FORM 10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8610
SBC COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At April 28, 2000, 3,401,719,865 common shares were outstanding.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SBC COMMUNICATIONS INC.
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
- -----------------------------------------------------------------------------
Three months ended
March 31,
-----------------------
2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Landline local service $ 4,997 $ 4,486
Wireless subscriber 1,500 1,322
Network access 2,667 2,509
Long distance service 804 909
Directory advertising 882 971
Other 1,732 1,622
- -----------------------------------------------------------------------------
Total operating revenues 12,582 11,819
- -----------------------------------------------------------------------------
Operating Expenses
Operations and support 7,243 6,826
Depreciation and amortization 2,263 1,942
- -----------------------------------------------------------------------------
Total operating expenses 9,506 8,768
- -----------------------------------------------------------------------------
Operating Income 3,076 3,051
- -----------------------------------------------------------------------------
Other Income (Expense)
Interest expense (356) (357)
Equity in net income of affiliates 200 172
Other income (expense) - net 41 (77)
- -----------------------------------------------------------------------------
Total other income (expense) (115) (262)
- -----------------------------------------------------------------------------
Income Before Income Taxes and Cumulative Effect of
Accounting Change 2,961 2,789
- -----------------------------------------------------------------------------
Income Taxes 1,139 1,016
- -----------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change 1,822 1,773
- -----------------------------------------------------------------------------
Cumulative Effect of Accounting Change, net of tax - 207
- -----------------------------------------------------------------------------
Net Income $ 1,822 $ 1,980
=============================================================================
Earnings Per Common Share:
Income Before Cumulative Effect of Accounting Change $ 0.54 $ 0.52
Net Income $ 0.54 $ 0.58
- -----------------------------------------------------------------------------
Earnings Per Common Share - Assuming Dilution:
Income Before Cumulative Effect of Accounting Change $ 0.53 $ 0.51
Net Income $ 0.53 $ 0.57
- -----------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding (in millions) 3,396 3,408
- -----------------------------------------------------------------------------
Dividends Declared Per Common Share $ 0.25375 $ 0.24375
=============================================================================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
- --------------------------------------------------------------------------------
March 31, December 31,
-------------- -------------
2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 678 $ 495
Accounts receivable - net of allowances for
uncollectibles of $1,072 and $1,099 8,759 9,378
Prepaid expenses 840 651
Deferred income taxes 572 767
Other current assets 1,137 639
- --------------------------------------------------------------------------------
Total current assets 11,986 11,930
- --------------------------------------------------------------------------------
Property, plant and equipment - at cost 118,505 116,332
Less: accumulated depreciation and amortization 71,373 69,761
- --------------------------------------------------------------------------------
Property, Plant and Equipment - Net 47,132 46,571
- --------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated
Amortization of $1,469 and $1,325 11,194 6,796
- --------------------------------------------------------------------------------
Investments in Equity Affiliates 11,084 10,648
- --------------------------------------------------------------------------------
Other Assets 8,005 7,270
- --------------------------------------------------------------------------------
Total Assets $ 89,401 $ 83,215
================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 8,992 $ 3,374
Accounts payable and accrued liabilities 14,447 15,103
Dividends payable 866 836
- --------------------------------------------------------------------------------
Total current liabilities 24,305 19,313
- --------------------------------------------------------------------------------
Long-Term Debt 16,337 17,475
- --------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 5,681 4,821
Postemployment benefit obligation 9,647 9,612
Unamortized investment tax credits 371 389
Other noncurrent liabilities 4,129 3,879
- --------------------------------------------------------------------------------
Total deferred credits and other noncurrent
liabilities 19,828 18,701
- --------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts* 1,000 1,000
- --------------------------------------------------------------------------------
Shareowners' Equity
Common shares issued ($1 par value) 3,433 3,433
Capital in excess of par value 12,544 12,453
Retained earnings 14,774 13,798
Guaranteed obligations of employee stock
ownership plans (58) (106)
Deferred compensation - LESOP (66) (73)
Treasury shares (at cost) (1,535) (1,717)
Accumulated other comprehensive loss (1,161) (1,062)
- --------------------------------------------------------------------------------
Total shareowners' equity 27,931 26,726
- --------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 89,401 $ 83,215
================================================================================
<FN>
* The trusts contain $1,030 in principal amount of the Subordinated Debentures
of Pacific Telesis Group.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
- --------------------------------------------------------------------------
Three months ended
March 31,
-------------------
2000 1999
- -------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 1,822 $ 1,980
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,263 1,942
Undistributed earnings from investments in
equity affiliates (152) (155)
Provision for uncollectible accounts 211 206
Amortization of investment tax credits (18) (21)
Deferred income tax expense 352 44
Cumulative effect of accounting change, net of tax - (207)
Other - net (1,540) (464)
- -------------------------------------------------------------------------
Total adjustments 1,116 1,345
- -------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,938 3,325
- -------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (2,349) (2,139)
Investments in affiliates (92) (30)
Proceeds from short-term investments - 5
Dispositions 215 862
Acquisitions (3,841) (8)
Other - 1
- --------------------------------------------------------------------------
Net Cash Used in Investing Activities (6,067) (1,309)
- --------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 4,867 (651)
Issuance of long-term debt - 5
Repayment of long-term debt (526) (128)
Issuance of common shares - 109
Issuance of preferred shares in subsidiaries - 3
Purchase of treasury shares (284) -
Issuance of treasury shares 60 66
Dividends paid (834) (805)
Other 29 -
- -------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 3,312 (1,401)
- -------------------------------------------------------------------------
Net increase in cash and cash equivalents 183 615
- -------------------------------------------------------------------------
Cash and cash equivalents beginning of year 495 599
- -------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 678 $ 1,214
=========================================================================
Cash paid during the three months ended March 31 for:
Interest $ 462 $ 467
Income taxes, net of refunds $ 1,179 $ 201
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Guaranteed
Capital Obligations
in of Employee Accumulated
Excess Stock Deferred Other
Common of Par Retained Ownership Compensation Treasury Comprehensive
Shares Value Earnings Plans - LESOP Shares Loss
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ 3,433 $ 12,453 $ 13,798 $ (106) $ (73) $ (1,717) $ (1,062)
Net income - - 1,822 - - - -
Other comprehensive loss - - - - - - (99)
Dividends to shareowners - - (863) - - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 48 - - -
Cost of LESOP trust shares allocated
to employee accounts - - - - 7 - -
Purchase of treasury shares - - - - - (284) -
Issuance of treasury shares - 58 - - - 466 -
Other - 33 17 - - - -
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 $ 3,433 $ 12,544 $ 14,774 $ (58) $ (66) $ (1,535) $ (1,161)
=======================================================================================================================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA
- -----------------------------------------------
<S> <C> <C>
At March 31, or for the three months then ended: 2000 1999
- ---------------------------------------- ---------- ----------
Debt ratio ..................................... 46.68% 45.53%
Voice grade equivalents (000)................... 93,768 82,746
Network access lines in service (000)........... 61,154 59,534
Resold lines (000).............................. 1,562 1,318
Access minutes of use (000,000)................. 69,475 63,640
Wireless customers (000)........................ 11,684 9,007
Number of employees ............................ 208,380 200,700
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
1. BASIS OF PRESENTATION The consolidated financial statements have been
prepared by SBC Communications Inc. (SBC) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the
opinion of management, include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the results for the interim
periods shown. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with United States'
generally accepted accounting principles (GAAP), have been condensed or
omitted pursuant to such SEC rules and regulations. The results for the
interim periods are not necessarily indicative of results for the full year.
The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in SBC's 1999 Annual Report to Shareowners.
The preparation of financial statements in conformity with GAAP 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.
2. CONSOLIDATION The consolidated financial statements include the accounts of
SBC and its majority-owned subsidiaries. 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 using the equity method are included for
periods ended within three months of the date of SBC's Consolidated
Statements of Income.
3. CUMULATIVE EFFECT OF CHANGE IN DIRECTORY ACCOUNTING Prior to January 1, 1999,
Ameritech Corporation's (Ameritech) directory publishing subsidiary
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, 1999,
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 by SBC's other
directory subsidiaries, 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, 1999 as a one-time, non-cash
gain of $207, or $0.06 per share, net of taxes of $125. Had the current
method been applied during prior periods, income before extraordinary items
and cumulative effect of accounting change would not have been materially
affected.
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
4. COMPREHENSIVE INCOME The components of SBC's comprehensive income for the
three months ended March 31, 2000 and 1999 include net income and adjustments
to shareowners' equity for foreign currency translation adjustment and net
unrealized gain (loss) on securities.
Following is SBC's comprehensive income:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Three months ended March 31, 2000 1999
--------------------------------------------------------------------
<S> <C> <C>
Net income $ 1,822 $ 1,980
Other comprehensive income, net of tax:
Foreign currency translation adjustment (110) (410)
Net unrealized gain (loss) on securities:
Unrealized gain (loss) on available for
sale securities 49 (1)
Less: reclassification adjustment for gains
included in net income (38) (5)
--------------------------------------------------------------------
Net unrealized gain (loss) on securities 11 (6)
--------------------------------------------------------------------
Other comprehensive loss (99) (416)
--------------------------------------------------------------------
Total comprehensive income $ 1,723 $ 1,564
====================================================================
</TABLE>
5. COMPLETION OF MERGERS In October 1999, SBC and Ameritech completed the merger
of an SBC subsidiary with Ameritech in a transaction in which each share of
Ameritech common stock was exchanged for 1.316 shares of SBC common stock
(equivalent to approximately 1,446 million shares). Ameritech 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.
In October 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 was accounted for as a pooling of interests and a tax-free
reorganization.
In April 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 was accounted for as a
pooling of interests and a tax-free reorganization.
Post-Merger Initiatives
Upon completion of each merger, SBC performed an evaluation and review of
operations throughout the merged company. These reviews included the
formation of teams that performed comprehensive evaluations of companywide
operations. Based on these merger integration reviews, certain strategic
decisions were made and significant integration of operations and
consolidation of some administrative and support functions occurred resulting
in one-time charges.
One-time charges incurred include costs related to various regulatory and
legal issues, merger approval costs and other related costs as well as costs
related to strategic decisions reached by the review teams. Remaining
accruals for anticipated cash expenditures related to these decisions totaled
$489 and $755 at March 31, 2000 and December 31, 1999.
6. SUBSIDIARY FINANCIAL INFORMATION SBC has not provided separate financial
statements and other disclosures for PAC as management has determined that
such information is not material to the holders of the Trust Originated
Preferred Securities, which have been guaranteed by SBC. See Note 8 for a
discussion of the effect of conforming items on the segments and
subsidiaries. This information is provided as a supplement only. The
following table presents summarized financial information for PAC:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PAC March 31, December 31,
2000 1999
-----------------------------------------------------------------------
<S> <C> <C>
Balance Sheets
Current assets $ 3,060 $ 3,022
Noncurrent assets 15,172 15,334
Current liabilities 4,735 4,944
Noncurrent liabilities 9,975 10,284
=======================================================================
-----------------------------------------------------------------------
Three months ended March 31, 2000 1999
-----------------------------------------------------------------------
Income Statements
Operating revenues $ 2,908 $ 2,977
Operating income 742 760
Income before cumulative effect of accounting
changes 421 425
Net income 421 207
=======================================================================
</TABLE>
<PAGE>
SBC has not provided separate financial statements and other disclosures for
Southwestern Bell Telephone Company (SWBell) or Pacific Bell Telephone
Company (PacBell) as management has determined that such information is not
material to the holders of certain SWBell and PacBell outstanding debt
securities, which have been guaranteed by SBC. See Note 8 for a discussion of
conforming items on the segments and subsidiaries. This information is
provided as a supplement only. The following tables present summarized
financial information for SWBell and PacBell:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
SWBell March 31, December 31,
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Balance Sheets
Current assets $ 2,422 $ 2,453
Noncurrent assets 13,690 13,978
Current liabilities 5,164 5,127
Noncurrent liabilities 8,039 8,403
========================================================================
------------------------------------------------------------------------
Three months ended March 31, 2000 1999
------------------------------------------------------------------------
Income Statements
Operating revenues $ 2,830 $ 2,776
Operating income 593 789
Income before cumulative effect of accounting
changes 314 440
Net income 314 167
=========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PacBell March 31, December 31,
2000 1999
-----------------------------------------------------------------------
<S> <C> <C>
Balance Sheets
Current assets $ 2,380 $ 2,318
Noncurrent assets 13,662 13,620
Current liabilities 4,558 4,539
Noncurrent liabilities 8,447 8,680
=======================================================================
-----------------------------------------------------------------------
Three months ended March 31, 2000 1999
-----------------------------------------------------------------------
Income Statements
Operating revenues $ 2,520 $ 2,363
Operating income 629 593
Income before cumulative effect of accounting
changes 318 313
Net income (loss) 318 (697)
=======================================================================
</TABLE>
<PAGE>
7. EARNINGS PER SHARE A reconciliation of the numerators and denominators of
basic earnings per share and diluted earnings per share for income before
cumulative effect of accounting change for the three months ended March 31,
2000 and 1999 are shown in the table below.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Three months ended
March 31,
----------------------
2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Numerators
Numerator for basic earnings per share:
Income before cumulative effect of
accounting change $ 1,822 $ 1,773
-------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 1 1
-------------------------------------------------------------------
Numerator for diluted earnings per share $ 1,823 $ 1,774
===================================================================
Denominators
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding (000,000) 3,396 3,408
-------------------------------------------------------------------
Dilutive potential common shares (000,000):
Stock options 29 44
Other stock-based compensation 7 6
-------------------------------------------------------------------
Denominator for diluted earnings per share 3,432 3,458
===================================================================
Basic earnings per share:
Income before cumulative effect of
accounting change $ 0.54 $ 0.52
Cumulative effect of accounting change - 0.06
-------------------------------------------------------------------
Net income $ 0.54 $ 0.58
===================================================================
Diluted earnings per share:
Income before cumulative effect of
accounting change $ 0.53 $ 0.51
Cumulative effect of accounting change - 0.06
-------------------------------------------------------------------
Net income $ 0.53 $ 0.57
===================================================================
</TABLE>
<PAGE>
8. SEGMENT INFORMATION SBC has four reportable segments that reflect the current
management of its business: wireline, wireless, information and
entertainment, and international. SBC evaluates performance based on income
before income taxes adjusted for normalizing (i.e., one-time) items. Wireline
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. Wireless provides
wireless telecommunications services, including local and long distance
services, and sells wireless equipment. Information and entertainment
includes all directory operations including advertising, yellow pages, white
pages and electronic publishing, electronic security and cable television
operations. International consists of all international investments.
Normalized results for the first quarter of 2000 include the following
adjustments:
o Pension settlement gains of $161 primarily related to employees who
terminated employment during 1999.
o A charge of $132 related to in-process research and development from the
March 2000 acquisition of Sterling Commerce, Inc. (Sterling).
o Costs of $117 associated with strategic initiatives and other adjustments
resulting from the merger integration process with Ameritech.
Normalized results for the first quarter of 1999 include the following
adjustments:
o Elimination of income of $39 from the incremental impacts of overlapping
wireless properties sold in October 1999.
o An after-tax reduction of $27 of a portion of a first quarter 1998 charge
to cover the cost of consolidating security monitoring centers and
company-owned wireless retail stores.
Segment results, including a reconciliation to SBC consolidated results, for
the first quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Revenues Income
from before
At March 31, 2000 or for external Intersegment income Segment
the three months ended customers revenues taxes assets
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wireline $ 9,599 $ 54 $ 2,135 $ 58,141
Wireless 1,861 - 312 12,268
Information and entertainment 1,009 30 278 3,962
International 61 - 239 13,140
Corporate, adjustments &
eliminations 52 (84) 20 1,890
Normalizing adjustments - - (23) -
-----------------------------------------------------------------------
Total $ 12,582 $ - $ 2,961 $ 89,401
=======================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Revenues Income
from before
At March 31, 1999 or for external Intersegment income Segment
the three months ended customers revenues taxes assets
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wireline $ 8,989 $ 72 $ 2,093 $ 51,441
Wireless 1,445 - 133 9,226
Information and entertainment 1,046 31 324 4,215
International 75 5 150 10,117
Corporate, adjustments &
eliminations 54 (108) (22) 41
Normalizing adjustments 210 - 111 -
-----------------------------------------------------------------------
Total $ 11,819 $ - $ 2,789 $ 75,040
=======================================================================
</TABLE>
Corporate, adjustments and eliminations include corporate activities, the
elimination of intersegment transactions and other adjustments. Included in
other adjustments are differences in accounting between subsidiaries and
consolidated financial statements for pension and postretirement benefits and
the treatment of conforming accounting adjustments arising out of the pooling
of interests transactions with Ameritech, SNET and PAC that were required to
be treated as cumulative effect of accounting changes by the subsidiaries.
9. ACQUISITION OF STERLING In March 2000, SBC acquired Sterling, a provider of
electronic business integration solutions, in an all cash tender offer valued
at approximately $3.6 billion. The transaction was accounted for under the
purchase method of accounting. The valuation of assets acquired includes
certain intangible assets such as developed technology, tradename, assembled
workforce, customer relationships and goodwill, which will be amortized over
their remaining useful lives of between 3 and 20 years. The acquired
in-process research and development of $132 was expensed by SBC in March
2000. Results of operations have been included in the consolidated financial
statements from the date of the acquisition.
Sterling specializes in creating, powering and managing secure "e-Marketplace
communities" where multiple buyers and sellers can conduct transactions
immediately, exchange goods and services, facilitate business-to-business
opportunities, and share information faster and at lower costs.
10.PENDING TRANSACTION In April 2000, SBC and BellSouth Corporation (BellSouth)
announced an agreement to combine their domestic wireless operations.
Assuming that all of the assets are contributed as provided for in the
agreement, ownership in the new company will be 60% for SBC and 40% for
BellSouth with control shared equally. SBC expects to account for its
interest under the equity method of accounting. SBC expects that the
basis of its investment will be approximately the same as the book value
of SBC's wireless assets. The new wireless company will be managed
independently with a four-seat board of directors (two seats from
each company). The transaction requires the approval of the Federal
Communications Commission as well as the review of the United States
Department of Justice. Divestitures of some overlapping properties will be
required. The companies expect to close the transaction by the end of 2000.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
Overview Financial results for SBC Communications Inc. (SBC) for the first
quarter of 2000 and 1999 are summarized as follows:
<TABLE>
- -------------------------------------------------------------------------------
Three-Month Period
------------------------------
Percent
2000 1999 Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $ 12,582 $ 11,819 6.5%
Operating expenses 9,506 8,768 8.4
Operating income 3,076 3,051 0.8
Income before income taxes and cumulative effect
of accounting change 2,961 2,789 6.2
Income before cumulative effect of accounting
change 1,822 1,773 2.8
Cumulative effect of accounting change - 207 -
Net income 1,822 1,980 (8.0)
===============================================================================
</TABLE>
In the first quarter of 1999, SBC's net income reflected a cumulative effect of
accounting change related to accounting for directory revenues and expenses (see
Note 3 of Notes to Consolidated Financial Statements).
SBC reported net income for the first quarter of 2000 of $1,822, or $0.53 per
share assuming dilution, compared to $1,980, or $0.57 per share assuming
dilution, in the first quarter of 1999.
The first quarter of 2000 and 1999 include several items that SBC normalizes for
management purposes.
Normalized results in 2000 include the following adjustments:
o Pension settlement gains of $161 primarily related to employees who
terminated employment in 1999
o A charge of $132 related to in-process research and development from the
March 2000 acquisition of Sterling Commerce, Inc. (Sterling). (See Note 9 of
Notes to Consolidated Financial Statements for a discussion of the
acquisition of Sterling.)
o Costs of $117 associated with strategic initiatives and other adjustments
resulting from the merger integration process with Ameritech Corporation
(Ameritech).
For 1999, normalizing adjustments included:
o Elimination of income of $39 from the incremental impacts of overlapping
wireless properties sold in October 1999.
o An after-tax reduction of $27 of a portion of a first quarter 1998 charge to
cover the cost of consolidating security monitoring centers and company-owned
wireless retail stores.
Excluding the 2000 and 1999 normalizing adjustments, SBC's net income for the
first quarter of 2000 was $1,910 compared to $1,914 for the first quarter of
1999.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
Segment Results Normalizing adjustments for the first quarter of 2000 and 1999
are described above. Components of normalized income before income taxes by
segment and a reconciliation to reported income before income taxes for the
first quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three-Month Period
-----------------------------
Percent
2000 1999 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline $ 2,135 $ 2,093 2.0%
Wireless 312 133 -
Information and entertainment 278 324 (14.2)
International 239 150 59.3
Corporate, adjustments & eliminations 20 (22) -
Total normalizing adjustments (23) 111 -
- ----------------------------------------------------------------------
Income Before Income Taxes and
Cumulative Effect of Accounting Change $ 2,961 $ 2,789 6.2%
================================================================================
</TABLE>
Income before income taxes is composed of operating income plus other income
(expense) - net. Changes in income before income taxes in the wireline, wireless
and information and entertainment segments primarily reflect increases in
operating income discussed below. Changes in operations included in the
international segment's income before income taxes resulted primarily from the
changes in other income (expense) - net discussed below.
A summary of the effect of normalizing adjustments on income before income taxes
by segment for the first quarter of 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three-Month Period
--------------------
2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Wireline $ (55) $ -
Wireless (14) 95
Information and entertainment (14) 16
International (50) -
Corporate, adjustments & eliminations 110 -
- --------------------------------------------------------------------------------
Total Normalizing Adjustments $ (23) $ 111
================================================================================
</TABLE>
The normalizing adjustments impacting the wireline segment include the 2000
costs associated with strategic initiatives and other adjustments resulting from
the merger integration process with Ameritech, offset by 2000 pension settlement
gains primarily related to employees who terminated employment during 1999. The
normalizing adjustments impacting the wireless segment include the 2000
Ameritech merger integration costs offset by 2000 pension settlement gains, the
1999 incremental impacts of the overlapping cellular properties sold in October
1999 and the 1999 reduction of a portion of the charge to consolidate
company-owned wireless retail stores. The information and entertainment
segment's normalizing adjustments include 2000 Ameritech merger integration
costs offset by 2000 pension settlement gains and the 1999 reduction of a
portion of the charge to consolidate security monitoring centers. The
international segment's normalizing adjustments include 2000 Ameritech merger
integration costs.
<PAGE>
Operating Income Components of normalized operating income by segment for the
first quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three-Month Period
-----------------------------
Percent
2000 1999 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline $ 2,430 $ 2,351 3.4%
Wireless 386 220 75.5
Information and entertainment 297 333 (10.8)
International (28) (9) -
Corporate, adjustments & eliminations 14 40 -
- ----------------------------------------------------------------------
Total Normalized Operating Income $ 3,099 $ 2,935 5.6%
================================================================================
</TABLE>
Components of segment operating revenues and expenses and discussion of the
segment results for the first quarter of 2000 and 1999 follow.
Operating Revenues SBC's normalized operating revenues increased $973, or 8.4%,
in the first quarter of 2000. Components of operating revenues by segment for
the first quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three-Month Period
-----------------------------
Percent
2000 1999 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline $ 9,653 $ 9,061 6.5%
Wireless 1,861 1,445 28.8
Information and entertainment 1,039 1,077 (3.5)
International 61 80 (23.8)
Corporate, adjustments & eliminations (32) (54) -
- ----------------------------------------------------------------------
Total Normalized Operating Revenues $ 12,582 $11,609 8.4%
================================================================================
</TABLE>
<PAGE>
Wireline
Wireline normalized operating revenues increased $592, or 6.5%, in the first
quarter of 2000. Components of wireline operating revenues for the first quarter
of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three-Month Period
------------------------------
Percent
2000 1999 Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Local service $ 5,005 $ 4,497 11.3%
Network access:
Interstate 2,012 1,865 7.9
Intrastate 678 663 2.3
Long distance service 764 898 (14.9)
Other 1,194 1,138 4.9
- -----------------------------------------------------------------------
Total Wireline Revenues $ 9,653 $ 9,061 6.5%
===============================================================================
</TABLE>
Local service revenues increased $508, or 11.3%, in the first quarter of
2000. Approximately $264 of the increase was attributed to increases in
demand for access lines, vertical services and data-related services. The
number of access lines increased by 2.7% since March 31, 1999 and
approximately 42% of access line growth was due to sales of additional
access lines to existing residential customers. Approximately 33% of the
access line growth was in California, 19% was in Texas and 8% was in
Illinois. Access lines in California, Texas and Illinois combined account
for approximately 60% of SBC's total access lines. Vertical services
revenues, which include custom calling services, such as Caller ID, Call
Waiting, voice mail and other enhanced services, increased by
approximately 10% and totaled more than $885 for the first quarter of
2000.
Revenues from a network integration company acquired by SBC in the second
quarter of 1999 contributed approximately $129 to the increase.
The introduction of extended area service plans and the September 1999
Texas Universal Service Fund (TUSF) rate rebalancing collectively
increased local service revenues by approximately $54. These regulatory
actions, however, decreased intrastate network access revenues by
approximately $38 and long distance revenues by approximately $11, with a
net increase on total wireline operating revenues of approximately $5. The
Texas Public Utility Commission has stated that the TUSF is intended to
directly subsidize the provision of service to high-cost areas and allow
Southwestern Bell Telephone Company (SWBell) to set competitive rates for
other services.
Network access Interstate network access revenues increased $147, or 7.9%,
in the first quarter of 2000. Increases in special access, demand for
access services by interexchange carriers and growth in revenues from
end-user charges attributable to an increasing access line base,
collectively resulted in an increase of approximately $188. Partially
offsetting these increases were the effects of rate reductions and price
caps of approximately $64.
Intrastate network access revenues increased $15, or 2.3%, in the first
quarter of 2000, due largely to increases in demand of approximately $75,
including cellular interconnection and usage by alternative intraLATA toll
carriers. These increases were partially offset due to state regulatory
rate reductions in Texas of approximately $28, including reduction of
cellular interconnection rates, and the effects of the TUSF described
above in local service of approximately $38.
Long distance service revenues decreased $134, or 14.9%, in the first
quarter of 2000. Long distance service revenues decreased by approximately
$96 due to the competitive losses as a result of implementing dialing
parity. This decrease was partially offset by an increase of approximately
$11 due to price increases in Illinois, Indiana, Michigan and Ohio. The
continued introduction of extended area service plans, as described above
in local service, decreased long distance revenues by approximately $11,
which increased local service revenues by approximately $11.
Other operating revenues increased $56, or 4.9%, in the first quarter of
2000 due primarily to e-commerce revenue from Sterling, acquired in late
March 2000, of approximately $31 and increased equipment sales of
approximately $21. Increased sales from other nonregulated products and
services, including Internet and network integration, also contributed to
the increase.
Wireless
Wireless normalized operating revenues increased $416, or 28.8%, in the first
quarter of 2000. Components of wireless operating revenues for the first quarter
of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Three-Month Period
-------------------------------
Percent
2000 1999 Change
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Subscriber $ 1,500 $ 1,153 30.1%
Other 361 292 23.6
- ---------------------------------------------------------------------
Total Wireless Revenues $ 1,861 $ 1,445 28.8%
==============================================================================
</TABLE>
Subscriber revenues increased $347, or 30.1%, in the first quarter of 2000
with approximately half of the increase due to the acquisitions of Comcast
Cellular Corporation (Comcast), Cellular Communications of Puerto Rico,
Inc. (Cellular Communications) and Radiofone, Inc. Also contributing to
the increase was customer growth in the California Personal Communications
Services operations. At March 31, 2000, SBC's domestic wireless customers
totaled approximately 11,684,000.
Other wireless revenues increased $69, or 23.6%, in the first quarter of
2000, primarily due to increased outcollect roaming revenues (revenues
from non-SBC wireless customers roaming on SBC's wireless network) and
equipment sales by businesses acquired in 1999.
Information and Entertainment
Information and entertainment normalized operating revenues decreased $38, or
3.5%, in the first quarter of 2000. Information and entertainment operating
revenues for the first quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three-Month Period
--------------------------------
Percent
2000 1999 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Information and Entertainment Revenues $ 1,039 $ 1,077 (3.5)%
================================================================================
</TABLE>
Information and entertainment operating revenues decreased in the first
quarter of 2000 by approximately $88 due to a change in the schedule of
published directories which will be primarily recovered in later quarters.
Partially offsetting the decrease was increased demand for directory
advertising services and approximately $14 from Ameritech's cable
television business due primarily to growth in the number of subscribers.
Operating Expenses SBC's normalized operating expenses increased $809, or 9.3%,
in the first quarter of 2000. Components of operating expenses by segment for
the first quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three-Month Period
--------------------------
Percent
2000 1999 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline $ 7,223 $ 6,710 7.6%
Wireless 1,475 1,225 20.4
Information and entertainment 742 744 (0.3)
International 89 89 -
Corporate, adjustments & eliminations (46) (94) -
- -------------------------------------------------------------------------
Total Normalized Operating Expenses $ 9,483 $ 8,674 9.3%
================================================================================
</TABLE>
<PAGE>
Operations and support SBC's normalized operations and support expenses
increased $534, or 7.9%, in the first quarter of 2000. Components of
operations and support expenses by segment for the first quarter of 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Three-Month Period
-------------------------
Percent
2000 1999 Change
-------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline $ 5,436 $ 5,068 7.3%
Wireless 1,194 1,045 14.3
Information and entertainment 689 698 (1.3)
International 85 85 -
Corporate, adjustments & eliminations (113) (139) -
-------------------------------------------------------------------
Total Normalized Operations and Support $ 7,291 $ 6,757 7.9%
=========================================================================
</TABLE>
Wireline operations and support expenses increased $368, or 7.3%, in the
first quarter of 2000. Approximately $153 was associated with a network
integration company acquired in 1999 and Sterling. Approximately $151 of
the increase was associated with business initiatives such as SBC's
national expansion, and other products, approximately $119 of which was
related to Digital Subscriber Line (DSL). Additionally, an increase of
approximately $102 was a result of increased wages and salaries, and
approximately $63 due to costs associated with reciprocal compensation for
the termination of Internet traffic. Additional operations and support
expense increases were due to weather-related network overtime increases
of approximately $32, primarily in California.
This increase was partially offset by a decreases in merger integration
costs, operating taxes and employee benefits of approximately $127. Also
offsetting the increase by approximately $26 was a lower average network
force at Ameritech.
Wireless operations and support expenses increased $149, or 14.3%, in the
first quarter of 2000 due primarily to the acquisitions discussed in
subscriber revenues above.
Information and entertainment operations and support expenses decreased
$9, or 1.3%, in the first quarter of 2000 due primarily to lower expenses
from changes in the schedule of published directories which will be
incurred in later quarters as discussed in information and entertainment
revenues above.
<PAGE>
Depreciation and amortization expense increased $275, or 14.3%, in the first
quarter of 2000. Components of normalized depreciation and amortization expense
by segment for the first quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Three-Month Period
-------------------------
Percent
2000 1999 Change
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline $ 1,787 $ 1,642 8.8%
Wireless 281 180 56.1
Information and entertainment 53 46 15.2
International 4 4 -
Corporate, adjustments & eliminations 67 45 -
- -------------------------------------------------------------------
Total Depreciation and Amortization $ 2,192 $ 1,917 14.3%
==========================================================================
</TABLE>
Overall higher plant levels increased depreciation expense by approximately $92
in the wireline segment and $12 in the wireless segment in the first quarter of
2000. Depreciation and amortization expenses in the wireless segment also
increased by approximately $84 due to the third quarter 1999 acquisitions of
Comcast and Cellular Communications. Amortization of capitalized software also
contributed approximately $52 to the increase in the first quarter of 2000.
Interest expense remained relatively unchanged, decreasing by $1, or 0.3%, in
the first quarter of 2000, due to a lower composite interest rate slightly
offset by higher debt levels.
Equity in net income of affiliates increased $28, or 16.3%, in the first quarter
of 2000 due primarily to increased equity in net income of approximately $82
from SBC's investments in Telefonos de Mexico, S.A. de C.V. (Telmex) and Bell
Canada, which was acquired during the second quarter of 1999. These increases
were partially offset by approximately $57 of reduced equity in net income from
SBC's investments in SFR (a French cellular communications company) and
ATL-Algar Telecom Leste S.A. (a Brazilian communications company), as well as
positive accounting true-ups and a stronger currency in the first quarter of
1999 related to SBC's investment in Tele Danmark.
Other income (expense) - net increased $118 to income of $41 in the first
quarter of 2000 from expense of $(77) in the first quarter of 1999. Increased
gains on sales of Telmex L shares were partially offset by increased expenses in
marking the DECS redeemable in Telmex L shares to market value, resulting in an
increase in other income of approximately $59. The first quarter of 2000 also
included a gain on the sale of a cost investment of approximately $58. The first
quarter of 1999 included a gain of approximately $24 recognized from the sale of
discontinued plant.
Income Taxes - increased $65 and $45 in the first quarter of 2000 and 1999 due
to the tax effect of one-time charges previously described in the Overview
section. The net effective tax rate on these items differed as a result of
nondeductible items included in the charges. Excluding these items, income taxes
for first quarter of 2000 and 1999 would have been $1,074 and $971. Income taxes
were higher due primarily to higher income before income taxes.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
COMPETITIVE AND REGULATORY ENVIRONMENT
Interconnection Under the Telecommunications Act of 1996 (Telecom Act), Regional
Bell Operating Companies (RBOCs) and GTE Corp. were required to allow
competitors to put equipment in their offices "necessary" for connecting to the
local network. In March 1999, the Federal Communications Commission (FCC) issued
rules allowing competitors to install any equipment that is "used" or "useful"
for interconnection, even if some equipment has other functions. In March 2000,
the United States Court of Appeals for the District of Columbia overturned that
portion of the FCC's interconnection rules, stating that they went beyond what
was authorized by the Telecom Act, and ordered the FCC to reconsider that
portion of the rules. The FCC is expected to issue a ruling in response to that
order by the end of 2001. The effect of any future rulings on SBC's results of
operations and financial position cannot be determined at this time.
Unbundled Network Elements In November 1999, the FCC adopted an order providing
that the major local telephone carriers must continue leasing certain parts of
their phone network to competitors at a discount as well as revised rules that
expand the definitions of certain unbundled network elements (UNE). The order
also limits discounted access to switches serving customers with four or more
lines under certain conditions. In addition, the FCC declined to expand its
regulation to include mandatory leasing of high speed Internet and data
equipment. Several parties have petitioned the FCC for reconsideration of
various aspects of this order. In addition, the United States Telecom
Association and others appealed this order to the United States Court of Appeals
for the District of Columbia (Court of Appeals). Parties have also sought
reconsideration of the FCC's line sharing order. Most notably, several parties
requested that the FCC require SBC and other major local telephone carriers to
provide and support line sharing on an UNE platform as well make DSL an UNE
product. In addition, a group of local exchange carriers has petitioned the
Court of Appeals for review of the line sharing order. The FCC or the Court of
Appeals may modify or vacate certain aspects of the UNE or line sharing orders.
Absent such action, the effects of both orders on SBC's results of operations
and financial position, although not determinable at this time, are expected to
be unfavorable. SBC will begin providing DSL line sharing no later than early
June 2000.
Reciprocal Compensation In March 2000, the Court of Appeals vacated the FCC's
February 1999 holding that Internet traffic is interstate and remanded to the
FCC for a more reasoned explanation of that conclusion. The Court of Appeals did
not rule on an appeal of the FCC's February 1999 conclusion that states may
require reciprocal compensation for Internet traffic and that appeal is still
pending.
Other appeals of reciprocal compensation decisions currently are pending before
the United States Circuit Courts of Appeals for the Sixth, Seventh and Tenth
Circuits and United States District Courts in Indiana, Ohio and California. SBC
records expense for amounts sought by certain CLECs for the termination of
Internet traffic to Internet service providers.
Texas Long Distance Application In April 2000, SBC filed an amended application
with the FCC to provide long distance service in Texas. SBC believes the amended
application addressed objections raised by Federal regulators. It also starts a
new review process and the FCC has 90 days from the amended filing date to rule
on the application.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
Illinois Alternative Regulation In 1994, the Illinois Commerce Commission (ICC)
approved Advantage Illinois, providing a framework for regulating Ameritech by
capping prices for noncompetitive services. In this order, the ICC approved a
price cap on the monthly line charge for residential customers and residential
calling rates within local calling areas for an initial five year period that
ended in October 1999. In January 2000 the ICC initiated a review of Advantage
Illinois with respect to its effectiveness and whether any modifications are
necessary. SBC expects the ICC to complete this review by July 2001. The price
cap on residential rates will remain in effect until the review is completed or
the price cap is overridden by legislation.
Indiana Alternative Regulation In October 1999, the Indiana Court of Appeals
(Indiana Court) issued a decision reversing a portion of the 1997 Indiana
Utility Regulatory Commission (IURC) Opportunity Indiana order, which had
directed Ameritech to reduce rates for basic residential and business services
and remanded the rate issue to the IURC. Ameritech will continue charging basic
local rates at current levels until the rate issue is resolved. Also in the
October 1999 decision, the Indiana Court affirmed the IURC's order requiring
Ameritech to comply with the infrastructure investment commitments made in
Opportunity Indiana. Ameritech sought rehearing of this portion of the decision.
In March 2000, the Indiana Court denied Ameritech's petition for rehearing. This
ruling is not expected to have a material effect on SBC's results of operations
or financial position.
Ohio Alternative Regulation Effective January 1995, the Public Utilities
Commission of Ohio (PUCO) adopted Advantage Ohio as Ameritech Ohio's plan of
alternative regulation, effective for a minimum of six years. In March 2000,
Ameritech filed an agreement with the PUCO providing for an extension of
Advantage Ohio. The agreement provides that residence and business basic local
rates be capped at current levels until January 2003, among other things. The
agreement also includes various Ameritech funding commitments; these are not
expected to be material to SBC's results of operations or financial position. In
April 2000, the PUCO approved the agreement providing for the extension of
Advantage Ohio for two years.
Oklahoma Alternative Regulation In March 2000, the Oklahoma legislature allowed
the Oklahoma Corporation Commission's (OCC) alternative regulation rule to go
into effect. SWBell will request to opt into alternative regulation effective
June 2000 under the transition plan previously approved by the OCC and will be
regulated under price cap regulation instead of rate of return regulation.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
OTHER BUSINESS MATTERS
Cumulative Effect of Change in Accounting See Note 1 of Notes to Consolidated
Financial Statements for a discussion of the change in directory accounting at
Ameritech.
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. SBC plans to
adopt FAS 133 on January 1, 2001 as a one-time, non-cash cumulative effect of
accounting change. The adoption impact will be based on market values at that
date, therefore, SBC cannot estimate the impact. However, because of SBC's
minimal use of derivatives, adoption of this standard is not expected to have a
significant effect on SBC's financial position or results of operations.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
OTHER BUSINESS MATTERS - Continued
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB 101) which
must be adopted by June 30, 2000. SAB 101 addresses, among other items, when
revenue relating to nonrefundable, up-front fees should be recognized. SBC
currently is evaluating the impact of SAB 101, but does not expect it to have a
significant effect on net income.
Acquisition See Note 9 of Notes to Consolidated Financial Statements for a
discussion of the acquisition of Sterling.
Pending Transaction See Note 10 of Notes to Consolidated Financial Statements
for a discussion of the agreement with BellSouth Corporation.
Marketing Agreement In April 2000, SBC entered into a strategic marketing and
sales alliance with Cisco Systems, Inc. (Cisco) to accelerate delivery of
broadband services to customers. Through joint marketing and sales efforts, SBC
will package Cisco equipment with advanced voice, broadband data and network
integration services. The alliance also consists of a series of joint research
and product development activities.
LIQUIDITY AND CAPITAL RESOURCES
SBC had $678 in cash and cash equivalents available at March 31, 2000. During
the first quarter of 2000, as in 1999, SBC's primary source of funds continued
to be cash provided by operating activities. SBC has entered into agreements
with several banks for committed lines of credit totaling $3,630, all of which
may be used to support commercial paper borrowings. SBC had no borrowings
outstanding under these lines of credit as of March 31, 2000. Commercial paper
borrowings as of March 31, 2000 totaled $4,991.
SBC's investing activities during the first quarter of 2000 consisted of $2,349
in construction and capital expenditures, primarily in the wireline and wireless
segments, and the approximate $3,600 acquisition of Sterling discussed above.
Short-term borrowings increased $4,867 primarily to fund the acquisition of
Sterling. SBC also spent $284 on the repurchase of shares of its common stock
under the repurchase plan announced in January 2000. As of April 28, 2000, SBC
has repurchased a total of approximately seven million shares of its common
stock of the 100,000,000 shares authorized to be repurchased. Cash paid for
dividends in the first quarter of 2000 was $834, or 3.6% higher than in the
first quarter of 1999 due to an increase in dividends per share effective March
31, 2000, for shareowners of record as of April 10, 2000, to $0.25375 from
$0.24375.
In late April 2000, SBC issued approximately $1,015 of variable rate notes due
May 1, 2001, with interest payable quarterly. The interest rate from May 1 to
August 1, 2000 is 6.33% and is reset quarterly based on the three-month London
Interbank Offer Rate (LIBOR) minus five basis points. The proceeds were used to
pay down commercial paper borrowings.
<PAGE>
SBC COMMUNICATIONS INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
There has been no material change in SBC's market risks since December 31, 1999.
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:
o Adverse economic changes in the markets served by SBC, or countries in which
SBC has significant investments.
o Changes in available technology.
o The final outcome of FCC rulemakings and judicial review, if any, of such
rulemakings, including issues relating to jurisdiction.
o The final outcome of state regulatory proceedings in SBC's 13-state area, and
judicial review, if any, of such proceedings, including proceedings relating
to interconnection terms, access charges, universal service, unbundled
network elements and resale rates, and reciprocal compensation.
o Enactment of additional state, Federal and/or foreign regulatory laws and
regulations pertaining to SBC's subsidiaries and foreign investments.
o The timing of entry and the extent of competition in the local and intraLATA
toll markets in SBC's 13-state area and SBC's entry into the in-region long
distance market.
o The impact of the Ameritech transaction, including performance with respect
to regulatory requirements and merger integration efforts.
o The timing and cost of deployment of SBC's broadband initiative also known as
Project Pronto, its effect on the carrying value of the existing wireline
network and the level of consumer demand for offered services.
o The impact of the wireless agreement with BellSouth Corporation, including
marketing and product development efforts and financial capacity.
Readers are cautioned that other factors discussed in this report, although not
enumerated here, also could materially impact SBC's future earnings.
<PAGE>
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the first quarter of 2000, the Company sold shares of common stock to
non-employee directors pursuant to the Company's Non-Employee Director Stock and
Deferral Plan. Under the plan, a director may make an annual election to receive
all or part of his annual retainer or fees in the form of SBC shares or deferred
stock units (DSUs) that are convertible into SBC shares. During this period, an
aggregate of 7,623 SBC shares and DSUs were purchased by non-employee directors
at prices ranging from $36.375 to $48.75, in each case the fair market value of
the shares on the date of purchase. The issuances of shares and DSUs were exempt
from registration pursuant to Section 4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
On January 13, 2000, SBC filed a Form 8-K, reporting on Item 5. Other
Events and Item 7. Financial Statements and Exhibits. In the report, SBC
disclosed a press release relating to its funding policy.
On January 25, 2000, SBC filed a Form 8-K, reporting on Item 5. Other
Events and Item 7. Financial Statements and Exhibits. In the report, SBC
disclosed a press release announcing fourth quarter and annual earnings
for 1999.
On January 28, 2000, SBC filed a Form 8-K, reporting on Item 5. Other
Events and Item 7. Financial Statements and Exhibits. In the report, SBC
disclosed a press release announcing that its board of directors has
authorized the repurchase of up to 100 million shares of the company's
common stock.
On February 22, 2000, SBC filed a Form 8-K, reporting on Item 5. Other
Events and Item 7. Financial Statements and Exhibits. In the report, SBC
disclosed a press release related to the acquisition of Sterling Commerce,
Inc.
On April 10, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events
and Item 7. Financial Statements and Exhibits. In the report, SBC
announced an agreement to combine its domestic wireless operations with
BellSouth Corporation.
One April 26, 2000, SBC filed a Form 8-K, reporting on Item 5. Other
Events. In the report, SBC disclosed a press release announcing first
quarter 2000 earnings and pro forma financial statements relating to the
wireless joint venture with BellSouth Corporation.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBC Communications Inc.
May 10, 2000 /s/ Donald E. Kiernan
---------------------
Donald E. Kiernan
Senior Executive Vice President,
Chief Financial Officer and Treasurer
<PAGE>
<TABLE>
<CAPTION>
SBC COMMUNICATIONS INC. EXHIBIT 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
----------------------- ----------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes,Extraordinary
Items and Cumulative Effect of Accounting
Changes* $ 2,809 $ 2,634 $ 10,382 $ 11,859 $ 6,356 $ 8,789 $ 8,139
Add: Interest Expense 356 357 1,430 1,605 1,550 1,418 1,513
Dividends on Preferred Securities 26 26 118 114 98 68 6
1/3 Rental Expense 50 57 236 228 202 188 152
------------ -------- ----------- --------- -------- --------- --------
Adjusted Earnings $ 3,241 $ 3,074 $ 12,166 $ 13,806 $ 8,206 $10,463 $ 9,810
============ ========= =========== ========= ======== ========= ========
Total Interest Charges $ 376 $ 377 $ 1,511 $ 1,691 $ 1,700 $ 1,589 $ 1,533
Dividends on Preferred Securities 26 26 118 114 98 68 6
1/3 Rental Expense 50 57 236 228 202 188 152
------------ -------- ----------- --------- -------- --------- --------
Adjusted Fixed Charges $ 452 $ 460 $ 1,865 $ 2,033 $ 2,000 $ 1,845 $ 1,691
============ ========= =========== ========= ======== ========= ========
Ratio of Earnings to Fixed Charges 7.17 6.68 6.52 6.79 4.10 5.67 5.80
*Undistributed earnings on investments accounted for under the equity method have been excluded.
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC
COMMUNICATIONS INC.'S MARCH 31, 2000 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENITRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 678
<SECURITIES> 180
<RECEIVABLES> 9,831
<ALLOWANCES> 1,072
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 11,986
<PP&E> 118,505
<DEPRECIATION> 71,373
<TOTAL-ASSETS> 89,401
<CURRENT-LIABILITIES> 24,305
<BONDS> 16,337
0
0
<COMMON> 3,433
<OTHER-SE> 24,498
<TOTAL-LIABILITY-AND-EQUITY> 89,401
<SALES> 0<F2>
<TOTAL-REVENUES> 12,582
<CGS> 0<F3>
<TOTAL-COSTS> 1,857
<OTHER-EXPENSES> 2,263
<LOSS-PROVISION> 211
<INTEREST-EXPENSE> 356
<INCOME-PRETAX> 2,961
<INCOME-TAX> 1,139
<INCOME-CONTINUING> 1,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,822
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.53
<FN>
<F1> THIS AMOUNT IS IMMATERIAL
<F2> NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING REVENUES AND
THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL STATEMENTS PURSUANT TO REGUALTION
S-X, RULE 5-03(B). THIS AMOUNT IS INCLUDED IN THE "TOTAL REVENUES" TAG.
<F3> COST OF TANGIBLE GOODS SOLD IS INCLUDED IN OPERATIONS AND SUPPORT IN THE FINANCIAL
STATEMENTS AND THE "TOTAL COST" TAG, PURSUANT TO REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
