2.08 $ 0.86 $ 1.73 $ 1.60 $ 1.53 - -------------------------------------------------------------------------------- Net income (loss) $ 2.06 $ 0.86 $ 1.78 $ (1.83)$ 1.54 ================================================================================ Earnings per common share-Assuming Dilution: Income from continuing operations before extraordinary loss and cumulative effect of accounting changes 3 $ 2.05 $ 0.85 $ 1.72 $ 1.60 $ 1.53 - -------------------------------------------------------------------------------- Net income (loss) $ 2.03 $ 0.85 $ 1.77 $ (1.82)$ 1.54 ================================================================================ Total assets $45,066 $ 44,836 $ 42,057 $ 40,361 $ 49,525 - -------------------------------------------------------------------------------- Long-term debt $11,612 $ 13,176 $ 12,100 $ 11,592 $ 11,698 - -------------------------------------------------------------------------------- Construction and capital expenditures $ 5,927 $ 6,230 $ 5,855 $ 4,729 $ 4,262 - -------------------------------------------------------------------------------- Free cash flow 4 $ 2,454 $ 1,366 $ 2,046 $ 2,572 $ 3,058 - -------------------------------------------------------------------------------- Dividends declared per common share 5 $ 0.935 $ 0.895 $ 0.86 $ 0.825 $ 0.79 - -------------------------------------------------------------------------------- Book value per common share $ 6.52 $ 5.38 $ 5.22 $ 4.50 $ 7.36 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges 5.89 2.77 5.22 5.12 4.99 - -------------------------------------------------------------------------------- Debt ratio 48.86% 57.07% 56.83% 63.04% 48.71% - -------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding (000,000) 1,957 1,945 1,956 1,955 1,936 - -------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding With Dilution (000,000) 1,984 1,962 1,967 1,963 1,940 - -------------------------------------------------------------------------------- End of Period Common Shares Outstanding (000,000) 1,959 1,954 1,942 1,960 1,952 - -------------------------------------------------------------------------------- Operating Data - -------------------------------------------------------------------------------- Network access lines in service (000) 37,252 35,727 34,003 32,385 31,173 - -------------------------------------------------------------------------------- Access minutes of use (000,000) 148,560 139,470 128,716 112,874 100,800 - -------------------------------------------------------------------------------- Wireless customers (000) 6,851 5,951 4,827 3,995 3,158 - -------------------------------------------------------------------------------- Number of employees 129,850 128,100 119,270 117,260 120,140 - -------------------------------------------------------------------------------- 1 As detailed in management's discussion and analysis of Results of Operations, 1998 results include charges for strategic initiatives related to the merger with Southern New England Telecommunications Corporation (SNET) and gains on sales of certain non-core businesses. Excluding these items, SBC reported an adjusted income from continuing operations before extraordinary loss and cumulative effect of accounting change of $4,117 and an adjusted net income of $4,072 for 1998. 2 As detailed in management's discussion and analysis of Results of Operations, 1997 results include charges for several items including strategic initiatives and ongoing merger integration costs, gain on the sale of SBC's interests in Bell Communications Research, Inc. and a first quarter after-tax settlement gain. Excluding these items, SBC reported an adjusted net income of $3,450 for 1997. 3 1998, Early retirement of debt and Change in directory accounting; 1996, Change in directory accounting; 1995, Discontinuance of Regulatory Accounting; and 1994, Income from spun-off operations. 4 Free cash flow is net cash provided by operating activities less construction and capital expenditures. 5 Dividends declared by SBC's Board of Directors; these amounts do not include dividends declared and paid by Pacific Telesis Group and SNET prior to their respective mergers. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts SBC Communications Inc. (SBC) is a holding company whose subsidiaries and affiliates operate predominantly in the communications services industry. SBC's subsidiaries and affiliates provide landline and wireless telecommunications services as well as equipment and directory advertising both domestically and worldwide. The consolidated financial results reflect SBC's mergers with Southern New England Telecommunications Corporation (SNET) in 1998 and Pacific Telesis Group (PAC) in 1997 as pooling of interests (see Note 2 of Notes to Consolidated Financial Statements). SBC's principal wireline subsidiaries are Southwestern Bell Telephone Company (SWBell), providing telecommunications services in Texas, Missouri, Oklahoma, Kansas and Arkansas (five-state area), Pacific Bell (PacBell, which also includes Pacific Bell Information Services), The Southern New England Telephone Company (SNETel) and Nevada Bell (collectively referred to as the Telephone Companies). SBC's principal wireless subsidiaries are Southwestern Bell Mobile Systems, Inc. (Mobile Systems), Pacific Bell Mobile Services (PBMS) and SNET Cellular, Inc. SBC's principal directory subsidiaries are Southwestern Bell Yellow Pages, Inc. (SWBYP), Pacific Bell Directory (PB Directory) and SNET Information Services, Inc. The Telephone Companies are subject to regulation by each of the states in which they operate and by the Federal Communications Commission (FCC). This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes. Results of Operations Summary Financial results, including percentage changes from the prior year, are summarized as follows: - ------------------------------------------------------------------------------- Percent Change ----------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 - ------------------------------------------------------------------------------- Operating revenues $ 28,777 $ 26,681 $ 25,202 7.9% 5.9% Operating expenses $ 21,891 $ 23,103 $ 18,976 (5.2)% 21.7% Income before extraordinary loss and cumulative effect of accounting change $ 4,068 $ 1,674 $ 3,387 - - Extraordinary loss $ (60) - - - - Cumulative effect of accounting change $ 15 - $ 90 - - Net income $ 4,023 $ 1,674 $ 3,477 - - =============================================================================== In 1998 and 1996, SBC reflected a cumulative effect of accounting change related to accounting for directory revenues and expenses (see Note 1 of Notes to Consolidated Financial Statements). In 1998, SBC incurred an extraordinary loss related to the early retirement of debt at PacBell (see Note 10 of Notes to Consolidated Financial Statements). Results for 1998 and 1997 also include several items that SBC normalizes for management purposes. For 1998, normalizing items included $219 of gains on sales of certain non-core businesses, principally the required disposition of SBC's interest in Mobile Telephone Networks (MTN), a South African national cellular company, due to SBC's investment in Telkom SA Limited (Telkom), and $268 of charges related to strategic initiatives resulting from the merger integration process with SNET. For 1997, normalizing items included $1,899 of costs related to strategic initiatives resulting from the merger integration process with PAC, the impact of several second quarter 1997 regulatory rulings and charges for ongoing merger integration costs (see Note 2 of Notes to Consolidated Financial Statements for further discussion of merger integration costs), as well as $33 of gain on the sale of the Telephone Companies' interests in Bell Communications Research, Inc. (Bellcore) and $90 of first quarter 1997 settlement gain at PAC associated with lump-sum pension payments that exceeded the projected service and interest costs for 1996 retirements. Collectively these items decreased income before extraordinary loss and cumulative effect of accounting change by $49 and $1,776 in 1998 and 1997. Excluding these items, 1998 income before extraordinary loss and cumulative effect of accounting change would have been $4,117, or 19.3% higher than 1997 earnings of $3,450. The corresponding diluted per share amounts would be $2.08 in 1998, or 18.2% higher than $1.76 in 1997. Excluding these items, the 1998 increase in income before extraordinary loss and cumulative effect of accounting change was due primarily to broad-based growth in demand for SBC's Wireline, Wireless and Directory operations. Results for 1998 also reflect reduced dilution from Personal Communications Services (PCS) operations in California and Nevada. Demand growth was also the primary factor contributing to the 1997 increases, partially offset by a high level of expenses for the introduction of PCS in California and Nevada. Segment Results SBC has four reportable segments: Wireline, Wireless, Directory and Other. The Wireline segment provides landline telecommunications services, including local, network access and long distance services, messaging and Internet services and sells customer premise and private business exchange equipment. The Wireless segment provides wireless telecommunications services, including local and long distance services, and sells wireless equipment. The Directory segment sells advertising for and publication of yellow pages and white pages directories and electronic publishing. The Other segment includes SBC's international investments and other domestic operating subsidiaries. (See Note 9 of Notes to Consolidated Financial Statements.) SBC evaluates performance of these segments based on income before income taxes, adjusted for normalizing items. Normalizing items for 1998 and 1997 are described above. There were no normalizing items for 1996. Collectively, these normalizing items had the effect of reducing operating revenues in 1998 and 1997 by $8 and $188 and increasing operating expenses in 1998 and 1997 by $422 and $2,550, as well as affecting non-operating income and expenses. If all of the normalizing items were included in their respective segments, the effect would be to increase (reduce) each segment's income before income tax in 1998 and 1997 as follows: Wireline $(306) and $(2,007); Wireless $(49) and $(100); Directory $12 and $(75); and Other $268 and $0. The following sections will discuss SBC's operations excluding these normalizing items. Operating Revenues Following are SBC's normalized operating revenues, including segment totals and percentage changes from the prior year (reductions of $8 in 1998 and $188 in 1997 are excluded): - -------------------------------------------------------------------------------- Percent Change ----------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Wireline $ 22,210 $ 20,926 $ 19,919 6.1% 5.1% Wireless 4,185 3,697 3,137 13.2 17.9 Directory 2,393 2,286 2,145 4.7 6.6 Other 85 57 43 49.1 32.6 Corporate, adjustments & eliminations (88) (97) (42) (9.3) - ============================================================== Total Normalized Operating Revenues $ 28,785 $ 26,869 $ 25,202 7.1% 6.6% ================================================================================ Wireline Wireline operating revenues increased $1,284, or 6.1%, in 1998 and $1,007, or 5.1%, in 1997. Components of Wireline operating revenues, including percentage changes from the prior year, are as follows: - -------------------------------------------------------------------------------- Percent Change ----------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Local service $ 11,154 $ 10,434 $ 9,513 6.9% 9.7% Network access: Interstate 4,612 4,494 4,354 2.6 3.2 Intrastate 1,917 1,884 1,851 1.8 1.8 Long distance service 2,353 2,351 2,523 0.1 (6.8) Other 2,174 1,763 1,678 23.3 5.1 ============================================================= Total Wireline $ 22,210 $ 20,926 $ 19,919 6.1% 5.1% ================================================================================ Local Service revenues increased $720, or 6.9%, in 1998 and $921, or 9.7%, in 1997 due primarily to increases in demand which totaled $656 and $799 in 1998 and 1997, including increases in access lines and vertical services revenues. The number of access lines increased by 4.3% and 5.1% in 1998 and 1997. Approximately 40% and 31% of access line growth in 1998 and 1997 was due to sales of additional access lines to existing residential customers. In both years, approximately 46% of the access line growth was in California and 32% was in Texas. Access lines in Texas and California account for approximately 75% of the Telephone Companies' access lines. Vertical services revenues, which include custom calling options, Caller ID, voice mail and other enhanced services, increased by approximately 20% in both years and totaled approximately $1,892 and $1,582 in 1998 and 1997. Additionally, local service revenues increased as a result of several regulatory actions that also had the effect of decreasing one or more other types of operating revenues. In 1998 and 1997, federal payphone regulation, introduction of extended area service plans and the introduction of the California High Cost Fund (CHCFB) collectively increased local service revenues by approximately $157 and $211, and decreased long distance revenue by approximately $53 and $117, interstate network access revenue by $20 and $53, intrastate network access revenue by approximately $24 and $26 and other operating revenue by approximately $7 and $0. The net effect on Wireline operating revenue was an increase of $53 and $15 in 1998 and 1997. The California Public Utilities Commission (CPUC) has stated that the CHCFB is intended to directly subsidize the provision of service to high-cost areas and allow PacBell to set competitive rates for other services. These increases in local service revenues were partially offset by decreases of approximately $43 and $18 resulting from cellular interconnection rate reductions in 1998 and 1997. Rate reductions under CPUC price cap orders also reduced 1997 local service revenues by approximately $56. Network Access Interstate network access revenues increased $118, or 2.6%, in 1998 and $140, or 3.2%, in 1997 due largely to increases in demand for access services by interexchange carriers, and growth in revenues from end-user charges attributable to an increasing access line base, which collectively resulted in an increase of approximately $420 and $361 in 1998 and 1997. Partially offsetting these increases were the effects of rate reductions of approximately $189 in 1998 and $120 in 1997 related to the FCC's productivity factor adjustment, access reform and other changes and regulatory shifts related to payphone deregulation of approximately $20 and $53 as noted in local service above. Additional decreases in 1998 totaling approximately $76 resulted from an increase in universal service fund net payments implemented in the first quarter of 1998 that exceeded the 1997 net payments of long-term support, which were designed to subsidize universal service. The net federal universal fund payments and receipts will be exogenous factors in future federal price cap filings. Interstate network access revenues in 1997 also had a net decrease of approximately $42 due to the reversal of 1996 revenue sharing and proposed 1996 tariff decrease estimates at the Telephone Companies. Intrastate network access revenues increased $33 in both 1998 and 1997, due largely to increases in demand totaling approximately $79 and $121 in 1998 and 1997, including usage by alternative intraLATA toll carriers. These increases in 1998 and 1997 were partially offset by state regulatory rate reductions at PacBell and SWBell totaling approximately $23 and $50 and the effects of the CHCFB described above in local service totaling approximately $24 and $26. Long Distance Service revenues were relatively unchanged in 1998 and decreased approximately $172, or 6.8%, in 1997. Long distance service revenues decreased due to the effect of the regulatory shifts discussed in local service above of approximately $53 and $117 in 1998 and 1997 related to the CHCFB, introduction of extended area service plans and payphone deregulation, price competition from alternative intraLATA toll carriers of approximately $43 and $100 in 1998 and 1997 at SWBell and SNETel and regulatory rate reductions of approximately $34 in 1997. These decreases were offset in 1998 and partially offset in 1997 by revenues from increased toll messages and demand at PacBell totaling approximately $48 and $45 in 1998 and 1997 and increased customer migration to SNET All Distance (trademark), an interstate and intrastate toll service, of approximately $20 and $42 in 1998 and 1997. In addition, revenues in 1998 increased by approximately $22 due to the net effect of regulatory rate orders and local exchange carrier billing settlements. Other operating revenues increased $411, or 23.3%, in 1998 and $85, or 5.1%, in 1997 due primarily to increased sales from nonregulated products and services at the Telephone Companies totaling approximately $201 and $72 in 1998 and 1997, increased equipment sales at the Telephone Companies of approximately $92 and $6 in 1998 and 1997 and revenues from new business initiatives, primarily Internet services, totaling approximately $71 and $39 in 1998 and 1997. In addition, net payments for state universal funds of approximately $15 in 1998 contributed to the increase. These increases were partially offset in 1998 by approximately $7 related to the CHCFB, discussed in local service above. Wireless Wireless operating revenues increased $488, or 13.2%, in 1998 and $560, or 17.9%, in 1997. Components of Wireless operating revenues, including percentage changes from the prior year, are as follows: - -------------------------------------------------------------------------------- Percent Change ----------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Subscriber $ 3,783 $ 3,372 $ 2,907 12.2% 16.0% Other 402 325 230 23.7 41.3 ============================================================== Total Wireless $ 4,185 $ 3,697 $ 3,137 13.2% 17.9% ================================================================================ Subscriber revenues consist of wireless local service and long distance. Wireless subscriber revenues increased $411, or 12.2%, in 1998 and $465, or 16%, in 1997 due primarily to growth in the number of customers of 15.1% and 23.3%, partially offset by declines in average revenue per customer. Increases in 1997 wireless subscriber revenues of approximately $103 also resulted from the introduction of PCS operations in California, Nevada and Oklahoma. At December 31, 1998, SBC had 5,924,000 traditional cellular customers, 81,000 resale customers and 846,000 PCS customers. At December 31, 1997, SBC had 5,526,000 traditional cellular customers, 60,000 resale customers and 365,000 PCS customers. Other wireless revenues increased $77, or 23.7%, in 1998 and $95, or 41.3%, in 1997 due primarily to increases in equipment revenue attributable to growth in the number of customers and conversion to digital equipment. Directory Directory operating revenues increased $107, or 4.7%, in 1998 and $141, or 6.6%, in 1997. Directory operating revenues, including percentage changes from the prior year, are as follows: - -------------------------------------------------------------------------------- Percent Change ----------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 ================================================================================ Total Directory $ 2,393 $ 2,286 $ 2,145 4.7% 6.6% ================================================================================ Directory operating revenues increased in 1998 due mainly to increased demand, including benefits from merger initiatives. Also contributing to the increase was approximately $17 from directory rescheduling from the first quarter of 1999 into the fourth quarter of 1998. Directory advertising revenues increased in 1997 due mainly to increased demand and the publication of directories in 1997 that were not published in 1996 due to rescheduling. Operating Expenses Following are SBC's normalized operating expenses, including percentage changes from the prior year(additions of $422 in 1998 and $2,550 in 1997 are excluded): - -------------------------------------------------------------------------------- Percent Change ---------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Operations and support: Wireline $ 12,711 $ 12,291 $ 11,464 3.4% 7.2% Wireless 2,786 2,610 1,994 6.7 30.9 Directory 1,227 1,230 1,159 (0.2) 6.1 Other 152 93 46 63.4 - Corporate, adjustments & eliminations (363) (368) (153) (1.4) - - ---------------------------------------------------------------- Total operations and support 16,513 15,856 14,510 4.1 9.3 Depreciation and amortization * 4,956 4,697 4,466 5.5 5.2 - ---------------------------------------------------------------- Total Normalized Operating Expenses $ 21,469 $ 20,553 $ 18,976 4.5% 8.3% ================================================================================ * See Note 9 of Notes to Consolidated Financial Statements for breakdown by segment. Wireline Operations and support expenses increased $420, or 3.4%, in 1998 and $827, or 7.2%, in 1997. Increases for 1998 include costs of approximately $262 related to progress in the merger implementation process including centralizing support functions and other merger initiatives at SWBell and PacBell. Offsetting these increased costs were reductions in 1998 primarily related to realization of merger initiative benefits that totaled approximately $317. These reductions included lower use of contract labor, primarily at PacBell, lower costs associated with customer number portability and reduced research and development costs. Operations and support expense also increased in 1998 due to costs associated with reciprocal compensation for the termination of Internet traffic of approximately $136 at the Telephone Companies (see "Federal Regulation" for further discussion about reciprocal compensation). Increased expenses in 1998 of approximately $55 related to new business initiatives, primarily voice mail, Internet, long distance and cable. Additional costs in 1998 totaling approximately $172 related to increased wages and salaries, benefits, materials and right to use fees. Comparisons to 1997 are also impacted by the absence of the recognition of 1997 pension settlement gains relating to 1997 retirees after the merger with PAC totaling approximately $136. Increases in 1997 include costs for wages, salaries, benefits, sales commissions and contract labor totaling approximately $327. Increases in 1997 also include costs associated with customer number portability after the merger with PAC, interconnection, other regulatory mandated network enhancements and materials of approximately $414. Increased expenses in 1997 of approximately $156 related to new business initiatives, primarily voice mail, Internet, long distance and cable. These increases were partially offset by a reduction related to the recognition of pension settlement gains discussed above. Wireless Wireless expenses increased $176, or 6.7%, in 1998 and $616, or 30.9%, in 1997 due primarily to growth in the number of customers and increased equipment sales. The large increase in 1997 expenses includes approximately $362 of expenses from the introduction of PCS operations. These increases were partially offset by decreased customer acquisition costs of 11% and 4% in 1998 and 1997. Directory Directory expenses remained relatively unchanged in 1998 as lower costs resulting from the merger integration process, including decreased employee-related costs, were offset by expenses from increased demand and directory rescheduling discussed in directory operating revenue above. Directory expenses increased in 1997 due mainly to increased demand and the publication of directories in 1997 that were not published in 1996 due to rescheduling. Depreciation and Amortization expense is primarily in the Wireline and Wireless segments. In total, depreciation and amortization increased $259, or 5.5%, in 1998 due primarily to increased depreciation expense of $201 in the Wireline segment and $41 in the Wireless segment resulting from overall higher plant levels. The increase in 1998 was partially offset by reduced depreciation at PacBell related to analog switching equipment of $42. Total depreciation and amortization increased $231, or 5.2%, in 1997. The increase was due to increased depreciation expense of $193 in the Wireline segment and $141 in the Wireless segment resulting from overall higher plant levels. The wireless increase was due primarily to the launch of PCS operations. Reduced depreciation of $107 at PacBell related to analog switching equipment partially offset the increase. Interest Expense on a consolidated basis for 1998 decreased by $50, or 4.8%, in 1998 and increased by $142, or 15.8%, in 1997. Interest expense for 1998 includes $3 of one-time charges for SNET merger-approval costs and 1997 includes $27 associated with one-time charges, primarily interest on the PAC merger-approval costs. Excluding these charges, interest expense for 1998 decreased $26, or 2.6%, and increased $115, or 12.8%, for 1997. The 1998 decrease was due primarily to reductions in interest expense resulting from lower average debt levels and lower weighted average interest rates, partially offset by lower capitalization of interest during construction. The 1997 increase was due primarily to increased average debt levels. Equity in Net Income of Affiliates increased $35 in 1998 and decreased $6 in 1997. The 1998 increase reflects increased equity in net income of $78 from SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications company, SBC's May 1997 investment in Telkom and SBC's wireless operations. Also contributing to the increase were lower losses resulting from reduced involvement in Tele-TV. These increases were partially offset by a reduction of $53 in contribution from investments in Switzerland, France and Israel, primarily resulting from expenditures on long distance and wireless in Switzerland and long distance in France and Israel. The 1997 decrease reflects decreased equity in net income of $49 from Telmex. This lower income resulted from the change in the functional currency used by SBC to record its interest in Telmex from the peso to the U.S. dollar beginning in 1997 and SBC's reduced ownership percentage after the sale of Telmex L shares. Results also reflect preoperating expenses of $32 in several international investments, including long distance in France, Switzerland and Israel and cellular communications in Taiwan, and decreased contribution of $13 from SBC's wireless operations. These decreases were mainly offset by equity in net income of $58 from Telkom and $27 in lower losses from Tele-TV. SBC's earnings from foreign affiliates will continue to be generally sensitive to exchange rate changes in the value of the respective local currencies. SBC's foreign investments are recorded under U.S. generally accepted accounting principles, which include adjustments for the purchase method of accounting and exclude certain adjustments required for local reporting in specific countries, such as inflation adjustments. Other Income (Expense) - Net for 1998 and 1997 includes amounts that SBC management normalized for reviewing results. Normalizing amounts for 1998 include $358 in gains on the sale of non-core businesses, primarily the required disposition of SBC's interest in MTN and the sale of SBC Media Ventures, Inc., pending from the prior year. Amounts for 1997 reflect gains of $54 from the sale of SBC's interests in Bellcore and $32 in second quarter charges related to SBC's strategic initiatives, primarily writeoffs of nonoperating plant. Absent these items, other income (expense) for 1998, 1997 and 1996 was $(113), $(100) and $(75). During 1998, several offsetting transactions impacted other income and expense contributing to the normalized increase of net other expense of $13. SBC recognized other expense of $237 related to an impairment of an international investment and investments in certain wireless technologies, primarily wireless video. Also increasing other expense were higher minority interest, lower interest income and call premiums and unamortized discounts on early retirement of debt at SWBell that totaled $67 more than the previous year. Offsetting these decreases were other income related to a special dividend of $158 received from a software affiliate and gains of $127 recognized on the sales and the charitable contribution of SBC's available-for-sale investment in Telewest Communications plc (see Note 7 of Notes to Consolidated Financial Statements for further discussion of the gains). Movement in the market value of Telmex L shares requires a market valuation adjustment on certain SBC debt redeemable either in cash or Telmex L shares. Additionally, Telmex under their repurchase program from time to time repurchases enough shares in the market that SBC is required to sell part of its Telmex L share holdings to Telmex to remain under 10% ownership of Telmex. The net of these activities contributed $90 more to other income than in 1997. Also affecting comparisons with 1997 was approximately $64 in royalties and gains recognized in 1997. During 1997, there were also several offsetting transactions contributing to the normalized increase in net other expense of $25. Higher minority interest, including distributions paid on an additional $500 of Trust Originated Preferred Securities (TOPrS) sold by PAC in June 1996, and lower interest income resulted in $43 more net expense than in 1996. The net activity related to market movement on Telmex L shares increased other expense by $47 more than in 1996. Partially offsetting these net other expenses were royalty payments associated with software developed by an affiliate and other investment gains totaling $64. Income Taxes for 1998 include taxes related to the sale of certain non-core businesses discussed in other income (expense) - net and tax benefits associated with merger integration initiatives relating to SNET. Income taxes for 1997 reflect the tax effect of charges for strategic initiatives resulting from SBC's comprehensive review of operations and the impact of several regulatory rulings. Income taxes for 1997 also included taxes on the first quarter pension settlement gain discussed in operations and support. The net effective tax rate on these items was lower as a result of non-deductible items included in the charge and valuation adjustments to certain deferred tax assets which may not be utilized due to restrictions associated with the merger. Excluding these items, income taxes for 1998 and 1997 would have been $2,332 and $1,951. Income taxes for 1998 were higher due primarily to higher income before income taxes. Income taxes for 1997, excluding the non-recurring items, were slightly lower than income taxes for 1996 of $2,070. Extraordinary Loss In 1998, SBC recorded an extraordinary loss of $60 related to the refinancing of $684 of long-term debt at PacBell. Cumulative Effect of Accounting Change As discussed in Note 1 of Notes to Consolidated Financial Statements, SNET Information Services, Inc. and PB Directory changed their methods of recognizing directory publishing revenues and related expenses effective January 1, 1998 and January 1, 1996, respectively. The cumulative after-tax effect of applying the new method to prior years for SNET Information Services, Inc. was recognized as of January 1, 1998 as a one-time, non-cash gain applicable to continuing operations of $15, or $0.01 per share. The gain is net of deferred taxes of $11. The one-time gain recognized as of January 1, 1996 for PB Directory was $90, net of deferred taxes of $53, or $0.05 per share. Management believes the change to the issue basis method is preferable because it is the method generally followed in the publishing industry, including SWBYP, and better reflects the operating activity of the businesses. These accounting changes are not expected to have a significant effect on net income in future periods. Operating Environment and Trends of the Business Regulatory Environment Overview The telecommunications industry is in a period of dynamic transition from a tightly regulated industry overseen by multiple regulatory bodies to a market-driven industry monitored by state and federal agencies. The Telephone Companies' wireline telecommunications operations remain subject to regulation by the eight state regulatory commissions for intrastate services and by the FCC for interstate services. Consolidation of companies is occurring within the marketplace for local telephone service and across other telecommunications services, such as long distance, cellular, cable television, Internet and other data transmission services. Companies operating in some of these markets are also expanding into others, such as the provision of local service by long distance companies. Additionally, new technologies are also affecting the way people view and use communications services. The telecommunications industry is also changing internationally, as government-owned telephone monopolies are being privatized in many countries and competitive entrants are authorized. U.S.-controlled companies may acquire or form investment, joint venture or strategic relationships with these newly privatized companies or their new competitors involving any or all of the range of telecommunications services. Foreign-controlled companies also may acquire or form such relationships with U.S. companies. SBC is aggressively representing its interests before federal and state regulatory bodies, courts, Congress and state legislatures. SBC will continue to evaluate the increasingly competitive nature of its business, and develop appropriate competitive, legislative and regulatory strategies. Wireline Federal Regulation Through affiliates, SBC offers landline interLATA long distance services to customers in selected areas outside the Telephone Companies' operating areas. Further, SBC offers interLATA long distance services to customers in Connecticut through SNET America, Inc. (SAI). Under the Telecommunications Act of 1996 (Telecom Act), before being permitted to offer landline interLATA long distance service in any state within the regulated operating areas of SWBell, PacBell and Nevada Bell, SBC must apply for and obtain state-specific approval from the FCC. The FCC's approval, which involves consultation with the United States Department of Justice and the appropriate state commission, requires favorable determinations that certain of the Telephone Companies have entered into interconnection agreement(s) that satisfy a 14-point "competitive checklist" with predominantly facilities-based carrier(s) that serve residential and business customers or, alternatively, that certain of the Telephone Companies have a statement of terms and conditions effective in that state under which they offer the "competitive checklist" items. The FCC must also make favorable public interest and structural separation determinations in connection with each application. See "State Regulation" for status of the state applications. In December 1997, the United States District Court for the Northern District of Texas ruled that parts of the Telecom Act were unconstitutional on the grounds that they improperly discriminate against certain subsidiaries of SBC by imposing restrictions that prohibit certain of the Telephone Companies by name from offering interLATA long distance and other services that other Local Exchange Carriers (LECs) are free to provide. In September 1998, the United States Court of Appeals for the Fifth Circuit (5th Circuit) reversed this decision and ruled that the challenged provisions of the Telecom Act were constitutional. In January 1999, the United States Supreme Court (Supreme Court) declined to hear an appeal of the 5th Circuit's decision. Interconnection In August 1996, the FCC issued rules by which competitors could connect with LECs' networks, including those of the Telephone Companies. Among other things, the rules addressed unbundling of network elements, pricing for interconnection and unbundled elements, and resale of retail telecommunications services. The FCC rules were appealed by numerous parties, including SBC. In July 1997, the United States Court of Appeals for the Eighth Circuit (8th Circuit) held that the FCC did not have the authority to promulgate rules related to the pricing of local intrastate telecommunications and that its rules in that regard were invalid. The 8th Circuit also overturned the FCC's rules which allowed competitors to "pick and choose" among the terms and conditions of approved interconnection agreements. In October 1997, the 8th Circuit issued a subsequent decision clarifying that the Telecom Act does not require the incumbent LECs to deliver network elements to competitors in anything other than completely unbundled form. In September 1997, a number of parties, including SBC, filed petitions to enforce the July 1997 ruling of the 8th Circuit that the right to set local exchange prices, including the pricing methodology used, is reserved exclusively to the states. The petitions responded to the FCC's rejection of Ameritech Corporation's interLATA long distance application in Michigan, in which the FCC stated it intended to apply its own pricing standards to Regional Holding Company (RHC) interLATA applications. The petitioners asserted the FCC was violating state authority. On January 22, 1998, the 8th Circuit ordered the FCC to abide by the July 1997 ruling and reiterated that the FCC cannot use interLATA long distance applications made by SBC and other RHC wireline subsidiaries wishing to provide interLATA long distance to attempt to reimpose the pricing standards ruled invalid in July 1997 by the 8th Circuit. In January 1999, the Supreme Court ruled on an appeal of the 8th Circuit's order. The ruling held that the Telecom Act gives the FCC the authority to set guidelines for states to follow in setting prices under the Telecom Act, and reinstated the FCC rules allowing those seeking to interconnect to "pick and choose" specific provisions from previous interconnection agreements. Because the 8th Circuit's decision did not address the lawfulness of the content of the FCC pricing guidelines, the Supreme Court remanded that issue to the 8th Circuit for further consideration. The ruling also upheld FCC rules forbidding incumbent LECs from separating already combined network elements, but remanded back to the FCC its determination of which network elements must be made available. The Supreme Court also held that, before the FCC could require telecommunications carriers to make a particular network element available to requesting carriers, the FCC must first consider as to proprietary elements, whether access to the elements was necessary and whether the failure to provide access to a particular element would impair the requesting carrier's ability to provide the service it seeks to offer. The effect of this ruling on the telecommunications industry cannot be determined at this time. Reciprocal Compensation Reciprocal compensation is billed to SBC's subsidiaries by Competitive Local Exchange Carriers (CLECs) for the termination of certain local exchange traffic to CLEC customers. SBC believes that under the Telecom Act the state commissions have authority to order reciprocal compensation for intrastate or local traffic, while only the FCC has authority over interstate and interexchange traffic. SBC believes most Internet traffic is interexchange and interstate. Several state commissions, including the CPUC in an October 1998 order, have taken the position that Internet communications is intrastate or local traffic and ordered SBC to pay reciprocal compensation to certain CLECs pursuant to then existing contracts. State commissions in the five-state area other than Kansas have also issued orders finding that SBC is required to pay reciprocal compensation to certain CLECs. In June 1998, a U.S. District Court in Texas affirmed the Texas Public Utility Commission's (TPUC) determination and upheld payment of reciprocal compensation, holding that an Internet call is comprised of two portions, and that the TPUC has jurisdiction over the local portion of the traffic and the FCC over the Internet component. Similar decisions regarding Internet traffic have been made by other state commissions. SBC has sought review or reconsideration of these cases. The question whether Internet communications should be classified as local/intrastate or interstate traffic for reciprocal compensation purposes is the subject of a pending FCC proceeding and the FCC is expected to rule on this issue in the near future. SBC's subsidiaries have been recording amounts sought by certain CLECs for the termination of Internet traffic to Internet Service Providers. Asymmetrical Digital Subscriber Line (ADSL) is a high-speed data service principally used for Internet access. In June 1998, SBC filed with the FCC a petition requesting relief for ADSL from pricing, unbundling and resale regulatory restrictions. The FCC denied the petition and declared that incumbents, such as the Telephone Companies, must offer such services for resale at a discount and must offer unbundled access to the equipment used in ADSL provisioning to the extent possible. SBC has filed with the FCC a petition for reconsideration of this order. The FCC sought comments on offering the incumbent LECs the option of providing deregulated advanced services through an affiliate with appropriate safeguards. The effects of the FCC decisions on the above topics are dependent on many factors including, but not limited to, the ultimate resolution of the pending appeals; the number and nature of competitors requesting interconnection, unbundling or resale; and the results of the state regulatory commissions' review and handling of related matters within their jurisdictions. Accordingly, SBC is not able to assess the impact of the FCC orders and proposed rulemaking at this time. State Regulation The following provides an overview of state regulation in the eight states in which the Telephone Companies operated at December 31, 1998. - -------------------------------------------------------------------------------- Number of Signed Wireline Alternative Interconnection Long Distance State Regulation 1 Dialing Parity 2 Agreements 3 Application Status - -------------------------------------------------------------------------------- Arkansas Yes, indefinite Presently not 54 Decision expected required prior in 1999 4 to long distance authorization - -------------------------------------------------------------------------------- California Yes, ends Proceeding 66 Decision expected 1/2002 pending in 1999 4 - -------------------------------------------------------------------------------- Connecticut Yes, ends Dialing parity 13 Long distance 2/2001 exists service provided by the retail entity 5 - -------------------------------------------------------------------------------- Kansas Yes, indefinite Commission 55 Decision expected ordered in 1999 4 implementation by 2/1999; state statute presently prohibits requirement before long distance authorization - -------------------------------------------------------------------------------- Missouri Yes, indefinite Proceeding 61 Decision expected pending in 1999 4 - -------------------------------------------------------------------------------- Nevada Yes, ends Presently not 19 No activity 12/2002 required prior to long distance approval; proceeding pending - -------------------------------------------------------------------------------- Oklahoma Yes, ends Ordered by 3/1999 52 Decision expected 2/2001 in 1999 4 - -------------------------------------------------------------------------------- Texas Yes, ends TPUC deferred 175 Decision expected 9/2001 its decision in 1999 4 pending FCC issuance of new dialing parity rules; state statute presently prohibits requirement before long distance authorization - -------------------------------------------------------------------------------- Other significant notes: 1 Alternative regulation is other than rate of return regulation. 2 In a January 1999 decision, the Supreme Court ruled that the FCC had the authority to issue rules implementing intrastate and intraLATA dialing parity. Several interexchange carriers are arguing in pending state proceedings that the ruling requires immediate implementation of dialing parity, preempting state requirements. The Telephone Companies take the position that dialing parity requirements should be consistent with state laws and that they should not be required to provide intraLATA toll dialing parity prior to receiving authorization to provide interLATA long distance services. In states where dialing parity exists, customers are able to subscribe to an intraLATA toll carrier just as they do for long distance services. 3 Interconnection agreements are signed with CLECs for the purpose of allowing the CLECs to exchange local calls with the incumbent telephone company. 4 Awaiting determination by state commissions on the Telephone Companies' compliance with the 14-point competitive checklist. FCC approval is required subsequent to state determination. 5 SNETel is restricted from providing interLATA long distance service in any of the other Telephone Companies' operating regions. The following presents highlights of certain regulatory developments. California In October 1998, the CPUC issued a decision modifying the current regulatory framework for PacBell effective January 1, 1999. The decision adopted PacBell's proposal that the current cap on basic residential rates be continued for three more years, through 2001, with the CPUC retaining the ability to adjust basic telephone rates. The decision suspended earnings sharing, rate of return reviews and the use of earnings caps and floors through 2001. In addition, the decision adopted PacBell's proposal to eliminate depreciation reviews and granted PacBell the freedom to set its own depreciation rates and methodology. It also continued the suspension of the productivity factor adjustment. In addition, the CPUC decision eliminated most future exogenous cost adjustments, including the recovery of future costs related to a 1993 accounting change for postretirement benefits other than pensions. Management currently estimates the items embodied within the new regulatory framework will have the net effect of reducing annual revenue by approximately $100 from 1999 through 2004. In July 1998, the CPUC issued a rate rebalancing decision related to its 1996 order on universal service. The CPUC's decision was implemented prospectively beginning September 1, 1998 and reduces PacBell's non-basic local service, network access and long distance service revenues by $305 annually to offset the approximately $305 annually that PacBell expects to receive from the CHCFB. Beginning in February 1997, PacBell, and all other California telecommunications carriers, began collecting funds via customer surcharges consistent with the CPUC's 1996 decision. The CPUC has yet to decide on the specific mechanism to be employed to ensure the distribution of funds collected by PacBell and other carriers from February 1997 through August 1998 is revenue neutral. Connecticut In January 1997, SNET submitted to the Connecticut Department of Public Utility Control (DPUC) its proposal on corporate restructure. The proposal recommended that SNETel functions be split: ownership and maintenance of switching and transmission network facilities, i.e., all wholesale functions, would remain in the telephone company, SNETel, and all retail functions would go to SAI, which was the long distance subsidiary. Both would be wholly-owned by SNET. In June 1997, the DPUC granted SNET permission to restructure its telephony operations, with several DPUC-imposed modifications. Under the plan, all retail operations (retail marketing and customer service) have been transferred to SAI, and SAI will be treated by the regulators like all other CLECs. SNET local service customers will choose their provider via a balloting process, which has been scheduled for September 1999. All wholesale services and the network infrastructure will remain with SNETel, which will be restricted to meeting the needs of CLECs, including SAI and other wholesale customers. SAI can buy its wholesale service from SNETel or any other wholesale provider. SAI has been providing interstate and international long distance service since 1993, and received certification to provide local service and intrastate toll in Connecticut in 1997. Missouri Effective September 26, 1997, the Missouri Public Service Commission (MPSC) determined that SWBell is subject to price cap regulation. Prices in effect as of December 31, 1996 are the initial maximum allowable rates for services and cannot be adjusted until January 1, 2000 for basic and access services and on January 1, 1999 for non-basic services. On an exchange basis where a competitor began operations, the freeze on maximum allowable rates for non-basic services was removed. After January 1, 2000, caps for basic and access services may be adjusted based on one of two government indices. After January 1, 1999, caps for non-basic services may be increased up to 8% per year. In an exchange where competition for basic local service exists for five years, services will be declared competitive and subject to market pricing unless the MPSC finds effective competition does not exist. The Office of Public Counsel and MCI WorldCom, Inc. (MCI WorldCom) sought judicial review of the MPSC determination and in May 1998 the state circuit court affirmed the MPSC decision. Texas Under the Public Utility Regulatory Act, which became effective in May 1995 (PURA), SWBell elected to move from rate of return regulation to price regulation with elimination of earnings sharing. Basic local service rates are capped at existing levels for four years following the election, i.e., until September 1999. The TPUC is prohibited from reducing switched access rates charged by LECs to interexchange carriers while rates are capped. LECs electing price regulation are committed to network and infrastructure improvement goals, including expansion of digital switching and advanced high-speed services to qualifying public institutions, such as schools, libraries and hospitals, requesting the services. PURA also established an infrastructure grant fund for use by public institutions in upgrading their communications and computer technology. The 1997 Texas legislative session changed the funding for this infrastructure grant fund from annually collecting $150 for ten years to a fixed percentage (1.25%) applied to all telecommunications providers' sales taxable revenues. The law also provides a cap of $1,500 for the life of the fund. SWBell's annual payments were approximately $36 in 1997 and $56 in 1998. Due to the industry's growth in revenues, the fund should be completely funded before the original ten years. PURA establishes local exchange competition by allowing companies that desire to provide local exchange services to apply for certification by the TPUC, subject to certain buildout requirements, resale restrictions and minimum service requirements. PURA provides that SWBell will remain the default carrier of "1 plus" intraLATA long distance traffic in its territory until SWBell is allowed to carry interLATA long distance. In 1996, MCI WorldCom and AT&T Corp. (AT&T) sued the state of Texas, alleging that PURA violates the Texas state constitution, and claiming that PURA establishes anticompetitive barriers designed to prevent MCI WorldCom, AT&T and Sprint Corporation (Sprint) from providing local services within Texas. The FCC, also in response to petitions filed by AT&T and MCI WorldCom, preempted and voided portions of PURA that required certain buildout requirements. Furthermore, the FCC also preempted rules that excluded competitors from entering markets with fewer than 31,000 access lines and which made resale of Centrex phone services subject to a limited property restriction. AT&T and MCI WorldCom have dismissed their suits regarding this matter. In October 1997, SWBell filed with the FCC a petition for reconsideration regarding the preemption of the property restriction for Centrex services. This issue is still pending before the FCC. Competition Wireline Competition continues to increase for telecommunications and information services. Recent changes in legislation and regulation have increased the opportunities for alternative service providers offering telecommunications services. Technological advances have expanded the types and uses of services and products available. As a result, SBC faces increasing competition as well as new opportunities in significant portions of its business. Recent state legislative and regulatory developments allow increased competition for local exchange services. Companies wishing to provide competitive local service have filed numerous applications with each of the state commissions throughout the Telephone Companies' regulated operating areas, and the commissions of each state have been approving these applications since late 1995. Under the Telecom Act, companies seeking to interconnect to the Telephone Companies' networks and exchange local calls must enter into interconnection agreements with the Telephone Companies. These agreements are then subject to approval by the appropriate state commission. SBC has reached approximately 495 interconnection and resale agreements with competitive local service providers, and most have been approved by the relevant state commission. AT&T, MCI WorldCom and other competitors are reselling SBC local exchange services, and as of December 31, 1998, there were approximately 800,000 SBC access lines supporting services of resale competitors throughout the Telephone Companies' regulated operating areas, most of them in Texas and California. Many competitors have placed facilities in service and have begun advertising campaigns and offering services. SBC also was granted facilities-based and resale operating authority in certain territories served by other LECs and now offers local exchange service offerings to these areas. In California, the CPUC authorized facilities-based local services competition effective January 1996 and resale competition effective March 1996. While the CPUC has established local competition rules and interim prices, several issues still remain to be resolved, including final rates for resale and LEC provisioning and pricing of certain network elements to competitors. PacBell has incurred substantial costs implementing local competition and number portability. In November 1998, the CPUC issued a decision allowing PacBell to begin recovery of local competition implementation costs. In Texas, the TPUC set rates in December 1997 that SWBell may charge for access and interconnection to its telephone network. The TPUC decision sets pricing for dozens of network components and completes a consolidated arbitration between SWBell and six of its wholesale customers, including AT&T and MCI WorldCom. In Missouri, the MPSC issued orders on a consolidated arbitration hearing with AT&T and MCI WorldCom and on selected items with Metropolitan Fiber Systems. Among other terms, the orders established discount rates for resale of SWBell services and prices for unbundled network elements. SWBell appealed the interconnection agreement resulting from the first arbitration proceeding on November 5, 1997; a decision is still pending. A second arbitration process to address other interconnection issues with AT&T has concluded, and the MPSC ordered that a conforming interconnection agreement be filed. SWBell appealed this order in April 1998. The Telephone Companies expect increased competitive pressure in 1999 and beyond from multiple providers in various markets, including facilities-based CLECs, interexchange carriers and resellers. At this time, management is unable to assess the effect of competition on the industry as a whole, or financially on SBC, but expects both losses of market share in local service and gains resulting from new business initiatives, vertical services and new service areas. Competition also continues to intensify in the Telephone Companies' intraLATA long distance markets. For example, it is estimated that providers other than PacBell now serve more than half of the business intraLATA long distance customers in PacBell's service areas. In addition, if intraLATA toll dialing parity is required, competition in intraLATA long distance markets is expected to increase. In the international arena, Telmex was granted a concession in 1990, which expired in August 1996, as the sole provider of long distance services in Mexico. Several large competitors have received licenses to compete with Telmex and have begun operations. As of December 31, 1998, Telmex has retained approximately 75% of its long distance customers. Telmex's share of international long distance traffic is expected to decline significantly when the proportional return mechanism, which guarantees Telmex the same percentage of incoming traffic as outgoing traffic, expires at the end of 1999. Aggressive local competition is expected in 1999, primarily in the business segment. Wireless In 1993, the FCC adopted an order allocating radio spectrum and licenses for PCS. PCS utilizes wireless telecommunications digital technology at a higher frequency radio spectrum than cellular. Like cellular, it is designed to permit access to a variety of communications services regardless of subscriber location. In an FCC auction, which concluded in March 1995, PCS licenses were awarded in 51 major markets. SBC or affiliates acquired PCS licenses in the Major Trading Areas of Los Angeles-San Diego, California; San Francisco-Oakland-San Jose, California; Memphis, Tennessee; Little Rock, Arkansas; and Tulsa, Oklahoma. The California licenses cover substantially all of California and Nevada. SBC is currently operational in all of its major California-Nevada markets and Tulsa, Oklahoma. During 1996, SBC received several AT&T cellular networks in Arkansas in exchange for SBC's PCS licenses in Memphis, Tennessee, and Little Rock, Arkansas, and other consideration. PCS service was formally launched in all the major California and Nevada markets at different times throughout 1997, with the buildout to other areas continuing. The network incorporates the Global System for Mobile Communications standard, which is widely used in Europe. PBMS is selling PCS as an off-the-shelf product in retail stores, through exclusive agents and in company-owned stores across California and Nevada. Significant competition exists, particularly from the two established cellular companies in each market. In an FCC auction that concluded in January 1997, SBC acquired eight additional PCS licenses for Basic Trading Areas that are within the five-state area. SBC also has state-approved interconnection agreements to receive reciprocal compensation from interexchange carriers and other local service providers accessing its wireless networks in all states where it provides wireless services. Companies that were granted licenses in areas where SBC also provides wireless service include subsidiaries and affiliates of AT&T, Sprint and other RHCs. Significant competition from PCS providers exists in SBC's major markets. Competition has been based upon both price and service packaging, such as unlimited calling plans, and has contributed to SBC's decline in average subscriber revenue per wireless customer. Under the Telecom Act of 1996, SBC may offer interLATA long distance over its wireless network both inside and outside the regulated operating areas. SBC has entered the wireless long distance markets, and offers wireless long distance service in all of its wireless service areas. Directory SWBYP, PB Directory and SNET Information Services, Inc. face competition from over 100 publishers of printed directories in their operating areas. Direct and indirect competition also exists from other advertising media, including newspapers, radio, television and direct mail providers, as well as from directories offered over the Internet. Other Business Matters New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which will require all derivatives to be recorded on the balance sheet at fair value, and will require changes in the fair value of the derivatives to be recorded in net income or comprehensive income. FAS 133 must be adopted for years beginning after June 15, 1999, with earlier adoption permitted. Management is currently evaluating the impact of the change in accounting required by FAS 133, but is not able to quantify the effect at this time. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the new accounting standard on software costs. Wireless Acquisition See Note 17 of Notes to Consolidated Financial Statements for a discussion of the acquisition of Comcast Cellular Corporation. Long Distance Agreement On February 8, 1999, SBC announced an agreement with Williams Communications (Williams), a subsidiary of Williams Cos., Inc., under which Williams will serve as SBC's long distance provider. As part of this agreement, SBC plans to acquire 10% of the common stock of Williams. This investment will occur simultaneously with an initial public offering of common stock by Williams, scheduled for the second quarter of 1999. Merger See Note 3 of Notes to Consolidated Financial Statements for a discussion of the merger agreement with Ameritech Corporation. SBC's Year 2000 Project SBC operates numerous date-sensitive computer applications and systems throughout its businesses. Since 1996, SBC has been working to upgrade its networks and computer systems to properly recognize the Year 2000 and continue to process critical operational and financial information. Companywide teams are in place to address and resolve Year 2000 issues and processes are under way to evaluate and manage the risks and costs associated with preparing SBC's date-impacted systems and networks for the new millennium. SBC is using a four-step methodology to address the issue. The methodology consists of inventory and assessment, hardware and software fixes, testing and deployment. SBC measures its progress by tracking the number of completed hardware and software applications, network components, personal computers and building facilities that can correctly process Year 2000 dates. Inventory and assessment is estimated to require 20% of the overall effort and includes the identification of items (i.e., line-by-line review of software code, switch generics, vendor products, etc.) that could be impacted by the Year 2000 and the determination of the work effort required to ensure compliance. The inventory and assessment phase has been completed. This process involved reviewing over 340 million lines of software code, 1,200 central office switches, 7,000 company buildings, conducting an inventory and assessment of 117,000 personal computers, and coordinating with 1,300 suppliers of 14,000 products to obtain adequate assurance they will be Year 2000 compliant or determine and address any appropriate contingency plans or backup systems. Making the hardware and software fixes is the second phase of the process and is estimated to require 25% of the overall effort. This activity involves modifying program code, upgrading computer software and upgrading or replacing hardware. As of December 31, 1998, the hardware and software fixes were substantially complete. Testing involves ensuring that hardware and software fixes will work properly in 1999 and beyond and occurs both before and after deployment. Testing is estimated to comprise 45% of the overall effort. Testing began early in 1998, is more than two-thirds complete, and will continue through 1999 to allow for thorough testing before the Year 2000. Contingency plans and backup systems are currently being written. Deployment involves placing the "fixed" systems into a live environment to ensure they are working properly. Additional testing is done after deployment as well. Deployment is estimated to require 10% of the overall effort. More than half of the deployment phase was completed as of December 31, 1998. SBC expects to spend approximately $265 on the entire project, with approximately $140 spent through December 31, 1998. As testing and hardware and software fixes are estimated to require most of the expenditures, there is not a strict correlation between expenditures and project completion. The activities involved in SBC's Year 2000 project necessarily require estimates and projections, as described above, of activities and resources that will be required in the future. These estimates and projections could change as work progresses on the project. Liquidity and Capital Resources SBC had $460 of cash and cash equivalents available at December 31, 1998. Commercial paper borrowings as of December 31, 1998 totaled $1,044. SBC has entered into agreements with several banks for lines of credit totaling $1,460, all of which may be used to support commercial paper borrowings (see Note 10 of Notes to Consolidated Financial Statements). SBC had no borrowings outstanding under these lines of credit as of December 31, 1998. Cash from Operating Activities During 1998, as in 1997 and 1996, SBC's primary source of funds continued to be cash generated from operations, as shown in the Consolidated Statements of Cash Flows. Net cash provided by operating activities exceeded SBC's construction and capital expenditures during 1998, as in 1997 and 1996; this excess is referred to as free cash flow, a supplemental measure of liquidity. SBC generated free cash flow of $2,454, $1,366 and $2,046 in 1998, 1997 and 1996. Cash from Investing Activities To provide high-quality communications services to its customers, SBC, particularly its Wireline and Wireless operations, must make significant investments in property, plant and equipment. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory commitments. SBC's capital expenditures totaled $5,927, $6,230 and $5,855 for 1998, 1997 and 1996. Capital expenditures in the Wireline segment were relatively unchanged in 1998 compared to 1997. The Wireline segment's capital expenditures increased 12% in 1997 due primarily to demand-related growth, network upgrades, customer-contracted requirements, ISDN projects and SWBell's regulatory commitments. The Wireless segment's capital expenditures decreased 17% and 23% in 1998 and 1997 due primarily to expenditures for initial buildout of the PCS network and conversion of SBC's largest cellular markets to digital during 1997 and 1996. In 1999, management expects total capital spending to be between $6,400 and $6,800. Capital expenditures in 1999 will relate primarily to the continued evolution of the Telephone Companies' networks, including amounts agreed to under regulation plans at SWBell, and continued buildout of Mobile Systems' markets and PBMS. SBC expects to fund ongoing capital expenditures with cash provided by operations. SWBell has substantially completed the additional network and infrastructure improvements to be made over periods ranging through 2001 to satisfy regulatory commitments. Cash from Financing Activities Dividends declared by the Board of Directors of SBC were $0.935 per share in 1998, $0.895 per share in 1997, and $0.86 per share in 1996. These per share amounts do not include dividends declared and paid by PAC and SNET prior to their respective mergers. The total dividends paid by SBC, PAC and SNET were $1,836 in 1998, $1,755 in 1997 and $1,795 in 1996. Pursuant to the terms of the merger agreement, PAC reduced its dividend beginning in the second quarter of 1996. The lower second and third quarter dividends paid in 1996 improved 1996 cash flow by approximately $195. SBC's dividend policy considers both the expectations and requirements of shareowners, internal requirements of SBC and long-term growth opportunities. In February 1998, SBC called $630 of long-term debt for retirement, including $175 at PacBell and $425 at SWBell, and issued approximately $200 in debentures at PacBell due February 2008 and approximately $200 in debentures at SWBell due March 2048. In September 1998, SBC called $175 of long-term debt for retirement, all at SWBell. In October 1998, PacBell repurchased $684 of debentures. Total debt increased during 1997 due primarily to the issuance of medium-term notes and debentures at the Telephone Companies and debt redeemable either in cash or Telmex L shares. During 1996 PAC issued $1,000 of TOPrS, $500 at 7.56% in January 1996 and $500 at 8.5% in June 1996 (see Note 11 of Notes to Consolidated Financial Statements). The proceeds were used to retire outstanding short-term debt, primarily commercial paper that had increased significantly during 1995. SBC's total capital consists of debt (long-term debt and debt maturing within one year), TOPrS and shareowners' equity. Total capital increased $108 in 1998 and $1,056 in 1997. The increase in 1998 was due to 1998 earnings, partially offset by lower debt levels. The increase in 1997 was primarily due to higher debt levels and 1997 earnings. SBC's debt ratio was 48.9%, 57.1% and 56.8% at December 31, 1998, 1997 and 1996. The debt ratio is affected by the same factors that affect total capital. Market Risk SBC's capital costs are directly linked to financial and business risks. SBC seeks to manage the potential negative effects from market volatility and market risk. Certain financial instruments used to obtain capital are subject to market risks from fluctuations in market interest rates. The majority of SBC's financial instruments are medium- and long-term fixed rate notes and debentures. Fluctuations in market interest rates can lead to significant fluctuations in the fair value of these notes and debentures. It is the policy of SBC to manage its debt structure and foreign exchange exposure in order to manage capital costs, control financial risks and maintain financial flexibility over the long term. Where appropriate, SBC will take actions to limit the negative effect of interest and foreign exchange rates, liquidity and counterparty risks on shareowner value. Quantitative Information about Market Risk - -------------------------------------------------- Foreign Exchange Risk Sensitivity Analysis - -------------------------------------------------- U.S. Dollar Net Underlying Value of Net Foreign Foreign Currency December 31, Exchange Transaction 1998 Contracts Exposures - -------------------------------------------------- Swiss Franc $ 24 $ 24 Japanese Yen 142 142 French Franc 37 37 Chilean Peso 32 32 - -------------------------------------------------- Total Exposure $ 235 $ 235 - -------------------------------------------------- Note: There is no net exposed long/short currency position and no foreign exchange loss from a 10% depreciation of the U.S. dollar. The preceding table describes the effects of a change in the value of the Swiss franc, Japanese yen, Chilean peso and French franc given a hypothetical 10% depreciation of the U.S. dollar. Since the identified exposure is fully covered with forward contracts, changes in the value of the U.S. dollar which affect the value of the underlying foreign currency commitment are fully offset by changes in the value of the foreign currency contract. If the underlying currency transaction exposure changed, the resulting mismatch would expose the company to currency risk of the foreign exchange contract. For this reason, all contracts are related to firm commitments and matched by maturity and currency. Equity Price Risk Sensitivity Analysis SBC is exposed to equity price risk related to the change in the price of AirTouch Communications, Inc. (AirTouch) common stock related to the settlement of employee stock options. At December 31, 1998, the net appreciated value of the equity swap contract entered in 1994 was $26, while the value of the underlying employee stock option exposures for AirTouch common stock was $25, leaving a net exposed long equity position of $1. If the value of AirTouch common stock increased by 26%, the net exposed long equity position would increase by $1 to $2. Since January 1, 1995, the average yearly share price of AirTouch common stock has increased 26%. The equity swap contract expires April 1999 and the last option grant expires January 2003. (See Note 11 of Notes to Consolidated Financial Statements.) In February 1999, management evaluated the exposure to future appreciation of AirTouch common stock and the benefit to "unwinding" the swap. As a result, SBC began exiting the equity swap contract, receiving cash for the appreciated value of the contract and recognizing a minimal gain. Once exited, SBC will record in other income (expense) - net future changes in the value of the underlying employee stock option exposure. If the value of AirTouch common stock were to increase by an additional 26% from mid-February 1999, SBC would record additional expense of approximately $8. Interest Rate Sensitivity The principal amount by expected maturity, average interest rate and fair value of SBC's liabilities that are exposed to interest rate risk are described in Notes 10 and 11 of Notes to Consolidated Financial Statements. Following are SBC's interest rate derivatives subject to interest rate risk (none of these derivatives mature in 2000 through 2003): - ----------------------------------------------------------- Maturity - ----------------------------------------------------------- Fair After Value 1999 2003 Total 12/31/98 - ----------------------------------------------------------- Interest Rate Derivatives - ----------------------------------------------------------- Interest Rate Swaps - ----------------------------------------------------------- Receive Variable/Pay Fixed Notional Amount 1 $50 - $50 $(1) Fixed Rate Payable 7.2% - Weighted Average Variable Rate Receivable 2 5.1% - - ----------------------------------------------------------- Receive Variable/Pay Fixed Notional Amount 3 - $13 $13 $(1) Fixed Rate Payable 6.7% 6.7% Weighted Average Variable Rate Receivable 4 5.0% 5.5% =========================================================== 1 Receive Variable/Pay Fixed amount is offset equally by $50 in Variable Rate Debt maturing in 1999 with an average interest rate of 4.5% and a fair value of $50. 2 Weighted Average Variable Rate Receivable based on current and the implied forward rates in the yield curve at the reporting date for Constant Maturity Treasury minus 20 basis points. 3 Receive Variable/Pay Fixed amount offsets $13 in lease obligation due after 2003 with an average interest rate of 5.8% and a fair value of $13. 4 Weighted Average Variable Rate Receivable based on current and the implied forward rates in the yield curve at the reporting date for One Month LIBOR. As a result of interest rate fluctuations, if SBC were to terminate the contracts, it would be required to pay $2 to replace the fixed rate flows or "unwind" the interest swaps. SBC does not intend to terminate the $50 contract as it is linked to the variable rate debt issued by SBC that also matures in 1999. There has been no material change in the updated market risks since December 31, 1997. Qualitative Information about Market Risk Foreign Exchange Risk From time to time SBC makes investments in operations in foreign countries, is paid dividends, receives proceeds from sales or borrows funds in foreign currency. Before making an investment, or in anticipation of a foreign currency receipt, SBC will often enter into forward foreign exchange contracts. The contracts are used to provide currency at a fixed rate. SBC's policy is to measure the risk of adverse currency fluctuations by calculating the potential dollar losses resulting from changes in exchange rates that have a reasonable probability of occurring. SBC covers the exposure that results from changes that exceed acceptable amounts. SBC does not speculate in foreign exchange markets. Equity Risk SBC has exposure to risk of market changes related to its recorded liability for outstanding employee stock options for common stock of AirTouch (spun-off operations). SBC plans to make open market purchases of the stock of spun-off operations to satisfy its obligation for options that are exercised. Off-balance-sheet risk exists to the extent the market price of AirTouch rises in value. As discussed in "Equity Price Risk Sensitivity Analysis" above, SBC evaluated the exposure to future appreciation of AirTouch common stock and is exiting a swap contract related to the options by April 1999. Interest Rate Risk SBC issues debt in fixed and floating rate instruments. Interest rate swaps are used for the purpose of controlling interest expense by fixing the interest rate of floating rate debt. When market conditions favor issuing debt in floating rate instruments, and SBC prefers not to take the risk of floating rates, SBC will enter interest rate swap contracts to obtain floating rate payments to service the debt in exchange for paying a fixed rate. SBC does not seek to make a profit from changes in interest rates. SBC manages interest rate sensitivity by measuring potential increases in interest expense that would result from a probable change in interest rates. When the potential increase in interest expense exceeds an acceptable amount, SBC reduces risk through the issuance of fixed rate instruments and purchasing derivatives. Cautionary Language Concerning Forward-Looking Statements Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties. SBC claims the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. The following factors could cause SBC's future results to differ materially from those expressed in the forward-looking statements: (1) adverse economic changes in the markets served by SBC or changes in available technology; (2) the final outcome of various FCC rulemakings and judicial review, if any, of such rulemakings; (3) the final outcome of various state regulatory proceedings in SBC's eight-state area, and judicial review, if any, of such proceedings; and (4) the timing of entry and the extent of competition in the local and intraLATA toll markets in SBC's eight-state area. Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially impact SBC's future earnings. SBC Communications Inc. Consolidated Statements of Income Dollars in millions except per share amounts - -------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------- Operating Revenues Landline local service $ 11,100 $ 10,334 $ 9,465 Wireless subscriber 3,783 3,372 2,907 Network access 6,512 6,215 6,203 Long distance service 2,355 2,352 2,523 Directory advertising 2,420 2,280 2,156 Other 2,607 2,128 1,948 - -------------------------------------------------------------------------------------------- Total operating revenues 28,777 26,681 25,202 - -------------------------------------------------------------------------------------------- Operating Expenses Operations and support 16,714 17,802 14,510 Depreciation and amortization 5,177 5,301 4,466 - -------------------------------------------------------------------------------------------- Total operating expenses 21,891 23,103 18,976 - -------------------------------------------------------------------------------------------- Operating Income 6,886 3,578 6,226 - -------------------------------------------------------------------------------------------- Other Income (Expense) Interest expense (993) (1,043) (901) Equity in net income of affiliates 236 201 207 Other income (expense) - net 245 (78) (75) - -------------------------------------------------------------------------------------------- Total other income (expense) (512) (920) (769) - -------------------------------------------------------------------------------------------- Income Before Income Taxes, Extraordinary Loss and Cumulative Effect of Accounting Change 6,374 2,658 5,457 - -------------------------------------------------------------------------------------------- Income taxes 2,306 984 2,070 - -------------------------------------------------------------------------------------------- Income Before Extraordinary Loss and Cumulative Effect of Accounting Change 4,068 1,674 3,387 Extraordinary Loss from Early Extinguishment of Debt, net of tax (60) - - Cumulative Effect of Accounting Change, net of tax 15 - 90 - -------------------------------------------------------------------------------------------- Net Income $ 4,023 $ 1,674 $ 3,477 ============================================================================================ Earnings Per Common Share: Income Before Extraordinary Loss and Cumulative Effect of Accounting Change $ 2.08 $ 0.86 $ 1.73 Net Income $ 2.06 $ 0.86 $ 1.78 - -------------------------------------------------------------------------------------------- Earnings Per Common Share-Assuming Dilution: Income Before Extraordinary Loss and Cumulative Effect of Accounting Change $ 2.05 $ 0.85 $ 1.72 Net Income $ 2.03 $ 0.85 $ 1.77 ============================================================================================ 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, --------------------------- 1998 1997 - ----------------------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 460 $ 410 Short-term cash investments 6 320 Accounts receivable - net of allowances for uncollectibles of $472 and $430 5,790 5,344 Prepaid expenses 414 357 Deferred income taxes 489 660 Other current assets 379 426 - ----------------------------------------------------------------------------------------- Total current assets 7,538 7,517 - ----------------------------------------------------------------------------------------- Property, Plant and Equipment - Net 29,920 29,068 - ----------------------------------------------------------------------------------------- Intangible Assets - Net of Accumulated Amortization of $741 and $1,047 3,087 3,663 - ----------------------------------------------------------------------------------------- Investments in Equity Affiliates 2,514 2,740 - ----------------------------------------------------------------------------------------- Other Assets 2,007 1,848 - ----------------------------------------------------------------------------------------- Total Assets $ 45,066 $ 44,836 ========================================================================================= Liabilities and Shareowners' Equity Current Liabilities Debt maturing within one year $ 1,551 $ 2,139 Accounts payable and accrued liabilities 7,980 8,330 Dividends payable 458 441 - ----------------------------------------------------------------------------------------- Total current liabilities 9,989 10,910 - ----------------------------------------------------------------------------------------- Long-Term Debt 11,612 13,176 - ----------------------------------------------------------------------------------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,990 1,569 Postemployment benefit obligation 5,220 5,200 Unamortized investment tax credits 359 431 Other noncurrent liabilities 2,116 2,030 - ----------------------------------------------------------------------------------------- Total deferred credits and other noncurrent liabilities 9,685 9,230 - ----------------------------------------------------------------------------------------- Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts# 1,000 1,000 - ----------------------------------------------------------------------------------------- Shareowners' Equity Preferred shares ($1 par value, 10,000,000 authorized: none issued) - - Common shares ($1 par value, 7,000,000,000 authorized: issued 1,987,532,349 at December 31, 1998 and 1,984,141,868 at December 31, 1997) 1,988 992 Capital in excess of par value 9,139 9,966 Retained earnings 3,396 1,204 Guaranteed obligations of employee stock ownership plans (ESOP) (147) (219) Deferred compensation - leveraged ESOP (LESOP) (82) (119) Treasury shares (28,217,018 at December 31, 1998 and 29,741,356 at December 31, 1997, at cost) (882) (730) Accumulated other comprehensive income (632) (574) - ----------------------------------------------------------------------------------------- Total shareowners' equity 12,780 10,520 - ----------------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $ 45,066 $ 44,836 ========================================================================================= # 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 - ------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------- Operating Activities Net income $ 4,023 $ 1,674 $ 3,477 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,177 5,301 4,466 Undistributed earnings from investments in equity affiliates (56) (100) (138) Provision for uncollectible accounts 513 566 438 Amortization of investment tax credits (72) (82) (82) Deferred income tax expense 533 239 485 Extraordinary loss, net of tax 60 - - Cumulative effect of accounting change, net of tax (15) - (90) Changes in operating assets and liabilities: Accounts receivable (959) (902) (1,097) Other current assets (8) (56) 301 Accounts payable and accrued liabilities (187) 1,431 591 Other - net (628) (475) (450) - ------------------------------------------------------------------------------------------- Total adjustments 4,358 5,922 4,424 - ------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 8,381 7,596 7,901 - ------------------------------------------------------------------------------------------- Investing Activities Construction and capital expenditures (5,927) (6,230) (5,855) Investments in affiliates (85) (26) (74) Purchase of short-term investments (42) (916) (1,005) Proceeds from short-term investments 355 1,029 816 Dispositions 1,140 578 96 Acquisitions - (1,118) (442) Other 11 13 19 - ------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (4,548) (6,670) (6,445) - ------------------------------------------------------------------------------------------- Financing Activities Net change in short-term borrowings with original maturities of three months or less (367) (563) (974) Issuance of other short-term borrowings 2 1,079 209 Repayment of other short-term borrowings (8) (805) (134) Issuance of long-term debt 413 1,597 988 Repayment of long-term debt (1,121) (602) (443) Early extinguishment of debt and related call premiums (765) (6) - Issuance of trust originated preferred securities - - 1,000 Purchase of fractional shares - (15) - Issuance of common shares 64 - 111 Purchase of treasury shares (498) (87) (650) Issuance of treasury shares 308 293 52 Dividends paid (1,811) (1,724) (1,765) Other - (7) (103) - ------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (3,783) (840) (1,709) - ------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 50 86 (253) - ------------------------------------------------------------------------------------------- Cash and cash equivalents beginning of year 410 324 577 - ------------------------------------------------------------------------------------------- Cash and Cash Equivalents End of Year $ 460 $ 410 $ 324 =========================================================================================== The accompanying notes are an integral part of the consolidated financial statements.
SBC Communications Inc. Consolidated Statements of Shareowners' Equity Dollars and shares in millions except per share amounts - ------------------------------------------------------------------------------------------------------------------------------------ Common Accumulated Treasury Shares Capital in Retained Guaranteed Deferred Other Shares Total ------------- Excess of Earnings Obligations Compensation Comprehensive ------------- Comprehensive Shares Amount Par Value (Deficit) of ESOP LESOP Income Shares Amount Income ----------------------------------------------------------------------------------------------------- Balance, December 31, 1995 991 $ 991 $ 10,002 $ (546) $ (331) $ (242) $ (578) (11) $ (481) $ - Net income for the year ($1.78 per share) - - - 3,477 - - - - - 3,477 Other comprehensive income, net of tax: Foreign currency translation adjustment, net of income tax benefit of $28 - - - - - - (59) - - (59) - ------------------------------------------------------------------------------------------------------------------------------------ Total Comprehensive Income 3,418 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends to shareowners ($0.86 per share) - - (115) (1,680) - - - - - - Reduction of debt associated with ESOP - - - - 55 - - - - - Cost of LESOP trust shares allocated to employee accounts - - - - - 81 - - - - Issuance of common shares - - 20 - - - - - - - Purchase of treasury shares - - - - - - - (13) (650) - Issuance of treasury shares - - 21 - - - - 4 146 - Other - - 3 14 - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 991 991 9,931 1,265 (276) (161) (637) (20) (985) 3,418 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year ($0.86 per share) - - - 1,674 - - - - - 1,674 Other comprehensive income, net of tax: Foreign currency translation adjustment, net of income tax expense of $38 - - - - - - 63 - - 63 - ------------------------------------------------------------------------------------------------------------------------------------ Total Comprehensive Income 1,737 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends to shareowners ($0.895 per share) - - - (1,755) - - - - - - Reduction of debt associated with ESOP - - - - 57 - - - - - Cost of LESOP trust shares allocated to employee accounts - - - - - 42 - - - - Issuance of common shares 1 1 39 - - - - - - - Purchase of treasury shares - - - - - - - (2) (87) - Issuance of treasury shares - - (38) - - - - 7 335 - Other - - 34 20 - - - - 7 - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 992 992 9,966 1,204 (219) (119) (574) (15) (730) 1,737 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year ($2.06 per share) - - - 4,023 - - - - - 4,023 Other comprehensive income, net of tax: Foreign currency translation adjustment, net of income tax benefit of $37 - - - - - - (58) - - (58) Unrealized gain on available-for-sale securities - - - - - - 60 - - 60 Less: reclassification adjustment for gains included in net income - - - - - - (60) - - (60) - ------------------------------------------------------------------------------------------------------------------------------------ Total Comprehensive Income 3,965 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends to shareowners ($0.935 per share) - - - (1,836) - - - - - - Two-for-one stock split 993 993 (993) - - - - (15) - - Reduction of debt associated with ESOP - - - - 72 - - - - - Cost of LESOP trust shares allocated to employee accounts - - - - - 37 - - - - Issuance of common shares 3 3 74 - - - - - - - Purchase of treasury shares - - - - - - - (12) (498) - Issuance of treasury shares - - (33) - - - - 14 346 - Other - - 125 5 - - - - - - ==================================================================================================================================== Balance, December 31, 1998 1,988 $1,988 $ 9,139 $ 3,396 $ (147) $ (82) $ (632) (28)$ (882) $ 3,965 ==================================================================================================================================== 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). The statements reflect SBC's mergers with Pacific Telesis Group (PAC) and Southern New England Telecommunications Corporation (SNET) as pooling of interests (see Note 2). SBC's subsidiaries and affiliates operate predominantly in the communications services industry, providing landline and wireless telecommunications services and equipment and directory advertising both domestically and worldwide. SBC's principal wireline subsidiaries are Southwestern Bell Telephone Company (SWBell), providing telecommunications services in Texas, Missouri, Oklahoma, Kansas and Arkansas, Pacific Bell (PacBell, which also includes Pacific Bell Information Services), The Southern New England Telephone Company and Nevada Bell (collectively referred to as the Telephone Companies). SBC's principal wireless subsidiaries are Southwestern Bell Mobile Systems, Inc., Pacific Bell Mobile Services and SNET Cellular, Inc. SBC's principal directory subsidiaries are Southwestern Bell Yellow Pages, Inc. (SWBYP), Pacific Bell Directory (PB Directory) and SNET Information Services, Inc. All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships, joint ventures and less than majority-owned subsidiaries are principally accounted for under the equity method. Earnings from certain foreign investments accounted for under the equity method are included for periods ended within three months of SBC's year end. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain amounts in prior period financial statements have been reclassified to conform to the current year's presentation. Income Taxes - Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Investment tax credits earned prior to their repeal by the Tax Reform Act of 1986 are amortized as reductions in income tax expense over the lives of the assets which gave rise to the credits. Cash Equivalents - Cash equivalents include all highly liquid investments with original maturities of three months or less. Deferred Charges - Directory advertising costs are deferred until the directory is published and advertising revenues related to these costs are recognized. Revenue Recognition/Cumulative Effect of Accounting Change - SBC recognizes revenues as earned. Amounts billed in advance of the period in which service is rendered are recorded as a liability. SNET Information Services, Inc. prior to January 1, 1998, and PB Directory, prior to January 1, 1996, recognized revenues and expenses related to publishing directories using the "amortization" method, under which revenues and expenses were recognized over the lives of the directories, generally one year. Effective January 1, 1998, for SNET Information Services, Inc. and January 1, 1996, for PB Directory, the accounting was changed to the "issue basis" method of accounting, which recognizes the revenues and expenses at the time the related directory is published. The change in methodology was made because the issue basis method is generally followed in the publishing industry, including SWBYP, and better reflects the operating activity of the business. The cumulative after-tax effect of applying the changes in method to prior years was recognized as of January 1, 1998 and 1996 as one-time, non-cash gains of $15, or $0.01 per share and $90, or $0.05 per share. The gains are net of deferred taxes of $11 and $53. Had the current method been applied during prior periods, income before extraordinary loss and cumulative effect of accounting change would not have been materially affected. Property, Plant and Equipment - Property, plant and equipment is stated at cost. The cost of additions and substantial betterments of property, plant and equipment is capitalized. The cost of maintenance and repairs of property, plant and equipment is charged to operating expenses. Property, plant and equipment is depreciated using straight-line methods over their estimated economic lives, generally ranging from 3 to 50 years. In accordance with composite group depreciation methodology, when a portion of the Telephone Companies' depreciable property, plant and equipment is retired in the ordinary course of business, the gross book value is charged to accumulated depreciation; no gain or loss is recognized on the disposition of this plant. Intangible Assets - Intangible assets consist primarily of wireless cellular and Personal Communications Services (PCS) licenses, customer lists and the excess of consideration paid over net assets acquired in business combinations. These assets are being amortized using the straight-line method, over periods generally ranging from 5 to 40 years. At December 31, 1998 and 1997, amounts included in net intangible assets for licenses were $2,141 and $2,261. Management periodically reviews the carrying value and lives of all intangible assets based on expected future cash flows. Software Costs - The costs of computer software purchased or developed for internal use are expensed as incurred. However, initial operating system software costs are capitalized and amortized over the estimated economic lives of the associated hardware. The American Institute of Certified Public Accountants has issued a Statement of Position (SOP) that requires capitalization of certain computer software expenditures beginning in 1999. Management continues to evaluate the impact of the change in accounting required by the SOP and anticipates that it will increase net income by less than $200 in 1999. With comparable levels of software expenditures, the SOP would tend to increase net income in comparison with SBC's current method of accounting for software costs. However, the increases would be largest in the year of adoption with diminishing levels of increases compared with current accounting throughout the amortization period. Consequently, given otherwise comparable income levels excluding software, and otherwise comparable software expenditures, the effect of the SOP would be to increase income in the first year and decrease income in each subsequent year until the number of years affected by the SOP equals the amortization period. Advertising Costs - Costs for advertising products and services or corporate image are expensed as incurred (see Note 18). Foreign Currency Translation - Local currencies are generally considered the functional currency for SBC's share of foreign operations, except in countries considered highly inflationary. SBC translates its share of foreign assets and liabilities at current exchange rates. Revenues and expenses are translated using average rates during the year. The ensuing foreign currency translation adjustments are recorded as a separate component of shareowners' equity. Other transaction gains and losses resulting from exchange rate changes on transactions denominated in a currency other than the local currency are included in earnings as incurred. Derivative Financial Instruments - SBC does not invest in any derivatives for trading purposes. From time to time as part of its risk management strategy, SBC uses immaterial amounts of derivative financial instruments including interest rate swaps to hedge exposures to interest rate risk on debt obligations, and foreign currency forward exchange contracts to hedge exposures to changes in foreign currency rates for transactions related to its foreign investments. Derivative contracts are entered into for hedging of firm commitments only. SBC currently does not recognize the fair values of these derivative financial investments or their changes in fair value in its financial statements. Interest rate swap settlements are recognized as adjustments to interest expense in the consolidated statements of income when paid or received. Foreign currency forward exchange contracts are set up to coincide with firm commitments. Gains and losses are deferred until the underlying transaction being hedged occurs, and then are recognized as part of that transaction. PAC entered into an equity swap contract to hedge exposure to risk associated with its recorded liability for certain outstanding employee stock options relating to stock of AirTouch Communications Inc. (AirTouch) (see Note 15). The equity swap contract and its liability are recorded at fair value in the balance sheet as other assets or liabilities. Equity swap settlements are recorded in interest expense in the consolidated statements of income when paid or received. Note 2. Mergers with SNET and PAC On April 1, 1997, SBC and PAC completed the merger of an SBC subsidiary with PAC, in a transaction in which each outstanding share of PAC common stock was exchanged for 1.4629 shares of SBC common stock (equivalent to approximately 626 million shares). With the merger, PAC became a wholly-owned subsidiary of SBC. The transaction has been accounted for as a pooling of interests and a tax-free reorganization. Transaction costs and one-time charges relating to the closing of the merger were $359 ($215 net of tax) including, among other items, the present value of amounts to be returned to California ratepayers as a condition of the merger and expenses for investment banker and professional fees. Of this total, $287 ($180 net of tax) is included in expenses in 1997, and $72 ($35 net of tax) in 1996. The amounts due to ratepayers are being paid out over five years, from 1998 to 2002. On October 26, 1998, SBC and SNET completed the merger of an SBC subsidiary with SNET, in a transaction in which each share of SNET common stock was exchanged for 1.7568 shares of SBC common stock (equivalent to approximately 120 million shares). SNET became a wholly-owned subsidiary of SBC effective with the merger and the transaction has been accounted for as a pooling of interests and a tax-free reorganization. Financial statements for prior periods have been restated to include the accounts of SNET. Transaction costs related to the merger were $40 ($26 net of tax). Operating revenues, income before extraordinary loss and cumulative effect of accounting change and net income of the separate companies for the pre-merger periods of the last three periods were as follows: ----------------------------------------------------------------------------- Nine Months Ended September 30, Year Ended December 31, ---------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------- Operating revenues: SBC $ 19,495 $ 24,659 $ 23,260 SNET 1,606 2,022 1,942 ============================================================================= Combined $ 21,101 $ 26,681 $ 25,202 ============================================================================= Income before extraordinary loss and cumulative effect of accounting change: SBC $ 3,085 $ 1,474 $ 3,189 SNET 164 198 193 Adjustments 3 2 5 ============================================================================= Combined $ 3,252 $ 1,674 $ 3,387 ============================================================================= Net income: SBC $ 3,085 $ 1,474 $ 3,279 SNET 179 194 193 Adjustments 3 6 5 ============================================================================= Combined $ 3,267 $ 1,674 $ 3,477 ============================================================================= The combined results include the effect of changes applied retroactively to conform the accounting methodologies between SNET and SBC for pension and postemployment benefits. SBC believes the new method is more prevalent and better reflects the operations of the business. Post-merger initiatives During the second quarter of 1997, SBC announced after-tax charges of $1.6 billion related to several strategic decisions resulting from the merger integration process that began with the April 1, 1997 closing of its merger with PAC, which included $165 ($101 after tax) of charges related to several regulatory rulings during the second quarter of 1997 and $281 ($176 after tax) for merger approval costs. The decisions resulted from an extensive review of operations throughout the merged company and include significant integration of operations and consolidation of some administrative and support functions. During the fourth quarter of 1998, SBC again performed a complete review of all operations affected by the merger with SNET to determine the impact on ongoing merger integration processes. Review teams examined operational functions and evaluated all strategic initiatives. As a result of this review, SBC announced net after-tax charges of $268 related to strategic decisions arising from the review and expensing of merger-related costs incurred by SNET. One-time charges related to the strategic decisions reached by the review teams totaled $403 ($249 after tax) in the fourth quarter of 1998 and $2 billion ($1.3 billion after tax) in the second quarter of 1997. At December 31, 1998 and 1997, remaining accruals for anticipated cash expenditures related to these decisions were approximately $323 and $432. Reorganization SBC is centralizing several key functions that will support the operations of the Telephone Companies, including network planning, strategic marketing and procurement. It is also consolidating a number of corporate-wide support activities, including research and development, information technology, financial transaction processing and real estate management. The Telephone Companies will continue as separate legal entities. These initiatives continue to result in the creation of some jobs and the elimination and realignment of others, with many of the affected employees changing job responsibilities and in some cases assuming positions in other locations. SBC recognized charges of approximately $82 ($50 net of tax) during the fourth quarter of 1998 and $338 ($213 net of tax) during the second quarter of 1997 in connection with these initiatives. The charges were comprised mainly of postemployment benefits, primarily related to severance, and costs associated with closing down duplicate operations, primarily contract cancellations. Other charges arising out of the mergers related to relocation, retraining and other effects of consolidating certain operations are being recognized in the periods those charges are incurred. The initial integration process subsequent to the PAC merger resulted in SBC incurring expenses for these merger-related items in advance of any substantial synergistic benefits. During the second half of 1997, these merger-related charges totaled $501 ($304 net of tax). Impairments/asset valuation As a result of SBC's merger integration plans, strategic review of domestic operations and organizational alignments, SBC reviewed the carrying values of related long-lived assets in the fourth quarter of 1998 and the second quarter of 1997. The reviews were conducted company-wide, although the fourth quarter 1998 review focused primarily on SNET. These reviews included estimating remaining useful lives and cash flows and identifying assets to be abandoned. Where this review indicated impairment, discounted cash flows related to those assets were analyzed to determine the amount of the impairment. As a result of these reviews, SBC wrote off some assets and recognized impairments to the value of other assets, recording a combined charge of $321 ($199 after tax) in the fourth quarter of 1998 and $965 ($667 after tax) in the second quarter of 1997. The 1998 impairments and writeoffs primarily related to recognition of an impairment of the assets supporting SNET's video and telephony operations, and also included charges for required changes in wireless equipment, inventory and sites. The 1997 impairments and writeoffs related primarily to the wireless digital TV operations in southern California, certain analog switching equipment in California, certain rural and other telecommunications equipment in Nevada, selected wireless equipment, duplicate or obsolete equipment, cable within commercial buildings in California, certain nonoperating plant and other assets. Pacific and Southwestern video curtailment/purchase commitments SBC also announced in 1997 that it was scaling back its limited direct investment in video services in the areas also served by PacBell and SWBell. As a result of this curtailment, SBC halted construction on the Advanced Communications Network (ACN) in California. As part of an agreement with the ACN vendor, SBC paid the liabilities of the ACN trust that owned and financed ACN construction, incurred costs to shut down all construction previously conducted under the trust and received certain consideration from the vendor. In the second quarter of 1997, SBC recognized net expense of $553 ($346 after tax) associated with these activities. During the third quarter of 1997, SBC recorded the corresponding short-term debt of $610 previously incurred by the ACN trust on its balance sheet. Additionally, SBC curtailed certain other video-related activities including discontinuing its broadband network video trials in Richardson, Texas, and San Jose, California, substantially scaling back its involvement in the Tele-TV joint venture and withdrawing its operations in territory served by SWBell from the Americast venture. Americast partners are disputing the withdrawal in arbitration and litigation, the outcome of which cannot be predicted, but is not expected to have a material impact on SBC's financial condition or results of operations. The collective impact of these decisions and actions by SBC resulted in a charge of $145 ($92 after tax) in the second quarter of 1997. Note 3. Merger Agreement with Ameritech Corporation On May 11, 1998, SBC announced a definitive agreement to merge an SBC subsidiary with Ameritech Corporation (Ameritech) in a transaction in which each share of Ameritech common stock will be converted into and exchanged for 1.316 shares of SBC common stock (equivalent to approximately 1,450 million shares). After the merger, Ameritech will be a wholly-owned subsidiary of SBC. The transaction, which has been approved by the board of directors and shareowners of each company, is intended to be accounted for as a pooling of interests and to be a tax-free reorganization. The merger is subject to certain regulatory approvals, including the Federal Communications Commission (FCC) and state commissions in Ohio and Illinois. If approvals are granted, the transaction is expected to close in 1999. SBC and Ameritech own competing cellular licenses in several markets, including, but not limited to, Chicago, Illinois, and St. Louis, Missouri (Overlapping Cellular Licenses). In an effort to comply with the FCC's rules and regulations and certain provisions of the Merger Agreement, SBC and Ameritech expect to be required by the FCC to divest one of the Overlapping Cellular Licenses in each market and are attempting to determine the manner in which an Overlapping Cellular License in each market should be divested. The pro forma effect on SBC's consolidated statements of income had the merger occurred on January 1, 1996 is as follows: ----------------------------------------------------------------- Pro Forma (unaudited): 1998 1997 1996 ----------------------------------------------------------------- Operating revenues $ 45,931 $ 42,679 $ 40,119 Income before extraordinary loss and cumulative effect of accounting change $ 7,674 $ 3,970 $ 5,521 Net income $ 7,629 $ 3,970 $ 5,611 ----------------------------------------------------------------- Basic earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 2.25 $ 1.17 $ 1.62 Net income $ 2.24 $ 1.17 $ 1.65 ----------------------------------------------------------------- Diluted earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 2.23 $ 1.16 $ 1.61 Net income $ 2.21 $ 1.16 $ 1.64 ================================================================= This pro forma information does not include the effect of changes, which will be applied retroactively, to conform accounting methodologies between SBC and Ameritech. Based on information currently available, management estimates the conforming changes will not materially affect the pro forma operating revenues or income before extraordinary loss and cumulative effect of accounting change. Additionally, the pro forma information also does not include any potential cost savings which may result from the integration of SBC's and Ameritech's operations or future transaction costs relating to the merger (which are estimated to be less than $90), nor does it consider any reorganization costs or costs associated with the disposition of the Overlapping Cellular Licenses that may be required. Management is unable to quantify the potential cost savings that may result from the integration of SBC and Ameritech. The financial impact of the reorganization costs or costs associated with the disposition of the Overlapping Cellular Licenses cannot be determined pending the resolution of the disposal. Note 4. Pacific Telesis Group Financial Information The following table presents summarized financial information for PAC at December 31, or for the year then ended: ---------------------------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------------------- Balance Sheets Current assets $ 3,037 $ 2,835 $ 2,474 Noncurrent assets 15,428 14,150 14,134 Current liabilities 5,278 4,513 3,527 Noncurrent liabilities 10,482 10,413 10,308 ============================================================================ Income Statements Operating revenues $ 11,302 $ 10,101 $ 9,588 Operating income (loss) 2,612 (166) 2,198 Income (loss) before extraordinary loss and cumulative effect of accounting changes 1,240 (546) 1,057 Net income (loss) 1,180 (224) 1,142 ============================================================================ SBC has not provided separate financial statements and other disclosures for PAC as management has determined that such information is not material to the holders of the Trust Originated Preferred Securities (TOPrS) (see Note 11), which have been guaranteed by SBC. This information is provided as a supplement only. Note 5. Earnings Per Share A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for income before extraordinary loss and cumulative effect of accounting change for the years ended December 31, 1998, 1997 and 1996 are shown in the table below. -------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 -------------------------------------------------------------------------- Numerators Numerator for basic earnings per share: Income before extraordinary loss and cumulative effect of accounting change $4,068 $1,674 $3,387 -------------------------------------------------------------------------- Dilutive potential common shares: Other stock-based compensation 4 3 2 -------------------------------------------------------------------------- Numerator for diluted earnings per share $4,072 $1,677 $3,389 ========================================================================== Denominators Denominator for basic earnings per share: Weighted average number of common shares outstanding (000) 1,956,610 1,944,617 1,956,200 -------------------------------------------------------------------------- Dilutive potential common shares (000): Stock options 21,701 12,926 7,385 Other stock-based compensation 5,542 4,388 3,410 -------------------------------------------------------------------------- Denominator for diluted earnings per share 1,983,853 1,961,931 1,966,995 ========================================================================== Basic earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 2.08 $ 0.86 $ 1.73 Extraordinary loss (0.03) - - Cumulative effect of accounting change 0.01 - 0.05 -------------------------------------------------------------------------- Net income $ 2.06 $ 0.86 $ 1.78 ========================================================================== Diluted earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 2.05 $ 0.85 $ 1.72 Extraordinary loss (0.03) - - Cumulative effect of accounting change 0.01 - 0.05 -------------------------------------------------------------------------- Net income $ 2.03 $ 0.85 $ 1.77 ========================================================================== Note 6. Property, Plant and Equipment Property, plant and equipment is summarized as follows at December 31: ------------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------------ Land $ 442 $ 434 Buildings 6,842 6,502 Central office equipment 28,019 25,864 Cable, wiring and conduit 30,916 29,943 Other equipment 5,897 5,926 Under construction 1,350 1,546 ------------------------------------------------------------------------ 73,466 70,215 Accumulated depreciation and amortization 43,546 41,147 ------------------------------------------------------------------------ Property, plant and equipment-net $ 29,920 $ 29,068 ======================================================================== SBC's depreciation expense as a percentage of average depreciable plant was 7.2%, 7.4% and 6.9% for 1998, 1997 and 1996. Certain facilities and equipment used in operations are under operating or capital leases. Rental expenses under operating leases for 1998, 1997 and 1996 were $440, $386 and $346. At December 31, 1998, the future minimum rental payments under noncancelable operating leases for the years 1999 through 2003 were $1,817, $2,652, $2,519, $2,553 and $2,508 and $7,096 thereafter. Capital leases are not significant. Note 7. Investment in Telewest Communications plc During 1998, SBC owned up to 15% of Telewest Communications plc (Telewest), the largest cable television operator in the United Kingdom. Due to restrictions existing on the sale of SBC's interest in Telewest, SBC accounted for its investment using the cost method of accounting. During the third quarter of 1998, as a result of Telewest's merger with General Cable, Telewest entered into a new agreement with its key shareholders, including SBC, which lifted those restrictions. SBC was then required to account for its investment in Telewest as available-for-sale securities pursuant to Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). Under FAS 115, available-for-sale securities are measured at fair value in the statement of financial position, and unrealized holding gains and losses are excluded from earnings and reported as a net amount in a separate component of shareowners' equity until realized. During 1998, SBC sold approximately 90% of its Telewest investment for $425 and made a charitable contribution of the remainder. The net effect from Telewest transactions for the year ended December 31, 1998 was to increase net income by $60. Note 8. Equity Investments Investments in affiliates accounted for under the equity method include SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications company. SBC is a member of a consortium that holds all of the AA shares of Telmex stock, representing voting control of the company. Another member of the consortium, Carso Global Telecom, S.A. de C.V., has the right to appoint a majority of the directors of Telmex. SBC also owns L shares which have limited voting rights. Throughout 1998, SBC sold portions of its L shares in response to open market share repurchases by Telmex, so that its total equity investment remained below 10% of Telmex's total equity capitalization. Other major equity investments held by SBC include a 1997 investment of approximately $760 in Telkom SA Limited (Telkom), the state-owned telecommunications company of South Africa (see Note 17), an indirect 15% ownership in Cegetel, a joint venture providing a broad range of telecommunications offerings in France, investments in Chilean telecommunications operations and minority ownership of several domestic wireless properties. The following table is a reconciliation of SBC's investments in equity affiliates: ----------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------- Beginning of year $ 2,740 $ 1,964 $ 1,616 Additional investments 55 1,076 337 Equity in net income 236 201 207 Dividends received (167) (90) (70) Currency translation adjustments (110) (135) (94) Reclassifications and other adjustments (240) (276) (32) ======================================================================= End of year $ 2,514 $ 2,740 $ 1,964 ======================================================================= The currency translation adjustment for 1998 primarily reflects the effect of exchange rate fluctuations on SBC's investment in South Africa. Other adjustments for 1998 reflect a write-down of an international investment and the sale of portions of SBC's Telmex L shares. Currency translation adjustments for 1997 primarily reflect the effect of the exchange rate fluctuations on SBC's investments in South African and French telecommunications companies. Other adjustments for 1997 reflect the sale of portions of SBC's Telmex L shares and the change to the cost method of accounting in 1997 for SBC's 1995 investment in South African wireless operations which were sold during the third quarter of 1998 (see Note 17). Undistributed earnings from equity affiliates were $918 and $862 at December 31, 1998 and 1997. Note 9. Segment Information SBC has four reportable segments: Wireline, Wireless, Directory and Other. The Wireline segment provides landline telecommunications services, including local, network access and long distance services, messaging and Internet services and sells customer premise and private business exchange equipment. The Wireless segment provides wireless telecommunications services, including local and long distance services, and sells wireless equipment. The Directory segment sells advertising for and publication of yellow pages and white pages directories and electronic publishing. The Other segment includes SBC's international investments and other domestic operating subsidiaries. These segments are strategic business units that offer different products and services and are managed accordingly. SBC evaluates performance based on income before income taxes, adjusted for normalizing items. For 1998, normalizing items included gains on sales of certain non-core businesses, principally the required disposition of SBC's interest in Mobile Telephone Networks (MTN), a South African national cellular company, due to SBC's investment in Telkom, and charges related to strategic initiatives resulting from the merger integration process with SNET. For 1997, normalizing items included the costs related to strategic initiatives resulting from the merger integration process with PAC, the impact of several second quarter 1997 regulatory rulings and charges for ongoing merger integration costs (see Note 2), as well as the gain on the sale of the Telephone Companies' interest in Bell Communications Research, Inc. (Bellcore) and the first quarter 1997 settlement gain at PAC associated with lump-sum pension payments that exceeded the projected service and interest costs for 1996 retirements. The effect of any normalizing adjustments is shown separately in the table below. The accounting policies of the segments are the same as those described in Note 1. Transactions between segments are reported at fair value. Corporate, adjustments and eliminations include corporate activities, the elimination of intersegment transactions, and other adjustments. Included in other adjustments are differences in accounting between subsidiary and consolidated financial statements for postretirement benefits at PacBell and the treatment of conforming accounting adjustments arising out of the pooling of interests with SNET and PAC that were required to be treated as changes in accounting principles by the subsidiaries. - --------------------------------------------------------------------------------------------------------------------------------- Corporate, At December 31, 1998 or for the Adjustments & Normalizing year ended Wireline Wireless Directory Other Eliminations Adjustments Total - --------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 22,097 $ 4,184 $ 2,320 $ 82 $ 102 $ (8) $ 28,777 Intersegment revenues 113 1 73 3 (190) - - Depreciation and amortization 4,265 583 31 - 77 221 5,177 Equity in net income of affiliates - 25 - 211 - - 236 Interest expense 861 179 11 37 (98) 3 993 Income before income taxes 4,364 490 1,131 269 195 (75) 6,374 Segment assets 33,427 7,161 1,385 2,854 239 - 45,066 Investment in equity method investees 34 232 - 2,274 (26) - 2,514 Expenditures for additions to long-lived assets 5,178 644 30 11 64 - 5,927 =================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------- Corporate, At December 31, 1997 or for the Adjustments & Normalizing year ended Wireline Wireless Directory Other Eliminations Adjustments Total - --------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 20,718 $ 3,696 $ 2,197 $ 57 $ 201 $ (188)$ 26,681 Intersegment revenues 208 1 89 - (298) - - Depreciation and amortization 4,095 491 28 - 83 604 5,301 Equity in net income of affiliates (5) 9 - 206 (9) - 201 Interest expense 837 152 4 25 (2) 27 1,043 Income before income taxes 3,736 355 1,043 192 75 (2,743) 2,658 Segment assets 32,018 7,071 1,227 3,398 1,122 - 44,836 Investment in equity method investees 34 229 - 2,503 (26) - 2,740 Expenditures for additions to long-lived assets 5,275 776 38 - 141 - 6,230 =================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------- Corporate, At December 31, 1996 or for the Adjustments & Normalizing year ended Wireline Wireless Directory Other Eliminations Adjustments Total - --------------------------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 19,751 $ 3,137 $ 2,077 $ 34 $ 203 $ - $ 25,202 Intersegment revenues 168 - 68 9 (245) - - Depreciation and amortization 3,954 397 28 1 86 - 4,466 Equity in net income of affiliates (5) 22 - 226 (36) - 207 Interest expense 766 107 5 34 (11) - 901 Income before income taxes 3,789 567 970 178 (47) - 5,457 Expenditures for additions to long-lived assets 4,712 1,006 32 5 100 - 5,855 =================================================================================================================================
Geographic Information SBC's investments outside of the United States are primarily accounted for under the equity method of accounting and do not record in operating revenues and expenses the revenues and expenses of the individual companies in which SBC invests. Long-lived assets consist primarily of the book value of these investments. ------------------------------------------------------------ Year Ended December 31, 1998 1997 1996 ------------------------------------------------------------ Revenues: United States $ 28,692 $ 26,624 $ 25,168 Mexico 15 21 25 South Africa 48 22 3 France 4 5 3 Chile 1 2 2 Other foreign 17 7 1 ------------------------------------------------------------ Total $ 28,777 $ 26,681 $ 25,202 ============================================================ ------------------------------------------------ December 31, 1998 1997 ------------------------------------------------ Long-Lived Assets: United States $ 31,135 $ 30,229 Mexico 836 733 South Africa 694 837 France 557 543 United Kingdom - 339 Chile 59 295 Other foreign 214 234 ------------------------------------------------ Total $ 33,495 $ 33,210 ================================================ Note 10. Debt Long-term debt, including interest rates and maturities, is summarized as follows at December 31: ----------------------------------------------------------------------------- 1998 1997 -------------------------------------------------------------------------- SWBell Debentures 5.38%-5.88% 2003-2006 $ 500 $ 500 6.13%-6.88% 2000-2048 1,750 1,550 7.00%-7.75% 2009-2027 1,150 1,750 --------------------------------------------------------------------------- 3,400 3,800 Unamortized discount-net of premium (38) (36) --------------------------------------------------------------------------- Total debentures 3,362 3,764 --------------------------------------------------------------------------- Notes 5.04%-7.67% 1998-2010 1,063 1,236 Unamortized discount (5) (6) --------------------------------------------------------------------------- Total notes 1,058 1,230 --------------------------------------------------------------------------- PacBell Debentures 4.62%-5.88% 1999-2006 475 475 6.00%-6.88% 2002-2034 1,194 1,194 7.12%-7.75% 2008-2043 1,587 2,250 8.50% 2031 29 225 --------------------------------------------------------------------------- 3,285 4,144 Unamortized discount-net of premium (65) (89) --------------------------------------------------------------------------- Total debentures 3,220 4,055 --------------------------------------------------------------------------- Notes 6.12%-8.70% 2001-2009 1,500 1,300 Unamortized discount (18) (18) --------------------------------------------------------------------------- Total notes 1,482 1,282 --------------------------------------------------------------------------- Other notes and debentures 4.37%-6.98% 1998-2007 501 633 7.00%-10.50% 1998-2033 2,048 2,033 --------------------------------------------------------------------------- 2,549 2,666 Unamortized premium-net of discount 61 65 --------------------------------------------------------------------------- Total other notes and debentures 2,610 2,731 --------------------------------------------------------------------------- Guaranteed obligations of ESOP 1 8.41%-9.40% 2000 127 198 --------------------------------------------------------------------------- Capitalized leases 260 294 --------------------------------------------------------------------------- Total long-term debt, including current maturities 12,119 13,554 Current maturities (507) (378) --------------------------------------------------------------------------- Total long-term debt $ 11,612 13,176 =========================================================================== 1 See Note 14. In February and September 1998, SBC called $805 of long-term debt for retirement. SBC recognized after-tax charges of $11 associated with the calling of this debt. In October 1998, PacBell repurchased $684 of long-term debt. The repurchases resulted in a $60 after-tax extraordinary loss, net of taxes of $42. At December 31, 1998, the aggregate principal amounts of long-term debt and average interest rate scheduled for repayment for the years 1999 through 2003 were $507 (6.6%), $574 (6.4%), $1,034 (7.5%), $980 (6.7%), $749 (6.3%) with $8,406 (6.9%) due thereafter. As of December 31, 1998, SBC was in compliance with all covenants and conditions of instruments governing its debt. Debt maturing within one year consists of the following at December 31: ------------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------------ Commercial paper $ 1,044 $ 1,412 Current maturities of long-term debt 507 378 Other short-term debt - 349 ------------------------------------------------------------------------ Total $ 1,551 $ 2,139 ======================================================================== The weighted average interest rate on commercial paper debt at December 31, 1998 and 1997 was 5.49% and 6.02%. SBC has entered into agreements with several banks for compensated lines of credit totaling $655 and uncompensated lines of credit totaling $805, thus total lines of credit available are $1,460, all of which may be used to support commercial paper borrowings. SBC had no borrowings outstanding under these lines of credit as of December 31, 1998 or 1997. Note 11. Financial Instruments The carrying amounts and estimated fair values of SBC's long-term debt, including current maturities and other financial instruments, are summarized as follows at December 31: ------------------------------------------------------------------------- 1998 1997 ------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------ SWBell debentures $3,362 $3,531 $3,764 $3,828 SWBell notes 1,058 1,129 1,230 1,271 PacBell debentures 3,220 3,463 4,055 4,337 PacBell notes 1,482 1,590 1,282 1,342 Other notes and debentures 2,610 2,725 2,731 2,947 TOPrS 1,000 1,029 1,000 1,034 Guaranteed obligations of ESOP 1 127 132 198 207 ======================================================================== 1 See Note 14. The fair values of SBC's long-term debt were estimated based on quoted market prices, where available, or on the net present value method of expected future cash flows using current interest rates. The fair value of the TOPrS was estimated based on quoted market prices. The carrying amounts of commercial paper debt approximate fair values. SBC does not hold or issue any financial instruments for trading purposes. SBC's cash equivalents and short-term investments are recorded at amortized cost. The carrying amounts of cash and cash equivalents and short-term investments and customer deposits approximate fair values. Pacific Telesis Financing I and II (the Trusts) were formed for the exclusive purpose of issuing preferred and common securities representing undivided beneficial interests in the Trusts and investing the proceeds from the sales of TOPrS in unsecured subordinated debt securities of PAC. Under certain circumstances, dividends on TOPrS could be deferred for up to a period of five years. PAC sold $1 billion of TOPrS, $500 at 7.56% in January 1996 through Pacific Telesis Financing I and $500 at 8.5% in June 1996 through Pacific Telesis Financing II. As of December 31, 1998, the Trusts held subordinated debt securities of PAC in principal amounts of $516 and $514 with interest rates of 7.56% and 8.5%. Both issues of TOPrS were priced at $25 per share, have an original 30-year maturity that may be extended up to 49 years, are callable five years after date of sale at par and are included on the balance sheet as corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts. The proceeds were used to retire short-term indebtedness, primarily commercial paper. SBC has guaranteed payment of the obligations of the TOPrS. Derivatives SBC entered into an equity swap contract to hedge exposure to risk of market changes related to its recorded liability for outstanding employee stock options for common stock of AirTouch (spun-off operations) and associated stock appreciation rights (SARs) (see Note 15). In February 1999, SBC began exiting the equity swap contract, receiving cash for the appreciated value of the contract and recognizing a minimal gain. Once exited, SBC will record in other income (expense) - net future changes in the value of the underlying employee stock option exposure. SBC plans to make open-market purchases of the stock of spun-off operations to satisfy its obligation for options that are exercised. Off-balance-sheet risk exists to the extent the market price of the stock of spun-off operations rises above the market price reflected in the liability's current carrying value. The equity swap hedged this exposure and minimized the impact of market fluctuations. The contract entitled SBC to receive settlement payments to the extent the price of the common stock of spun-off operations rose above the notional value of $23.74 per share, but imposed an obligation to make payments to the extent the price declined below this level. The swap also obligated SBC to make a monthly payment of a fee based on LIBOR. The total notional amount of the contract, $13 and $19 as of December 31, 1998 and 1997, covered the approximate number of the outstanding options and SARs of spun-off operations on that date. SBC periodically adjusted downward the outstanding notional amount as the options and SARs were exercised. Both the equity swap and SBC's liability for the stock options and SARs of spun-off operations are carried in the balance sheet at their market values, which were immaterial as of December 31, 1998 and 1997. Gains and losses from quarterly market adjustments of the carrying amounts were substantially offsetting. As of December 31, 1998 and 1997, the accounting loss that would have been incurred from nonperformance by the counterparty to the equity swap was $26 and $14. Note 12. Income Taxes Significant components of SBC's deferred tax liabilities and assets are as follows at December 31: ------------------------------------------------------------------- 1998 1997 ------------------------------------------------------------------- Depreciation and amortization $ 3,959 $ 3,679 Equity in foreign subsidiaries 357 253 Other 355 2,052 ------------------------------------------------------------------- Deferred tax liabilities 4,671 5,984 ------------------------------------------------------------------- Employee benefits 1,707 2,528 Unamortized investment tax credits 91 174 Currency translation adjustments 333 303 Other 1,244 2,140 ------------------------------------------------------------------- Deferred tax assets 3,375 5,145 ------------------------------------------------------------------- Deferred tax assets valuation allowance 36 70 ------------------------------------------------------------------- Net deferred tax liabilities $ 1,332 $ 909 =================================================================== The decrease in the valuation allowance is the result of an evaluation of the uncertainty associated with the realization of certain deferred tax assets. The valuation allowance is maintained in deferred tax assets for certain unused federal and state loss carryforwards. The components of income tax expense are as follows: ---------------------------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------------------- Federal: Current $ 1,583 $ 786 $ 1,443 Deferred-net 437 76 364 Amortization of investment tax credits (72) (82) (82) ---------------------------------------------------------------------------- 1,948 780 1,725 ---------------------------------------------------------------------------- State and local: Current 262 41 224 Deferred-net 96 163 121 ---------------------------------------------------------------------------- 358 204 345 ---------------------------------------------------------------------------- Total $ 2,306 $ 984 $ 2,070 ============================================================================ A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate (35%) to income before income taxes, extraordinary loss and cumulative effect of accounting change is as follows: ----------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------- Taxes computed at federal statutory rate $ 2,231 $ 930 $ 1,910 Increases (decreases) in income taxes resulting from: Amortization of investment tax credits over the life of the plant that gave rise to the credits (47) (53) (53) State and local income taxes-net of federal income tax benefit 233 133 224 Other-net (111) (26) (11) ----------------------------------------------------------------------------- Total $ 2,306 $ 984 $ 2,070 ============================================================================= Note 13. Employee Benefits Pensions - Substantially all employees of SBC are covered by one of various noncontributory pension and death benefit plans. The pension benefit formula used in the determination of pension cost for nonmanagement employees is based on a flat dollar amount per year of service according to job classification. For PAC managers, benefits accrue in separate account balances based on a fixed percentage of each employee's monthly salary with interest. For all other managers, benefits accrue in separate account balances based on a fixed percentage of each employee's monthly salary plus interest or are determined based upon a stated percentage of adjusted career income. Both the bargaining-unit and management employees of SNET have a cash balance pension plan. Accordingly, pension benefits are determined as a single account balance and grow each year with pay and interest credits. SBC's objective in funding the plans, in combination with the standards of the Employee Retirement Income Security Act of 1974 (as amended), is to accumulate funds sufficient to meet its benefit obligations to employees upon their retirement. Contributions to the plans are made to a trust for the benefit of plan participants. Plan assets consist primarily of stocks, U.S. government and domestic corporate bonds, index funds and real estate. The following table presents the change in the pension plan benefit obligation for the years ended December 31: ------------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------------ Benefit obligation at beginning of the year $ 18,116 $ 16,330 Service cost - benefits earned during the period 339 300 Interest cost on projected benefit obligation 1,265 1,237 Amendments 254 402 Actuarial gain 566 1,398 Special termination benefits 53 - Benefits paid (1,723) (1,551) ------------------------------------------------------------------------ Benefit obligation at end of year $ 18,870 $ 18,116 ======================================================================== The following table presents the change in pension plan assets for the years ended December 31 and the pension plans' funded status at December 31: ------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------ Fair value of plan assets at beginning of the year $ 24,998 $ 22,428 Actual return on plan assets 3,753 4,111 Benefits paid (1,720) (1,541) ------------------------------------------------------------------ Fair value of plan assets at end of year $ 27,031 $ 24,998 ================================================================== Funded status $ 8,161 $ 6,882 Unrecognized prior service cost 1,312 1,221 Unrecognized net gain (8,327) (7,081) Unamortized transition asset (759) (895) ------------------------------------------------------------------ Prepaid pension cost $ 387 $ 127 ================================================================== The following table presents amounts recognized in SBC's Consolidated Balance Sheets at December 31: ---------------------------------------------------------------- 1998 1997 ---------------------------------------------------------------- Prepaid pension cost $ 819 $ 545 Accrued pension liability (432) (418) ---------------------------------------------------------------- Net amount recognized $ 387 $ 127 ================================================================ Net pension cost is composed of the following: --------------------------------------------------------------------------- 1998 1997 1996 --------------------------------------------------------------------------- Service cost - benefits earned during the period $ 339 $ 300 $ 317 Interest cost on projected benefit obligation 1,265 1,237 1,226 Expected return on plan assets (1,771) (1,640) (1,664) Amortization of prior service cost 27 15 (19) Recognized actuarial gain (99) (115) (92) --------------------------------------------------------------------------- Net pension benefit $ (239) $ (203) $ (232) =========================================================================== Significant weighted average assumptions used in developing pension information include: ----------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------- Discount rate for determining projected benefit obligation 7.0% 7.25% 7.5% Long-term rate of return on plan assets 8.5% 8.5% 8.5% Composite rate of compensation increase 4.3% 4.3% 4.3% ============================================================================= The projected benefit obligation is the actuarial present value of all benefits attributed by the pension benefit formula to previously rendered employee service. It is measured based on assumptions concerning future interest rates and employee compensation levels. Should actual experience differ from the actuarial assumptions, the benefit obligation will be affected. In April 1997, management amended the pension plan for non-PAC managers to a cash balance pension plan effective June 1, 1997. Under the new plan, participants accrue benefits based on a percentage of pay plus interest. In addition, a transition benefit is phased in over five years. The new plan also requires computation of a grandfathered benefit using the old formula for five years. Participants receive the greater of the cash balance benefit or the grandfathered benefit. The new cash balance plan allows lump sum benefit payments in addition to annuities. This change did not have a significant impact on SBC's net income for 1997. In March 1996, management amended the pension plan for PAC managers from a final pay plan to a cash balance plan effective July 1, 1996. An enhanced transition benefit, based on frozen pay and service as of June 30, 1996, was established to preserve benefits already accrued by salaried employees under the final pay plan and resulted in an increase in earned benefits for most employees. SBC also updated the actuarial assumptions used in valuing the PAC plans to reflect changes in market interest rates and recent experience, including a change in its assumption concerning future ad hoc increases in pension benefits. Taken together, these changes increased net income by approximately $125 during 1996. Approximately 4,200 employees left PacBell during 1996 under retirement or voluntary and involuntary severance programs and received special pension benefits and cash incentives in connection with the PacBell restructuring and related force reduction programs. Annual pension cost excludes $64 of additional pension benefits charged to PacBell's restructuring reserve in 1996. During 1997, a significant amount of lump sum pension payments resulted in a partial settlement of PAC's pension plans. Therefore, net settlement gains in the amount of $299 were recognized in 1997. Of this amount, $152 was recognized in the first quarter of 1997 and related primarily to managers who terminated employment in 1996. These gains are not included in the net pension cost shown in the preceding table. In connection with a voluntary early-out offer that provided enhanced pension benefits, approximately 1,135 employees left SNET during 1996. Annual pension cost excludes $65 of net settlement gains charged to SNET's restructuring reserve in 1996. Supplemental Retirement Plans - SBC also provides senior and middle management employees with nonqualified, unfunded supplemental retirement and savings plans. These plans include supplemental defined pension benefits as well as compensation deferral plans, some of which include a corresponding match by SBC based on a percentage of the compensation deferral. Expenses related to these plans were $105, $90 and $90 in 1998, 1997 and 1996. Liabilities of $1,008 and $897 related to these plans have been included in other noncurrent liabilities in SBC's Consolidated Balance Sheets at December 31, 1998 and 1997. Postretirement Benefits - SBC provides certain medical, dental and life insurance benefits to substantially all retired employees under various plans and accrues actuarially determined postretirement benefit costs as active employees earn these benefits. Employees retiring after certain dates will pay a share of the costs of medical coverage that exceed a defined dollar medical cap. Such future cost-sharing provisions have been reflected in determining SBC's postretirement benefit costs. SBC maintains Voluntary Employee Beneficiary Association trusts to fund postretirement benefits. Assets consist principally of stocks and U.S. government and corporate bonds. The following table sets forth the change in the benefit obligation for the years ended December 31: ----------------------------------------------------------------------- 1998 1997 ----------------------------------------------------------------------- Benefit obligation at beginning of the year $ 7,701 $ 7,112 Service cost - benefits earned during the period 109 106 Interest cost on projected benefit obligation 537 516 Amendments 363 (48) Actuarial gain (220) 397 Benefits paid (410) (382) ----------------------------------------------------------------------- Benefit obligation at end of year $ 8,080 $ 7,701 ======================================================================= The following table sets forth the change in plan assets for the years ended December 31 and the plans' funded status at December 31: ------------------------------------------------------------------- 1998 1997 ------------------------------------------------------------------- Fair value of plan assets at beginning of the year $ 3,826 $ 2,926 Actual return on plan assets 847 677 Employer contribution 354 462 Benefits paid (248) (239) ------------------------------------------------------------------- Fair value of plan assets at end of year $ 4,779 $ 3,826 =================================================================== Funded status $ (3,301) $ (3,875) Unrecognized prior service cost 286 (13) Unrecognized net gain (1,912) (1,175) ------------------------------------------------------------------- Accrued postretirement benefit obligation $ (4,927) $ (5,063) =================================================================== Postretirement benefit cost is composed of the following: --------------------------------------------------------------------------- 1998 1997 1996 --------------------------------------------------------------------------- Service cost-benefits earned during the period $ 109 $ 106 $ 105 Interest cost on accumulated postretirement benefit obligation (APBO) 537 516 512 Expected return on assets (272) (220) (181) Other - net 6 (14) 5 --------------------------------------------------------------------------- Postretirement benefit cost $ 380 $ 388 $ 441 =========================================================================== The fair value of plan assets restricted to the payment of life insurance benefits was $844 and $987 at December 31, 1998 and 1997. At December 31, 1998 and 1997, the accrued life insurance benefits included in the APBO benefit obligation were $367 and $93. The assumed medical cost trend rate in 1999 is 7.0%, decreasing linearly to 5.5% in 2002, prior to adjustment for cost-sharing provisions of the medical and dental plans for active and certain recently retired employees. The assumed dental cost trend rate in 1999 is 5.75%, reducing to 5.0% in 2002. Raising the annual medical and dental cost trend rates by one percentage point increases the APBO as of December 31, 1998 by $488 and increases the aggregate service and interest cost components of the net periodic postretirement benefit cost for 1998 by approximately $34. Decreasing the annual medical and dental cost trend rates by one percentage point decreases the APBO as of December 31, 1998 by $408 and decreases the aggregate service and interest cost components of the net periodic postretirement benefit cost for 1998 by approximately $27. Significant assumptions for the discount rate, long-term rate of return on plan assets and composite rate of compensation increase used in developing the APBO and related postretirement benefit costs were the same as those used in developing the pension information. Note 14. Other Employee Benefits Employee Stock Ownership Plans - SBC maintains contributory savings plans which cover substantially all employees. Under the savings plans, SBC matches a stated percentage of eligible employee contributions, subject to a specified ceiling. SBC has four leveraged ESOPs as part of the existing savings plans. Two of the ESOPs were funded with notes issued by the savings plans to various lenders, the proceeds of which were used to purchase shares of SBC's common stock in the open market. These notes are unconditionally guaranteed by SBC and therefore presented as a reduction to shareowners' equity and an increase in long-term debt. They will be repaid with SBC contributions to the savings plans, dividends paid on SBC shares and interest earned on funds held by the ESOPs. The third ESOP purchased PAC treasury shares in exchange for a promissory note from the plan to PAC. Since PAC is the lender, this note is not reflected as a liability and the remaining cost of unallocated trust shares is carried as a reduction of shareowners' equity. Principal and interest on the note are paid from employer contributions and dividends received by the trust. All PAC shares were exchanged for SBC shares effective with the merger April 1, 1997. The provisions of the ESOP were unaffected by this exchange. The fourth ESOP acquired SNET shares with the proceeds of notes issued by the savings plans, which SNET guaranteed, through a third party. The SNET common stock was acquired through open market purchases, in exchange for a promissory note from the plan to SNET. SNET periodically makes cash payments to the ESOP that, together with dividends received on shares held by the ESOP, are used to make interest and principal payments on both loans. All SNET shares were exchanged for SBC shares effective with the merger October 26, 1998. The provisions of the ESOP were unaffected by this exchange. SBC's match of employee contributions to the savings plans is fulfilled with shares of stock allocated from the ESOPs and with purchases of SBC's stock in the open market. Shares held by the ESOPs are released for allocation to the accounts of employees as employer matching contributions are earned. Benefit cost is based on a combination of the contributions to the savings plans and the cost of shares allocated to participating employees' accounts. Both benefit cost and interest expense on the notes are reduced by dividends on SBC's shares held by the ESOPs and interest earned on the ESOPs' funds. Information related to the ESOPs and the savings plans is summarized below: ----------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------- Benefit expense-net of dividends and interest income $ 55 $ 59 $ 76 Interest expense-net of dividends and interest income 16 21 30 ----------------------------------------------------------------------------- Total expense $ 71 $ 80 $ 106 ============================================================================= Company contributions for ESOPs $ 110 $ 112 $ 121 ============================================================================= Dividends and interest income for debt service $ 58 $ 63 $ 67 ============================================================================= SBC shares held by the ESOPs are summarized as follows at December 31: ------------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------------ Unallocated 11,505,123 17,210,803 Committed to be allocated 1,245,335 282,388 Allocated to participants 47,425,671 45,966,307 ------------------------------------------------------------------------ Total 60,176,129 63,459,498 ======================================================================== Note 15. Stock-Based Compensation Under various SBC plans, senior and other management employees and non-employee directors have received stock options, SARs, performance shares and nonvested stock units to purchase shares of SBC common stock. Options issued through December 31, 1998 carry exercise prices equal to the market price of the stock at the date of grant and have maximum terms ranging from five to ten years. Depending upon the grant, vesting of options may occur up to four years from the date of grant. Performance shares are granted to key employees in the form of common stock and/or in cash based upon the price of common stock at date of grant and are awarded at the end of a two- or three-year period, subject to the achievement of certain performance goals. Nonvested stock units also are valued at market price of the stock at date of grant and vest over a three-year period. Up to 206 million shares may be issued under these plans. In 1996, SBC elected to continue measuring compensation cost for these plans using the intrinsic value-based method of accounting prescribed in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Accordingly, no compensation cost for SBC's stock option plans has been recognized. The compensation cost that has been charged against income for SBC's other stock-based compensation plans, primarily SARs and nonvested stock units, totaled $45, $43 and $22 for 1998, 1997 and 1996. Had compensation cost for stock option plans been recognized using the fair value based method of accounting at the date of grant for awards in 1998, 1997 and 1996 as defined by FAS 123, SBC's net income would have been $3,921, $1,597 and $3,445, and basic net income per share would have been $2.00, $0.82 and $1.76. Options and SARs held by the continuing employees of PAC at the time of the AirTouch spin-off were supplemented with an equal number of options and SARs for common shares of spun-off operations. The exercise prices for outstanding options and SARs held by continuing employees of PAC were adjusted downward to reflect the value of the supplemental spun-off operations' options and SARs. The balance sheet reflects a related liability equal to the difference between the current market price of spun-off operations stock and the exercise prices of the supplemental options outstanding (see Note 11). As of December 31, 1998, 459,916 supplemental spun-off operations options and SARs were outstanding with expiration dates ranging from 1999 to 2003. Outstanding options and SARs that were held by employees of the wireless operations at the spin-off date were replaced by options and SARs for common shares of spun-off operations. The spun-off operations assumed liability for these replacement options and SARs. For purposes of these pro forma disclosures, the estimated fair value of the options granted after 1994 is amortized to expense over the options' vesting period. Because most employee options vest over a two- to four-year period, these disclosures will not be indicative of future pro forma amounts until the FAS 123 rules are applied to all outstanding non-vested awards. The fair value for these options was estimated at the date of grant, using a Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: risk-free interest rate of 5.72%, 6.56% and 6.25%; dividend yield of 2.21%, 3.07% and 4.91%; expected volatility factor of 15%, 15% and 18%; and expected option life of 5.3, 5.8 and 4.7 years. Information related to options and SARs is summarized below: ----------------------------------------------------------------------------- Weighted Average Number Exercise Price ----------------------------------------------------------------------------- Outstanding at January 1, 1996 60,648,949 $20.89 Granted 25,035,921 23.00 Exercised (3,979,290) 18.73 Forfeited/Expired (2,159,301) 21.59 ----------------------------------------------------------------------------- Outstanding at December 31, 1996 (35,522,826 exercisable at weighted average price of $20.13) 79,546,279 21.64 Granted 33,560,019 27.28 Exercised (17,548,592) 20.51 Forfeited/Expired (4,817,751) 25.16 ----------------------------------------------------------------------------- Outstanding at December 31, 1997 (40,802,392 exercisable at weighted average price of $21.02) 90,739,955 23.76 Granted 21,756,535 42.51 Exercised (16,853,425) 22.13 Forfeited/Expired (4,591,616) 31.08 ----------------------------------------------------------------------------- Outstanding at December 31, 1998 (47,493,729 exercisable at weighted average price of $22.31) 91,051,449 $28.17 ============================================================================= Information related to options and SARs outstanding at December 31, 1998: ----------------------------------------------------------------------------- $13.50- $17.50- $26.00- $34.00- Exercise Price Range $17.49 $25.99 $33.99 $43.00 ----------------------------------------------------------------------------- Number of options and SARs: Outstanding 3,492,843 41,277,620 25,901,002 20,379,984 Exercisable 3,492,843 41,277,620 2,639,149 84,117 Weighted average exercise price: Outstanding $16.51 $22.39 $27.60 $42.59 Exercisable $16.51 $22.39 $28.21 $42.00 Weighted average remaining contractual life 3.43 years 6.38 years 8.31 years 5.97 years ============================================================================= The weighted-average, grant-date fair value of each option granted during 1998, 1997 and 1996 was $8.62, $5.57 and $3.47. Note 16. Shareowners' Equity Common Stock Split - On January 30, 1998, the Board of Directors of SBC declared a two-for-one stock split, effected in the form of a stock dividend, on the shares of SBC's common stock. Each shareholder of record on February 20, 1998 received an additional share of common stock for each share of common stock then held. The stock was issued March 19, 1998. SBC retained the current par value of $1.00 per share for all shares of common stock. Note 17. Acquisitions and Dispositions During the third quarter of 1998, SBC sold its interest in MTN to the remaining shareholders of MTN for $337. The sale fulfilled SBC's obligation to divest MTN as a requirement of the acquisition of Telkom. The effect on other income (expense) - net and net income from the sale of MTN was $250 and $162. See Note 7 for the disposition of SBC's interest in Telewest. In May 1997, a consortium made up of SBC and Telekom Malaysia Berhad, 60% owned by SBC, completed the purchase of 30% of Telkom. SBC invested approximately $760, approximately $600 of which will remain in Telkom. During 1996, SBC received several AT&T Corp. cellular networks in Arkansas in exchange for SBC's PCS licenses in Memphis and Little Rock and other consideration. These acquisitions were primarily accounted for under the purchase method of accounting. The purchase prices in excess of the underlying fair value of identifiable net assets acquired are being amortized over periods not to exceed 40 years. Results of operations of the properties acquired have been included in the consolidated financial statements from their respective dates of acquisition. The above developments did not have a significant impact on consolidated results of operations for 1998, 1997 or 1996, nor would they had they occurred on January 1 of the respective periods. On January 20, 1999, SBC announced it has agreed to acquire Comcast Cellular Corporation (Comcast Cellular), the wireless subsidiary of Comcast Corporation, in a transaction valued at $1,674. Under the terms of the agreement, SBC will pay $400 in cash and assume Comcast Cellular's current debt of $1,274. The transaction will be accounted for through the purchase accounting method. Comcast Cellular offers analog and digital wireless services to more than 800,000 subscribers in Pennsylvania, Delaware, New Jersey and Illinois. The largest market in which Comcast Cellular operates is Philadelphia, Pennsylvania. SBC for several years has been operating the Illinois properties it is purchasing under a previous agreement between the two companies. The transaction, which is subject to regulatory approvals, is expected to be completed by the end of 1999. Note 18. Additional Financial Information ----------------------------------------------------------------------------- December 31, ----------------------- Balance Sheets 1998 1997 ----------------------------------------------------------------------------- Accounts payable and accrued liabilities: Accounts payable $ 2,865 $ 3,115 Accrued taxes 1,206 1,118 Advance billing and customer deposits 855 764 Compensated future absences 568 558 Accrued interest 249 326 Accrued payroll 338 315 Other 1,899 2,134 ----------------------------------------------------------------------------- Total $ 7,980 $ 8,330 ============================================================================= Statements of Income 1998 1997 1996 ----------------------------------------------------------------------------- Advertising expense $ 594 $ 558 $ 400 ============================================================================= Interest expense incurred $ 1,052 $ 1,168 $ 1,043 Capitalized interest (59) (125) (142) ----------------------------------------------------------------------------- Total interest expense $ 993 $ 1,043 $ 901 ============================================================================= ----------------------------------------------------------------------------- Statements of Cash Flows 1998 1997 1996 ----------------------------------------------------------------------------- Cash paid during the year for: Interest $ 1,070 $ 1,014 $ 888 Income taxes, net of refunds $ 1,721 $ 489 $ 1,367 ============================================================================= No customer accounted for more than 10% of consolidated revenues in 1998, 1997 or 1996. Several subsidiaries of SBC have negotiated contracts with the Communications Workers of America (CWA), none of which is subject to renegotiation in 1999. Approximately two-thirds of SBC's employees are represented by the CWA. Note 19. Quarterly Financial Information (Unaudited) ----------------------------------------------------------------------------------- Basic Earnings Total Operating (Loss) Stock Price Calendar Operating Income Net Income Per Common ----------------------------- Quarter Revenues (Loss) (Loss) Share High Low Close ----------------------------------------------------------------------------------- 1998 First 1 $ 6,855 $ 1,775 $ 985 $ 0.50 $ 46.563 $ 35.375 $ 43.375 Second 7,030 1,817 1,020 0.52 44.938 37.125 40.000 Third 2 7,216 1,903 1,262 0.65 44.875 35.000 44.375 Fourth 1,2 7,676 1,391 756 0.39 54.875 41.125 53.625 -------------------------------------------- Annual 1,2 $ 28,777 $ 6,886 $ 4,023 $ 2.06 =================================================================================== 1997 3 First $ 6,405 $ 1,685 $ 901 $ 0.46 $ 29.125 $ 24.813 $ 26.250 Second 6,372 (831) (736) (0.38) 30.938 24.625 30.938 Third 6,790 1,573 867 0.45 31.125 26.781 30.719 Fourth 7,114 1,151 642 0.33 38.063 30.000 36.625 -------------------------------------------- Annual $ 26,681 $ 3,578 $ 1,674 $ 0.86 =================================================================================== 1 Net Income and Earnings per Common Share reflect a cumulative effect of accounting change of $15, or $0.01 per share in the first quarter from a change in accounting for directory operations and an extraordinary loss on retirement of debt of $60, or $0.03 per share in the fourth quarter. 2 Net income in the third quarter includes after-tax gains of $219 for gains on sales of certain non-core businesses, principally the required disposition of MTN, due to SBC's investment in Telkom. Net income in the fourth quarter also includes $268 of charges related to strategic initiatives resulting from the merger integration process with SNET. 3 Net income (loss) includes $90 in first quarter pension settlement gain for 1996 retirements (see Note 13), $1.6 billion in second quarter charges related to post-merger initiatives (see Note 2), $10 and $294 in third and fourth quarter merger integration costs and $33 in fourth quarter gain on sale of SBC's interests in Bellcore.
Report of Independent Auditors The Board of Directors and Shareowners SBC Communications Inc. We have audited the accompanying consolidated balance sheets of SBC Communications Inc. (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1996 financial statements of Pacific Telesis Group, a wholly-owned subsidiary, which statements reflect total operating revenues constituting approximately 38% of the Company's related consolidated financial statement total for the year ended December 31, 1996. Those statements were audited by other auditors whose report, which has been furnished to us, included an explanatory paragraph that describes the change in its method of recognizing directory publishing revenues and related expenses. Our opinion, insofar as it relates to the 1996 data included for Pacific Telesis Group, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1996, the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SBC Communications Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Antonio, Texas February 12, 1999 Report of Management The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The integrity and objectivity of the data in these financial statements, including estimates and judgments relating to matters not concluded by year end, are the responsibility of management, as is all other information included in the Annual Report, unless otherwise indicated. The financial statements of SBC Communications Inc. (SBC) have been audited by Ernst & Young LLP, independent auditors. Management has made available to Ernst & Young LLP all of SBC's financial records and related data, as well as the minutes of shareowners' and directors' meetings. Furthermore, management believes that all representations made to Ernst & Young LLP during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the costs of an internal accounting controls system should not exceed, in management's judgment, the benefits to be derived. Management also seeks to ensure the objectivity and integrity of its financial data by the careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communication programs aimed at ensuring that its policies, standards and managerial authorities are understood throughout the organization. Management continually monitors the system of internal accounting controls for compliance. SBC maintains an internal auditing program that independently assesses the effectiveness of the internal accounting controls and recommends improvements thereto. The Audit Committee of the Board of Directors, which consists of eight directors who are not employees, meets periodically with management, the internal auditors and the independent auditors to review the manner in which they are performing their responsibilities and to discuss auditing, internal accounting controls and financial reporting matters. Both the internal auditors and the independent auditors periodically meet alone with the Audit Committee and have access to the Audit Committee at any time. /s/ Edward E. Whitacre Jr. Edward E. Whitacre Jr. Chairman of the Board and Chief Executive Officer /s/ Donald E. Kiernan Donald E. Kiernan Senior Vice President, Treasurer and Chief Financial Officer Stock Trading Information SBC is listed on the New York, Chicago and Pacific stock exchanges and The Swisss Exchange. SBC is traded on the London Stock Exchange through the SEAQ International Markets facility. Ticker symbol (NYSE): SBC Newspaper stock listing: SBC or SBC Comm EX-21 6 SUBSIDIARIES OF SBC EXHIBIT 21 PRINCIPAL SUBSIDIARIES OF SBC COMMUNICATIONS INC. AS OF DECEMBER 31, 1998 State of Conducts Name Incorporation Business Under Southwestern Bell Missouri Same Telephone Company Southwestern Bell Dually incorporated in Same Mobile Systems, Inc. Delaware and Virginia SBC International, Inc. Delaware Same Southwestern Bell Missouri Same Yellow Pages, Inc. Pacific Telesis Group Nevada Same Southern New England Connecticut Same Telecommunications Corporation EX-23 7 CONSENT OF INDEPENDENT AUDITOR EXHIBIT 23-a Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of SBC Communications Inc. (SBC) of our report dated February 12, 1999, included in the 1998 Annual Report to Shareowners of SBC. Our audits also included the financial statement schedules of SBC listed in Item 14(a). These schedules are the responsibility of SBC's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8) pertaining to the SBC Savings Plan and the SBC Savings and Security Plan and certain other plans (Nos. 333-24295 and 333-66105), the Stock Savings Plan (Nos. 33-37451 and 33-54291), the SBC Communications Inc. 1992 Stock Option Plan (No. 33-49855), the SBC Communications Inc. 1995 Management Stock Option Plan (Nos. 33-61715 and 333-49343), the SBC Communications Inc. 1996 Stock and Incentive Plan (No. 333-30669), and in the Registration Statements (Form S-3) pertaining to the SBC Communications Inc. Direct Stock Purchase and Reinvestment Plan (Nos. 333-08979, 333-44553, and 333-02587 (originally filed on Form S-4)), and SBC Communications Capital Corporation and SBC Communications Inc. (Nos. 33-45490 and 33-56909), and in the Registration Statement (Form S-4) pertaining to SBC Communications Inc. (No. 333-45837), and in the related Prospectuses, of our report dated February 12, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) for the year ended December 31, 1998. ERNST & YOUNG LLP San Antonio, Texas March 8, 1999 EX-23 8 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, 1998 on Form 10-K and the accompanying Proxy Statement dated on or about March 12, 1998 of SBC Communications Inc., of our report dated February 27, 1997 (Exhibit 99-a), on our audit of the consolidated financial statements and financial statement schedule of Pacific Telesis Group and Subsidiaries as of December 31, 1996, and for the year then ended, as included in Pacific Telesis Group's annual report on Form 10-K for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statements (Form S-8) pertaining to the SBC Savings Plan and the SBC Savings and Security Plan and certain other plans (Nos. 333-24295 and 333-66105), the Stock Savings Plan (Nos. 33-37451 and 33-54291), the SBC Communications Inc. 1992 Stock Option Plan (No. 33-49855), the SBC Communications Inc. 1995 Management Stock Option Plan (No. 33-61715 and 333-49343), the SBC Communications Inc. 1996 Stock and Incentive Plan (No. 333-30669), and in the Registration Statements (Form S-3) pertaining to the SBC Communications Inc. Direct Stock Purchase and Reinvestment Plan (Nos. 333-08979, 333-44553, and 333-02587, originally filed on Form S-4), and SBC Communications Capital Corporation and SBC Communications Inc. (Nos. 33-45490 and 33-56909), and in the Registration Statement (Form S-4) pertaining to SBC Communications Inc. (No. 333-45837), and in the related Prospectuses, of our report dated February 27, 1997 (Exhibit 99-a), on our audit of the consolidated financial statements and financial statement schedule of Pacific Telesis Group and Subsidiaries as of December 31, 1996 and for the year then ended, as included in Pacific Telesis Group's annual report on Form 10-K for the year ended December 31, 1996. PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP San Francisco, California March 8, 1999 EX-24 9 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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /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 29th day of January 1999. /s/ Joyce M. Roche __________________________________ Joyce M. Roche 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 29th day of January 1999. /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 29th day of January 1999. /s/ Carlos Slim Helu __________________________________ Carlos Slim Helu 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 29th day of January 1999. /s/ Patricia P. Upton __________________________________ Patricia P. Upton Director EX-27 10 EXHIBIT 27: FINANCIAL DATA SCHEDULE, 12/31/98
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC COMMUNICATIONS INC.'S DECEMBER 31, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 460 6 6,262 472 0 7,538 73,466 43,546 45,066 9,989 11,612 0 0 1,988 10,792 45,066 0 28,777 0 16,714 5,177 513 993 6,374 2,306 4,068 0 (60) 15 4,023 2.06 2.03 THIS AMOUNT IS IMMATERIAL. NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING REVENUES AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL STATEMENTS PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS INCLUDED IN THE "TOTAL REVENUES" TAG. COST OF TANGIBLE GOODS SOLD IS INCLUDED IN OPERATIONS AND SUPPORT IN THE FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO REGULATION S-X, RULE 5-03(B).
EX-99 11 REPORT OF INDEPENDENT ACCOUNTANTS Exhibit 99-a Report of Independent Accountants To the Board of Directors and Shareowner of Pacific Telesis Group: We have audited the consolidated statement of income, shareowner's equity and cash flows of Pacific Telesis Group (a wholly-owned subsidiary of SBC Communications Inc. effective April 1, 1997) and subsidiaries (the "Company") for the year ended December 31, 1996, and the related financial statement schedule as of and for the year ended December 31, 1996, as included in the Company's annual report on Form 10-K for the year ended December 31, 1996. These consolidated financial statements and the financial statement schedule are the responsibility of management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations of Pacific Telesis Group and Subsidiaries and of their cash flows for the year ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, schedule presents fairly, in all material respects, the information required to be included therein as of and for the year ended December 31, 1996. As discussed in Note A to the consolidated financial statements, Pacific Bell, a subsidiary of Pacific Telesis Group, changed its method of recognizing directory publishing revenues and related expenses effective January 1, 1996. PricewaterhouseCoopers LLP San Francisco, California March 8, 1999 -----END PRIVACY-ENHANCED MESSAGE-----