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 September 30, 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 October 31, 2000, 3,384,971,128 common shares were outstanding.
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<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 Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Landline local service $ 5,721 $ 4,938 $ 16,333 $ 14,384
Wireless subscriber 1,749 1,639 4,897 4,405
Network access 2,492 2,535 7,832 7,595
Long distance service 807 869 2,391 2,680
Directory advertising 912 926 2,761 2,746
Other 1,773 1,638 5,023 4,815
--------------------------------------------------------------------------------------------
Total operating revenues 13,454 12,545 39,237 36,625
--------------------------------------------------------------------------------------------
Operating Expenses
Operations and support 8,245 7,640 23,374 21,507
Depreciation and amortization 2,363 2,443 6,943 6,378
--------------------------------------------------------------------------------------------
Total operating expenses 10,608 10,083 30,317 27,885
--------------------------------------------------------------------------------------------
Operating Income 2,846 2,462 8,920 8,740
--------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (422) (365) (1,194) (1,069)
Equity in net income of affiliates 267 220 656 574
Other income (expense) - net 2,013 (29) 2,196 (129)
--------------------------------------------------------------------------------------------
Total other income (expense) 1,858 (174) 1,658 (624)
--------------------------------------------------------------------------------------------
Income Before Income Taxes 4,704 2,288 10,578 8,116
--------------------------------------------------------------------------------------------
Income Taxes 1,705 1,153 3,906 3,270
--------------------------------------------------------------------------------------------
Income Before Cumulative Effect of
Accounting Change 2,999 1,135 6,672 4,846
--------------------------------------------------------------------------------------------
Cumulative Effect of Accounting Change,
net of tax - - - 207
--------------------------------------------------------------------------------------------
Net Income $ 2,999 $ 1,135 $ 6,672 $ 5,053
============================================================================================
Earnings Per Common Share:
Income Before Cumulative Effect of
Accounting Change $ 0.89 $ 0.33 $ 1.97 $ 1.42
Net Income $ 0.89 $ 0.33 $ 1.97 $ 1.48
--------------------------------------------------------------------------------------------
Earnings Per Common Share - Assuming Dilution:
Income Before Cumulative Effect of
Accounting Change $ 0.88 $ 0.33 $ 1.95 $ 1.40
Net Income $ 0.88 $ 0.33 $ 1.95 $ 1.46
--------------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding (in millions) 3,387 3,414 3,393 3,411
Dividends Declared Per Common Share $ 0.25375 $ 0.24375 $ 0.76125 $ 0.73125
============================================================================================
<FN>
See Notes to Consolidated Financial Statements.
============================================================================================
</FN>
</TABLE>
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<CAPTION>
SBC COMMUNICATIONS INC.
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CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
---------------------------------------------------------------------------------------
September 30, December 31,
------------- ------------
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 545 $ 495
Accounts receivable - net of allowances for
uncollectibles of $1,039 and $1,099 10,142 9,378
Prepaid expenses 950 651
Deferred income taxes 590 767
Other current assets 1,585 639
---------------------------------------------------------------------------------------
Total current assets 13,812 11,930
---------------------------------------------------------------------------------------
Property, plant and equipment - at cost 124,044 116,332
Less: accumulated depreciation and amortization 74,347 69,761
---------------------------------------------------------------------------------------
Property, Plant and Equipment - Net 49,697 46,571
---------------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated
Amortization of $1,472 and $1,115 7,149 4,737
Goodwill - Net of Accumulated
Amortization of $362 and $210 4,998 2,059
Investments in Equity Affiliates 9,937 10,648
Other Assets 8,983 7,270
---------------------------------------------------------------------------------------
Total Assets $ 94,576 $ 83,215
=======================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 9,413 $ 3,374
Accounts payable and accrued liabilities 12,137 11,717
Accrued taxes 4,248 3,386
Dividends payable 861 836
---------------------------------------------------------------------------------------
Total current liabilities 26,659 19,313
---------------------------------------------------------------------------------------
Long-Term Debt 15,890 17,475
---------------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 6,532 4,821
Postemployment benefit obligation 9,875 9,612
Unamortized investment tax credits 336 389
Other noncurrent liabilities 4,094 3,879
---------------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 20,837 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 12,356 12,453
Retained earnings 17,905 13,798
Guaranteed obligations of employee stock ownership
plans (ESOP) (33) (106)
Deferred compensation leveraged ESOP (LESOP) (62) (73)
Treasury shares (at cost) (2,163) (1,717)
Accumulated other comprehensive loss (1,246) (1,062)
---------------------------------------------------------------------------------------
Total shareowners' equity 30,190 26,726
---------------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 94,576 $ 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>
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<CAPTION>
SBC COMMUNICATIONS INC.
--------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
--------------------------------------------------------------------------------------
Nine months ended
September 30,
--------------------------
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 6,672 $ 5,053
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,943 6,378
Undistributed earnings from investments in equity
affiliates (344) (343)
Provision for uncollectible accounts 604 824
Amortization of investment tax credits (53) (64)
Deferred income tax expense 996 662
Cumulative effect of accounting change, net of tax - (207)
Gain on sales of investments (2,160) (268)
Changes in operating assets and liabilities:
Accounts receivable (1,368) 56
Other current assets (713) 30
Accounts payable and accrued liabilities 1,442 (271)
Other - net (1,073) (351)
--------------------------------------------------------------------------------------
Total adjustments 4,274 6,446
--------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,946 11,499
--------------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (9,202) (7,006)
Investments in affiliates (140) (32)
Purchase of short-term investments (533) (26)
Proceeds from short-term investments - 6
Dispositions 3,534 1,448
Acquisitions (5,306) (4,792)
Other - 2
--------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (11,647) (10,400)
--------------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 4,278 2,214
Issuance of long-term debt 1,039 738
Repayment of long-term debt (921) (2,140)
Issuance of common shares - 307
Issuance of preferred shares in subsidiaries - 3
Purchase of treasury shares (1,457) (21)
Issuance of treasury shares 307 197
Dividends paid (2,560) (2,464)
Other 65 -
--------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 751 (1,166)
--------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 50 (67)
--------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 495 599
--------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 545 $ 532
======================================================================================
Cash paid during the nine months ended September 30 for:
Interest $ 1,298 $ 1,200
Income taxes, net of refunds $ 2,113 $ 1,929
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
SBC COMMUNICATIONS INC.
----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
---------------------------------------------------------------------------------------------------------=-----------------------
Guaranteed Accumulated
Capital in Obligations of Deferred Other
Common Excess of Par Retained Employee Stock Compensation Treasury Comprehensive
Shares Value Earnings Ownership 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 - - 6,672 - - - -
Other comprehensive loss - - - - - - (184)
Dividends to shareowners - - (2,583) - - - -
Reduction of debt associated with ESOP - - - 73 - - -
Cost of LESOP trust shares allocated
to employee accounts - - - - 11 - -
Purchase of treasury shares - - - - - (1,457) -
Issuance of treasury shares - (222) - - - 1,011 -
Other - 125 18 - - - -
---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ 3,433 $ 12,356 $ 17,905 $ (33) $ (62) $ (2,163) $ (1,246)
=================================================================================================================================
<FN>
See Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA
At September 30, or for the nine months then ended: 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Debt ratio....................................... 44.79% 47.54%
Network access lines in service (000)............ 61,287 60,383
Resold lines (000)............................... 1,616 1,422
Access minutes of use (000,000).................. 210,927 196,393
Wireless customers (000)......................... 13,025 10,693
Number of employee............................... 223,260 203,270
</TABLE>
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SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
1. BASIS OF PRESENTATION Throughout this document, SBC Communications Inc. is
referred to as "we" or "SBC". The consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) that permit reduced disclosure for interim periods. We
believe that these financial statements include all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the results
for the interim periods shown. The results for the interim periods are not
necessarily indicative of results for the full year. You should read these
consolidated financial statements in conjunction with the consolidated
financial statements and accompanying notes included in SBC's 1999 Annual
Report to Shareowners.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. We have reclassified certain amounts in prior period financial
statements to conform to the current period's presentation.
2. CONSOLIDATION The consolidated financial statements include the accounts of
SBC and our 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,
we changed the method of accounting to the "issue basis", which recognizes
revenues and expenses at the time the related directory is published. We
changed the methodology because the issue basis method is generally followed
in the publishing industry, including our 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 deferred taxes of $125. Had we used the current
method during prior periods, income before extraordinary items and cumulative
effect of accounting change would not have been materially affected.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
third quarter and nine months ended September 30, 2000 and 1999 include net
income and adjustments to shareowners' equity for foreign currency
translation adjustment and net unrealized gain (loss) on securities.
<TABLE>
<CAPTION>
Following is SBC's comprehensive income:
------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 2,999 $ 1,135 $ 6,672 $ 5,053
Other comprehensive income, net of tax:
Foreign currency translation adjustment (259) 122 (470) (368)
Reclassification adjustment to net income for
cumulative translation adjustment on
securities sold 323 - 323 -
Net unrealized gain (loss) on securities:
Unrealized gain (loss) on available for
sale securities (18) 18 7 18
Less: reclassification adjustment for (gain)
loss included in net income 2 - (44) (5)
------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities (16) 18 (37) 13
------------------------------------------------------------------------------------------
Other comprehensive income (loss) 48 140 (184) (355)
------------------------------------------------------------------------------------------
Total comprehensive income $ 3,047 $ 1,275 $ 6,488 $ 4,698
==========================================================================================
</TABLE>
5. COMPLETION OF MERGERS Upon completion of the mergers with Ameritech, Southern
New England Telecommunications Corporation (SNET), and Pacific Telesis Group
(PAC), we reviewed operations throughout the merged company. Based on these
merger integration reviews, we made strategic decisions to significantly
integrate operations and consolidate some administrative and support
functions 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. We did not incur
any of these one-time charges in the third quarter or for the first nine
months of 2000. In the third quarter and first nine months of 1999, we
incurred costs of $884 ($883 net of tax) related to the merger with
Ameritech. Remaining accruals for anticipated cash expenditures related to
these decisions totaled $343 at September 30, 2000 and $755 at
December 31, 1999.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
6. SUBSIDIARY FINANCIAL INFORMATION We have fully and unconditionally guaranteed
certain outstanding debt securities of PAC, Pacific Bell Telephone Company
(PacBell), and Southwestern Bell Telephone Company (SWBell), each of which is
a wholly owned subsidiary of SBC. In August 2000, the SEC issued new rules
for reporting parent company guarantees of subsidiary securities. In
accordance with these new rules, we are providing the following condensed
consolidating financial information.
The Parent column presents investments in all subsidiaries under the equity
method of accounting. PAC, PacBell and SWBell are listed separately because
each has issued debt that we have guaranteed. PacBell is a wholly owned
subsidiary of PAC, and the new rules require that its financial information
also be included in the PAC column. All other subsidiaries that do not have
securities guaranteed by us are presented in the Other column. The
consolidating adjustments column (Adjs.) eliminates the intercompany balances
and transactions between our subsidiaries, as well as removing the double
presentation of PacBell in order to reconcile to the SBC consolidated
financial information. See Note 8 for a discussion of conforming items on the
segments and subsidiaries.
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 2000
Parent PAC PacBell SWBell Other Adjs. Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $ - $3,016 $ 2,619 $ 2,904 $ 7,851 $ (2,936) $ 13,454
Total operating expenses (88) 1,982 1,793 2,109 6,922 (2,110) 10,608
-------------------------------------------------------------------------------------------- --------
Operating income 88 1,034 826 795 929 (826) 2,846
-------------------------------------------------------------------------------------------- --------
Interest expense (158) (106) (94) (91) (377) 404 (422)
Equity in net income of affiliates 2,882 21 - - 272 (2,908) 267
Other income (expense) - net 234 (24) (1) 2 2,088 (286) 2,013
-------------------------------------------------------------------------------------------- --------
Income before income taxes 3,046 925 731 706 2,912 (3,616) 4,704
------------------------------------------------------------------------------------------- --------
Income taxes 47 361 293 260 1,037 (293) 1,705
-------------------------------------------------------------------------------------------- --------
Net Income $ 2,999 $ 564 $ 438 $ 446 $ 1,875 $ (3,323) $ 2,999
============================================================================================ ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 1999
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $ - $2,920 $ 2,455 $ 2,797 $ 7,056 $ (2,683) $ 12,545
Total operating expenses (27) 2,092 1,792 2,044 6,202 (2,020) 10,083
-------------------------------------------------------------------------------------------- --------
Operating income 27 828 663 753 854 (663) 2,462
-------------------------------------------------------------------------------------------- --------
Interest expense (42) (94) (84) (95) (393) 343 (365)
Equity in net income of affiliates 1,185 - - - 237 (1,202) 220
Other income (expense) - net 169 2 4 1 41 (246) (29)
-------------------------------------------------------------------------------------------- --------
Income before income taxes 1,339 736 583 659 739 (1,768) 2,288
-------------------------------------------------------------------------------------------- --------
Income taxes 204 287 231 242 420 (231) 1,153
-------------------------------------------------------------------------------------------- --------
Net Income $ 1,135 $ 449 $ 352 $ 417 $ 319 $ (1,537) $ 1,135
============================================================================================ ========
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Income
For the Nine Months Ended September 30, 2000
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $ - $ 8,880 $ 7,725 $ 8,662 $ 22,561 $ (8,591) $ 39,237
Total operating expenses (135) 6,330 5,659 6,547 18,441 (6,525) 30,317
-------------------------------------------------------------------------------------------- --------
Operating income 135 2,550 2,066 2,115 4,120 (2,066) 8,920
-------------------------------------------------------------------------------------------- --------
Interest expense (359) (338) (297) (283) (1,079) 1,162 (1,194)
Equity in net income of affiliates 6,353 55 - - 664 (6,416) 656
Other income (expense) - net 624 (5) - 3 2,379 (805) 2,196
-------------------------------------------------------------------------------------------- --------
Income before income taxes 6,753 2,262 1,769 1,835 6,084 (8,125) 10,578
-------------------------------------------------------------------------------------------- --------
Income taxes 81 883 706 677 2,265 (706) 3,906
--------------------------------------------------------------------------------
Net Income $ 6,672 $ 1,379 $ 1,063 $ 1,158 $ 3,819 $ (7,419) $ 6,672
============================================================================================ ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Income
For the Nine Months Ended September 30, 1999
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $ - $ 8,839 $ 7,245 $ 8,375 $ 20,105 $ (7,939) $ 36,625
Total operating expenses (38) 6,530 5,350 6,069 16,018 (6,044) 27,885
-------------------------------------------------------------------------------------------- --------
Operating income 38 2,309 1,895 2,306 4,087 (1,895) 8,740
-------------------------------------------------------------------------------------------- --------
Interest expense (150) (341) (287) (284) (1,043) 1,036 (1,069)
Equity in net income of affiliates 5,102 - - - 591 (5,119) 574
Other income (expense)- net 169 82 35 5 347 (767) (129)
-------------------------------------------------------------------------------------------- --------
Income before income taxes 5,159 2,050 1,643 2,027 3,982 (6,745) 8,116
-------------------------------------------------------------------------------------------- --------
Income taxes 99 813 650 745 1,613 (650) 3,270
-------------------------------------------------------------------------------------------- --------
Income before cumulative effect
of accounting change 5,060 1,237 993 1,282 2,369 (6,095) 4,846
-------------------------------------------------------------------------------------------- --------
Cumulative effect
of accounting change (7) (218) (1,010) (273) 705 1,010 207
-------------------------------------------------------------------------------------------- --------
Net Income $ 5,053 $ 1,019 $ (17) $ 1,009 $ 3,074 $ (5,085) $ 5,053
============================================================================================ ========
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheets
September 30, 2000
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 334 $ 10 $ 9 $ 42 $ 159 $ (9) $ 545
Accounts receivable - net 9,061 2,839 2,280 2,191 12,155 (18,384) 10,142
Other current assets 687 566 443 619 1,253 (443) 3,125
-------------------------------------------------------------------------------------------- --------
Total current assets 10,082 3,415 2,732 2,852 13,567 (18,836) 13,812
-------------------------------------------------------------------------------------------- --------
Property, plant and equipment - net 144 13,275 12,862 14,387 21,891 (12,862) 49,697
-------------------------------------------------------------------------------------------- --------
Intangible assets - net - 803 - - 11,344 - 12,147
-------------------------------------------------------------------------------------------- --------
Investments in equity affiliates 29,810 181 - - 5,660 (25,714) 9,937
-------------------------------------------------------------------------------------------- --------
Other assets 2,703 1,694 1,525 26 11,408 (8,373) 8,983
-------------------------------------------------------------------------------------------- --------
Total Assets $42,739 $19,368 $ 17,119 $17,265 $ 63,870 $(65,785) $ 94,576
============================================================================================ ========
Debt maturing within one year $ 8,472 $ 1,568 $ 1,827 $ 2,433 $ 10,316 $(15,203) $ 9,413
Other current liabilities 1,348 3,826 3,406 3,443 11,357 (6,134) 17,246
-------------------------------------------------------------------------------------------- --------
Total current liabilities 9,820 5,394 5,233 5,876 21,673 (21,337) 26,659
-------------------------------------------------------------------------------------------- --------
Long-term debt 568 4,353 4,293 3,976 13,755 (11,055) 15,890
-------------------------------------------------------------------------------------------- --------
Postemployment benefit obligation 87 2,922 2,740 2,967 3,899 (2,740) 9,875
-------------------------------------------------------------------------------------------- --------
Other noncurrent liabilities 2,074 1,575 1,278 1,103 6,296 (1,364) 10,962
-------------------------------------------------------------------------------------------- --------
Corporation-obligated mandatorily
redeemable preferred securities of
subsidiary trusts - 1,000 - - - - 1,000
-------------------------------------------------------------------------------------------- --------
Total shareowners' equity 30,190 4,124 3,575 3,343 18,247 (29,289) 30,190
-------------------------------------------------------------------------------------------- --------
Total Liabilities
and Shareowners' Equity $42,739 $19,368 $ 17,119 $17,265 $ 63,870 $(65,785) $ 94,576
============================================================================================ ========
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheets
December 31, 1999
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 101 $ 13 $ 12 $ 49 $ 332 $ (12) $ 495
Accounts receivable - net 8,012 2,538 1,929 1,913 13,374 (18,388) 9,378
Other current assets 223 471 377 491 872 (377) 2,057
-------------------------------------------------------------------------------------------- --------
Total current assets 8,336 3,022 2,318 2,453 14,578 (18,777) 11,930
-------------------------------------------------------------------------------------------- --------
Property, plant and equipment - net 89 12,628 12,213 13,958 19,896 (12,213) 46,571
-------------------------------------------------------------------------------------------- --------
Intangible assets - net - 824 - - 5,972 - 6,796
-------------------------------------------------------------------------------------------- --------
Investments in equity affiliates 23,461 199 - - 8,347 (21,359) 10,648
-------------------------------------------------------------------------------------------- --------
Other assets 2,203 1,683 1,407 20 10,158 (8,201) 7,270
-------------------------------------------------------------------------------------------- --------
Total Assets $34,089 $18,356 $ 15,938 $16,431 $ 58,951 $(60,550) $ 83,215
============================================================================================ ========
Debt maturing within one year $ 3,364 $ 1,869 $ 1,674 $ 2,086 $ 10,861 $(16,480) $ 3,374
Other current liabilities 1,347 3,075 2,865 3,041 10,129 (4,518) 15,939
-------------------------------------------------------------------------------------------- --------
Total current liabilities 4,711 4,944 4,539 5,127 20,990 (20,998) 19,313
-------------------------------------------------------------------------------------------- --------
Long-term debt 685 4,551 4,491 4,211 14,796 (11,259) 17,475
-------------------------------------------------------------------------------------------- --------
Postemployment benefit obligation 111 2,888 2,703 3,049 3,564 (2,703) 9,612
-------------------------------------------------------------------------------------------- --------
Other noncurrent liabilities 1,856 1,845 1,486 1,143 4,271 (1,512) 9,089
-------------------------------------------------------------------------------------------- --------
Corporation-obligated mandatorily
redeemable preferred securities of
subsidiary trusts - 1,000 - - - - 1,000
-------------------------------------------------------------------------------------------- --------
Total shareowners' equity 26,726 3,128 2,719 2,901 15,330 (24,078) 26,726
-------------------------------------------------------------------------------------------- --------
Total Liabilities
and Shareowners' Equity $ 34,089 $18,356 $ 15,938 $16,431 $ 58,951 $ (60,550)$ 83,215
============================================================================================ ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2000
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net cash from operating activities $ 3,149 $ 2,959 $ 2,287 $ 2,444 $ 3,699 $ (3,592) $ 10,946
Net cash from investing activities (4,261) (2,108) (2,035) (2,483) (2,464) 1,704 (11,647)
Net cash from financing activities 1,345 (854) (255) 32 (1,408) 1,891 751
-------------------------------------------------------------------------------------------- --------
Net Increase (Decrease) in Cash $ 233 $ (3)$ (3) $ (7) $ (173)$ 3 $ 50
=========================================================================================== ========
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 1999
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash from operating activities $ 1,005 $ 2,084 $ 2,293 $ 2,988 $ 5,687 $ (2,558) $ 11,499
Net cash from investing activities (22) (1,880) (1,665) (2,075) (6,424) 1,666 (10,400)
Net cash from financing activities (1,248) (188) (614) (886) 892 878 (1,166)
-------------------------------------------------------------------------------------------- --------
Net Increase (Decrease) in Cash $ (265) $ 16 $ 14 $ 27 $ 155 $ (14) $ (67)
============================================================================================ ========
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
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 and nine months ended
September 30, 2000 and 1999 are shown in the table below.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerators
Numerator for basic earnings per share:
Income before cumulative effect of
accounting change $ 2,999 $ 1,135 $6,672 $ 4,846
-------------------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 1 1 4 3
-------------------------------------------------------------------------------
Numerator for diluted earnings per share $ 3,000 $ 1,136 $6,676 $ 4,849
===============================================================================
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding 3,387 3,414 3,393 3,411
-------------------------------------------------------------------------------
Dilutive potential common shares:
Stock options 30 42 31 43
Other stock-based compensation 8 7 7 7
-------------------------------------------------------------------------------
Denominator for diluted earnings per share 3,425 3,463 3,431 3,461
===============================================================================
Basic earnings per share:
Income before cumulative effect of
accounting change $ 0.89 $ 0.33 $ 1.97 $ 1.42
Cumulative effect of accounting change - - - 0.06
-------------------------------------------------------------------------------
Net income $ 0.89 $ 0.33 $ 1.97 $ 1.48
===============================================================================
Diluted earnings per share:
Income before cumulative effect of
accounting change $ 0.88 $ 0.33 $ 1.95 $ 1.40
Cumulative effect of accounting change - - - 0.06
-------------------------------------------------------------------------------
Net income $ 0.88 $ 0.33 $ 1.95 $ 1.46
===============================================================================
</TABLE>
Under the Financial Accounting Standards Board's proposed Exposure Draft
issued in September 1999, "Business Combinations and Intangible Assets", SBC
would begin reporting on the income statement an earnings per share amount
which excludes all goodwill charges (amortization expense and impairment
losses). Goodwill charges related to investments in equity affiliates are
currently included in equity in net income of affiliates on the income
statement.
The diluted earnings per share before goodwill charges for net income was
$0.90 and $2.05 for the three and nine months ended September 30, 2000 and
$0.43 and $1.59 for the three and nine months ended September 30, 1999.
8. SEGMENT INFORMATION SBC's segments are strategic business units that offer
different products and services and are managed accordingly. We evaluate
performance based on income before income taxes adjusted for normalizing
(i.e. one-time) items.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
We have four reportable segments that reflect the current management of our
business: (1) wireline; (2) wireless; (3) information and entertainment; and
(4) international. 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 information and entertainment segment consists
of directory operations including advertising, yellow pages, white pages and
electronic publishing and Ameritech's electronic security and cable
television operations. All international investment operations are disclosed
separately in the international segment.
Normalized results for 2000 exclude the following items:
o Gains of $1,699 ($1,125 net of tax) in the third quarter and for the first
nine months related to the sale of direct and indirect interests in MATAV
and Netcom GSM, two international equity investments.
o Gains of $238 ($155 net of tax) in the third quarter and for the first
nine months on the sale of Telefonos de Mexico, S.A. de C.V. L shares
associated with SBC's purchase of a Mandatorily Exchangeable Debt
Securities note with characteristics that will essentially offset future
mark to market adjustments on the Debt Exchangeable for Common Stock.
o Pension settlement gains of $29 ($19 net of tax) in the third quarter
associated with pension litigation and $403 ($260 net of tax) for the
first nine months primarily related to employees who terminated employment
during 1999. These third quarter and first nine month gains were primarily
in the wireline segment.
o Costs of $400 ($258 net of tax) in the third quarter and $780 ($528 net of
tax) for the first nine months primarily in the wireline segment
associated with strategic initiatives and other adjustments resulting from
the merger integration process with Ameritech.
o A charge of $132 in the first nine months (with no tax effect) in the
wireline segment related to in-process research and development from the
March 2000 acquisition of Sterling Commerce, Inc. (Sterling).
Normalized results for 1999 exclude the following items:
o Costs of $884 ($883 net of tax) in the third quarter and for the first
nine months related to conforming accounting estimation techniques and
valuation assumptions, the impairment of a portion of the accounting
goodwill associated with Ameritech's security business and costs
associated with strategic initiatives resulting from the merger
integration process with Ameritech.
o Income of $73 ($47 net of tax) in the third quarter and $191 ($114 net of
tax) for the first nine months in the wireless segment from the
incremental impacts of overlapping wireless properties sold in October
1999.
o A reduction of $45 ($27 net of tax), primarily in the wireless segment, in
the first nine months for a portion of a first quarter 1998 charge to
cover the cost of consolidating security monitoring centers and
company-owned wireless retail stores.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Segment results, including a reconciliation to our consolidated results, for
the third quarter of 2000 and 1999 and for the nine months ended September
30, 2000 and 1999 are as follows:
--------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
September 30, 2000 customers revenues income taxes
--------------------------------------------------------------------------
Wireline $ 10,074 $ 52 $ 1,766
Wireless 2,214 1 370
Information and entertainment 1,042 17 368
International 77 2 209
Corporate, adjustments &
eliminations 46 (72) 425
Normalizing adjustments 1 - 1,566
--------------------------------------------------------------------------
Total $ 13,454 $ - $ 4,704
==========================================================================
--------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
September 30, 1999 customers revenues income taxes
--------------------------------------------------------------------------
Wireline $ 9,425 $ 80 $ 2,189
Wireless 1,882 - 317
Information and entertainment 1,055 16 352
International 56 3 150
Corporate, adjustments &
eliminations 43 (99) 91
Normalizing adjustments 84 - (811)
--------------------------------------------------------------------------
Total $ 12,545 $ - $ 2,288
==========================================================================
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Revenues
At September 30, 2000 or for from external Intersegment Income before Segment
the nine months ended customers revenues income taxes assets
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wireline $ 29,592 $ 166 $ 5,918 $ 61,444
Wireless 6,144 1 960 13,872
Information and entertainment 3,111 72 1,018 3,787
International 245 2 642 12,096
Corporate, adjustments &
eliminations 145 (241) 612 3,377
Normalizing adjustments - - 1,428 -
-------------------------------------------------------------------------------------
Total $ 39,237 $ - $ 10,578 $ 94,576
=====================================================================================
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Revenues
At September 30, 1999 or for from external Intersegment Income before Segment
the nine months ended customers revenues income taxes assets
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wireline $ 27,764 $ 239 $ 6,569 $ 52,876
Wireless 4,945 - 720 12,642
Information and entertainment 3,060 72 940 3,638
International 172 11 498 13,542
Corporate, adjustments &
eliminations 156 (322) 37 (852)
Normalizing adjustments 528 - (648) -
-------------------------------------------------------------------------------------
Total $ 36,625 $ - $ 8,116 $ 81,846
=====================================================================================
</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. ACQUISITIONS AND DISPOSITIONS In March 2000, SBC acquired Sterling, a
provider of electronic business integration solutions, in an all cash tender
offer valued at approximately $3,576. We accounted for the transaction 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. We expensed the
acquired in-process research and development of approximately $132 in March
2000. We included the results of operations in the consolidated financial
statements from the date of the acquisition.
In July 2000, SBC exercised its right to sell its interest in MATAV, a
Hungarian telecommunications company, to Deutsche Telekom, SBC's partner in
the investment, for approximately $2,199. The transaction closed in August
2000 with a pre-tax gain of approximately $1,153.
In August 2000, Tele Danmark and SBC sold their interests in Netcom GSM, a
wireless telecommunications provider in Norway, to a third party with a
pre-tax gain of approximately $546.
10.WIRELESS TRANSACTIONS In August 2000, SBC acquired wireless properties in
Texas and Washington from GTE Corporation for approximately $1,349. The
properties acquired cover a population of more than 7.4 million people and
included approximately 318,000 customers, and were included in the
contribution to the wireless joint venture with BellSouth Corporation
(BellSouth).
In October 2000, SBC and BellSouth began contributions of their wireless
properties and formally began operations of their wireless joint venture,
Cingular Wireless (Cingular), formed in April 2000. Cingular serves more than
19 million customers, the second largest wireless operator in the United
States, and has approximately 190 million potential customers in 38 states,
the District of Columbia, Puerto Rico and the United States Virgin Islands.
Ownership in Cingular is held 60% by SBC and 40% by BellSouth, with control
shared equally. SBC will account for its interest under the equity
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
method of accounting. Cingular will be managed independently with a four-seat
board of directors (two seats from each company). The contributions to
Cingular were made after we received the approval of the United States
Department of Justice and the Federal Communications Commission.
At the contribution date we were required to sell our overlapping properties
in Indianapolis, Indiana and selected Radiofone properties in New Orleans and
Baton Rouge, Louisiana. We received approximately $930 in proceeds from these
sales and will record pre-tax gains of more than $300 in the fourth quarter
of 2000.
11.VOLUNTARY ENHANCED PENSION AND RETIREMENT PROGRAM In October 2000, we
implemented a voluntary enhanced pension and retirement benefit program to
reduce the number of management employees. The program offers eligible
management employees who decide to terminate employment with SBC an enhanced
pension and increased eligibility for post-retirement medical and dental
benefits. Most of the employees who accepted this offer should terminate
employment before the end of the year, however, under the program, SBC may
retain employees for up to one year. If our cost savings targets are not met
through the voluntary program, there may be involuntary personnel reductions
in the fourth quarter of 2000.
We are still evaluating the results of the program, but we expect to report
in the fourth quarter significant costs attributable to the enhanced benefits
and significant pension settlement gains. We currently anticipate that the
pension settlement gains will exceed the enhanced benefits costs and any
collateral severance costs.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Overview Financial results for SBC Communications Inc. (SBC) for the third
quarter and the first nine months of 2000 and 1999 are summarized as follows:
--------------------------------------------------------------------------------------
Third Quarter Nine-Month Period
Percent Percent
2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 13,454 $ 12,545 7.2% $ 39,237 $ 36,625 7.1%
Operating expenses 10,608 10,083 5.2% 30,317 27,885 8.7%
Operating income 2,846 2,462 15.6% 8,920 8,740 2.1%
Income before income taxes and
cumulative effect of
accounting change 4,704 2,288 - 10,578 8,116 30.3%
Income before cumulative effect
of accounting change 2,999 1,135 - 6,672 4,846 37.7%
Cumulative effect of accounting
change - - - - 207 -
Net income 2,999 1,135 - 6,672 5,053 32.0%
======================================================================================
</TABLE>
SBC reported net income of $2,999, or $0.88 per share assuming dilution, in the
third quarter of 2000 and $6,672, or $1.95 per share assuming dilution, for the
first nine months of 2000 compared to $1,135, or $0.33 per share assuming
dilution, in the third quarter of 1999 and $5,053, or $1.46 per share assuming
dilution, for the first nine months of 1999.
The first nine months of 1999 included a cumulative effect of accounting change
related to accounting for directory revenues and expenses (see Note 3 of Notes
to Consolidated Financial Statements). The third quarter and first nine months
of 2000 and 1999 also included several items that SBC normalizes for management
purposes.
Normalized results for 2000 exclude the following items:
o Gains of $1,699 ($1,125 net of tax) in the third quarter and for the first
nine months related to the sale of direct and indirect interests in MATAV and
Netcom GSM, two international equity investments.
o Gains of $238 ($155 net of tax) in the third quarter and for the first nine
months on the sale of Telefonos de Mexico, S.A. de C.V. (Telmex), L shares
associated with SBC's purchase of a Mandatorily Exchangeable Debt Securities
note with characteristics that will essentially offset future mark to market
adjustments on the Debt Exchangeable for Common Stock (DECS).
o Pension settlement gains of $29 ($19 net of tax) in the third quarter
associated with pension litigation and $403 ($260 net of tax) for the first
nine months primarily related to employees who terminated employment during
1999. These third quarter and first nine month gains were primarily in the
wireline segment.
o Costs of $400 ($258 net of tax) in the third quarter and $780 ($528 net of
tax) for the first nine months primarily in the wireline segment associated
with strategic initiatives and other adjustments resulting from the merger
integration process with Ameritech Corporation (Ameritech).
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
o A charge of $132 in the first nine months (with no tax effect) in the
wireline segment related to in-process research and development from the
March 2000 acquisition of Sterling Commerce, Inc. (Sterling).
Normalized results for 1999 exclude the following items:
o Costs of $884 ($883 net of tax) in the third quarter and for the first nine
months related to conforming accounting estimation techniques and valuation
assumptions, the impairment of a portion of the accounting goodwill
associated with Ameritech's security business and costs associated with
strategic initiatives resulting from the merger integration process with
Ameritech.
o Income of $73 ($47 net of tax) in the third quarter and $191 ($114 net of
tax) for the first nine months in the wireless segment from the incremental
impacts of overlapping wireless properties sold in October 1999.
o A reduction of $45 ($27 net of tax), primarily in the wireless segment, in
the first nine months for 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 items, SBC's income before cumulative
effect of accounting change was $1,958, or $0.57 per share assuming dilution, in
the third quarter of 2000 and $5,792, or $1.69 per share assuming dilution, for
the first nine months of 2000 compared to $1,971, or $0.57 per share assuming
dilution, in the third quarter of 1999 and $5,588, or $1.62 per share assuming
dilution, for the first nine months of 1999.
The primary factors contributing to the increase in consolidated revenues were
growth in demand for data communications and wireless services and products.
These increases were partially offset by increased operating expenses related to
the buildout of our broadband network, and investments in new products and
services, including Digital Subscriber Line (DSL), national expansion and long
distance service. The national expansion initiative is SBC's plan to enter the
top 30 metropolitan markets beyond its traditional regions by October 2001.
InterLATA long distance service was launched in Texas on July 10, 2000.
Segment Results
The following tables show components of normalized results of operations by
segment. A discussion of significant segment results is also presented.
Intercompany interest affects the segment results of operations but is not
discussed as it is eliminated in consolidation. The consolidated results section
discusses interest expense, other income (expense) - net and income taxes.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
Wireline
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.
--------------------------------------------------------------------------------
Third Quarter Nine-Month Period
Percent Percent
2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------
Operating revenues
Local service $ 5,721 $ 5,006 14.3% $16,342 $ 14,469 12.9%
Network access 2,515 2,571 (2.2) 7,901 7,675 2.9
Long distance service 750 843 (11.0) 2,241 2,627 (14.7)
Other 1,140 1,085 5.1 3,274 3,232 1.3
--------------------------------------------- ------------------
Total Operating Revenues 10,126 9,505 6.5 29,758 28,003 6.3
--------------------------------------------- ------------------
Operating expenses
Operations and support 6,111 5,320 14.9 17,332 15,573 11.3
Depreciation and
amortization 1,959 1,725 13.6 5,636 5,051 11.6
--------------------------------------------- ------------------
Total Operating Expenses 8,070 7,045 14.5 22,968 20,624 11.4
--------------------------------------------- ------------------
Operating Income 2,056 2,460 (16.4) 6,790 7,379 (8.0)
--------------------------------------------- ------------------
Interest Expense (297) (292) 1.7 (925) (877) 5.5
--------------------------------------------- ------------------
Other Income (Expense) - Net 7 21 (66.7) 53 67 (20.9)
--------------------------------------------- ------------------
Income Before Income Taxes $ 1,766 $ 2,189 (19.3)% $ 5,918 $ 6,569 (9.9)%
================================================================================
Local service revenues increased $715, or 14.3%, in the third quarter and
$1,873, or 12.9%, for the first nine months of 2000. Excluding the operations
of Sterling, acquired in March 2000, the increases were approximately 11.7%
in the third quarter and 10.9% for the first nine months of 2000.
Approximately $179 of the increase in the third quarter and $390 for the
first nine months of 2000 was attributable to increased demand from business
customers for network integration and Internet services. Wholesale revenues
accounted for approximately $122 of the third-quarter increase and $264 of
the increase for the first nine months of 2000. Increased demand for vertical
services such as Caller ID, Call Waiting, voice mail and other enhanced
services increased revenue by approximately $103 in the third quarter and
$260 for the first nine months of 2000. Demand for data services in the
residential market increased local service revenues by approximately $67 in
the third quarter and $103 for the first nine months of 2000. Directory
assistance revenues increased approximately $33 in the third quarter and $56
for the first nine months of 2000, primarily due to price increases in
California, Illinois and Texas.
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 $19 in the third quarter and $131 for the
first nine months of 2000. However, these regulatory actions had only a
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
nominal effect on overall revenue because they decreased intrastate network
access revenues by approximately $23 in the third quarter and $98 for the
first nine months of 2000 and decreased long distance revenues by
approximately $2 in the third quarter and $22 for the first nine months of
2000. The Texas Public Utility Commission has stated that the TUSF is
intended, among other things, to help support the provision of basic local
telephone service to high-cost rural areas.
Network access revenues decreased $56, or 2.2%, in the third quarter and
increased $226, or 2.9%, for the first nine months of 2000. The third quarter
decline was primarily due to the July 2000 implementation of the Coalition
for Affordable Local and Long Distance Service (CALLS) proposal, which
required reduction of carrier switched access rates. Implementation of CALLS
reduced third quarter network access revenues by approximately $167.
Additionally, intrastate access rate reductions in Texas resulted in a
decrease in network access revenues of approximately $70 in the third quarter
and $184 for the first nine months of 2000. These decreases in access rates
were largely offset by continued demand for special access and switched data
transport services, as well as higher network usage by alternative providers
of intraLATA toll services.
Long distance service revenues decreased $93, or 11.0%, in the third quarter
and $386, or 14.7%, for the first nine months of 2000. Long distance service
revenues decreased by approximately $69 in the third quarter and $265 for the
first nine months of 2000 due to competitive losses resulting from dialing
parity implementation. This decrease was partially offset by an increase of
approximately $6 in the third quarter and $24 for the first nine months of
2000 due to price increases in Illinois, Indiana, Michigan and Ohio. The
decrease was also offset by approximately $18 in the third quarter and for
the first nine months of 2000 from entry into the Texas long distance market.
The continued introduction of extended area service plans, as described above
in local service, decreased long distance revenues by approximately $2 in the
third quarter and $22 for the first nine months of 2000, which increased
local service revenues by the same amounts.
Other operating revenues increased $55, or 5.1%, in the third quarter and
$42, or 1.3%, for the first nine months of 2000. Equipment sales increases,
primarily residential, of approximately $50 in the third quarter and $105 for
the first nine months of 2000, were partially offset by declines in the
payphone business of approximately $28 in the third quarter and $71 for the
first nine months of 2000. Sales of other nonregulated products and services
increased in the third quarter and were up slightly for the first nine months
of 2000.
Operations and support expenses increased $791, or 14.9%, in the third
quarter and $1,759, or 11.3%, for the first nine months of 2000.
Approximately $259 of third quarter and $608 of the first nine months
increases were related to costs associated with the continued rollout of DSL.
Personnel increases, particularly in the residential and business channels,
increased operations and support expenses by approximately $150 in the third
quarter and $353 for the first nine months of 2000. Operations and support
expenses also increased approximately $247 in the third quarter and $502 for
the first nine months of 2000 due to costs associated with network
integration and E-Commerce services, including costs of Sterling. In
addition, SBC's national expansion initiative increased expenses by
approximately $119 in the third quarter and $222 for the first nine months of
2000.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
Depreciation and amortization expenses increased $234, or 13.6%, in the third
quarter and $585, or 11.6%, for the first nine months of 2000. Overall higher
plant levels increased depreciation expense by approximately $85 in the third
quarter and $239 for the first nine months of 2000. The acquisition of
Sterling caused an increase of approximately $86 in the third quarter and
$178 for the first nine months of 2000. Amortization of capitalized software
also increased approximately $56 in the third quarter and $153 for the first
nine months of 2000.
Wireless
<TABLE>
<CAPTION>
Wireless provides wireless telecommunications services, including local and long
distance services, and sells wireless equipment.
------------------------------------------------------------------------------------
Third Quarter Nine-Month Period
Percent Percent
2000 1999 Change 2000 1999 Change
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Subscriber revenues $ 1,749 $ 1,457 20.0% $ 4,897 $ 3,872 26.5%
Other 466 425 9.6 1,248 1,073 16.3
----------------------------------------------- ------------------
Total Operating Revenues 2,215 1,882 17.7 6,145 4,945 24.3
----------------------------------------------- ------------------
Operating expenses
Operations and support 1,429 1,191 20.0 3,996 3,316 20.5
Depreciation and
amortization 248 262 (5.3) 817 632 29.3
----------------------------------------------- ------------------
Total Operating Expenses 1,677 1,453 15.4 4,813 3,948 21.9
----------------------------------------------- ------------------
Operating Income 538 429 25.4 1,332 997 33.6
----------------------------------------------- ------------------
Interest Expense (143) (68) - (267) (152) 75.7
----------------------------------------------- ------------------
Equity in Net Income of
Affiliates 7 12 (41.7) 7 28 (75.0)
----------------------------------------------- ------------------
Other Income (Expense) - Net (32) (56) (42.9) (112) (153) (26.8)
----------------------------------------------- ------------------
Income Before Income Taxes $ 370 $ 317 16.7% $ 960 $ 720 33.3%
====================================================================================
</TABLE>
Subscriber revenues increased $292, or 20.0%, in the third quarter and
$1,025, or 26.5%, for the first nine months of 2000. Approximately $40 of the
increase in the third quarter and $385 for the first nine months of 2000 was
due to acquisitions of wireless properties. The remaining increases were
primarily due to the net additions of 486,000 customers in the third quarter
and 1,361,000 customers for the first nine months of 2000. Average revenue
per customer declined by approximately 2.0% in the third quarter but was flat
for the first nine months of 2000. At September 30, 2000, domestic wireless
customers totaled 13,025,000.
Other wireless revenues increased $41, or 9.6%, in the third quarter and
$175, or 16.3%, for the first nine months of 2000. The increase was primarily
due to increased equipment sales of approximately $49 in the third quarter
and $104 for the first nine months of 2000, related to the increase in gross
customer additions of 43% in the third quarter and 37% for the first nine
months of 2000.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
Additionally, in the third quarter, outcollect roaming revenues (revenues
from non-SBC wireless customers roaming on SBC's wireless network) decreased
by approximately $7, due to reduced rates and usage, but increased for the
first nine months of 2000 by approximately $76, due to acquisitions.
Operations and support expenses increased $238, or 20.0%, in the third
quarter and $680, or 20.5%, for the first nine months of 2000 due primarily
to the net additions of customers discussed in subscriber revenues. Equipment
costs also increased as a result of the increase in equipment sales noted
above.
Depreciation and amortization expenses decreased by $14, or 5.3%, in the
third quarter and increased by $185, or 29.3%, for the first nine months of
2000. The third quarter of 2000 includes approximately a $35 decrease
resulting from a purchase price allocation true-up adjustment related to the
third quarter 1999 acquisition of Comcast Cellular Corporation (Comcast) and
Cellular Communications of Puerto Rico (Cellular Communications). The nine
month increase was primarily related to these third quarter 1999
acquisitions.
Under the terms of our joint venture agreement with BellSouth Corporation
(BellSouth) (see Note 10 of Notes to Consolidated Financial Statements), we will
begin accounting for our interest in Cingular Wireless (Cingular) using the
equity method of accounting in the fourth quarter of 2000. However, we currently
anticipate using proportional consolidation in evaluating the results of
Cingular internally. Consequently, our prospective wireless segment results will
reflect 60% of the results of Cingular.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
Information and Entertainment
<TABLE>
<CAPTION>
Information and entertainment consists of directory operations including
advertising, yellow pages, white pages and electronic publishing, electronic
security and cable television operations.
-----------------------------------------------------------------------------------
Third Quarter Nine-Month Period
Percent Percent
2000 1999 Change 2000 1999 Change
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 1,059 $ 1,071 (1.1)%$ 3,183 $ 3,132 1.6%
---------------------------------------------- ------------------
Operating expenses
Operations and support 618 659 (6.2) 1,945 2,022 (3.8)
Depreciation and
amortization 54 49 10.2 161 141 14.2
---------------------------------------------- ------------------
Total Operating Expenses 672 708 (5.1) 2,106 2,163 (2.6)
---------------------------------------------- ------------------
Operating Income 387 363 6.6 1,077 969 11.1
---------------------------------------------- ------------------
Interest Expense (25) (13) 92.3 (75) (37) -
---------------------------------------------- ------------------
Other Income (Expense)
- Net 6 2 - 16 8 -
---------------------------------------------- ------------------
Income Before Income Taxes $ 368 $ 352 4.5% $ 1,018 $ 940 8.3%
===================================================================================
</TABLE>
Information and entertainment operating revenues decreased $12, or 1.1%, in
the third quarter and increased $51, or 1.6%, for the first nine months of
2000. A change in the timing of the publication of directories to the fourth
quarter caused a decrease of approximately $48 in the third quarter,
partially offset by an increase of approximately $29 related to increased
demand for directory advertising services. Increased demand for directory
advertising services contributed approximately $93 to the increase for the
first nine months of 2000, offset by a decrease of approximately $66 related
to the change in the timing of directory publications. Also contributing to
the nine month increase was approximately $29 from growth in subscribers at
Ameritech's cable business.
Operations and support expenses decreased $41, or 6.2%, in the third quarter
and $77, or 3.8%, for the first nine months of 2000. Of these decreases
approximately $11 in the third quarter and $13 for the first nine months were
due to changes in the timing of directory publications noted above, and the
remaining reductions are primarily related to cost savings in the directory
operations from the merger integration process with Ameritech.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
<TABLE>
<CAPTION>
International
-----------------------------------------------------------------------------------
Third Quarter Nine-Month Period
Percent Percent
2000 1999 Change 2000 1999 Change
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 79 $ 59 33.9% $ 247 $ 183 35.0%
---------------------------------------------- ------------------
Operating Expenses 144 77 87.0 351 220 59.5
---------------------------------------------- ------------------
Operating Income (Loss) (65) (18) - (104) (37) -
---------------------------------------------- ------------------
Interest Expense (36) (42) (14.3) (173) (173) -
---------------------------------------------- ------------------
Equity in Net Income of
Affiliates 207 208 (0.5) 604 546 10.6
---------------------------------------------- ------------------
Other Income (Expense) - Net 103 2 - 315 162 94.4
---------------------------------------------- ------------------
Income Before Income Taxes $ 209 $ 150 39.3% $ 642 $ 498 28.9%
===================================================================================
</TABLE>
Operating revenues increased $20, or 33.9%, in the third quarter and $64, or
35.0%, for the first nine months of 2000. The increase was primarily from
increased volume-related long distance revenues.
Operating expenses increased $67, or 87.0%, in the third quarter and $131, or
59.5%, for the first nine months of 2000. The increase was partly due to the
costs associated with the increased long distance volumes as noted above and
partly due to an increase in parent allocated charges.
Equity in net income of affiliates decreased $1, or 0.5%, in the third
quarter and increased $58, or 10.6%, for the first nine months of 2000. In
the third quarter of 2000, SBC sold investments in the Aurec companies in
Israel and MATAV, a Hungarian telecommunications company, which resulted in
reductions in equity in net income totaling approximately $3 in the third
quarter of 2000. Additionally, SBC's investments in ATL-Algar Telecom Leste
S.A., a Brazilian communications company (ATL) and Amdocs Limited (Amdocs)
had equity losses as compared to the prior year, totaling a decrease of
approximately $43 in the third quarter and $87 for the first nine months of
2000. TeleDanmark had lower equity income in the third quarter and for the
first nine months of 2000 due primarily to the decline in the value of the
Danish Kroner, which resulted in reductions of approximately $8 in the third
quarter and $25 for the first nine months. Offsetting these decreases were
increases in equity in net income from SBC's investments in Telmex and Bell
Canada, for a total increase of approximately $50 in the third quarter and
$169 for the first nine months of 2000.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
Consolidated Results
Interest expense increased $57, or 15.6%, in the third quarter and $125, or
11.7%, for the first nine months of 2000. This increase was primarily due to
higher composite rates and increased debt levels in 2000.
Other income (expense) - net increased $2,042 to income of $2,013 in the third
quarter of 2000 from expense of $29 in the third quarter of 1999. Other income
increased $2,325 to income of $2,196 for the first nine months of 2000 from
expense of $129 for the first nine months of 1999. The increases in the third
quarter and first nine months of 2000 are primarily due to gains on the sale of
our interests in MATAV and Netcom GSM totaling approximately $1,699.
Additionally, the increases are due to a decline in the market value of the DECS
redeemable in Telmex L shares in 2000 as compared to an increase in 1999, net of
gains recognized from the sale of Telmex L shares, resulting in a year over year
increase totaling approximately $210 in the third quarter and $498 for the first
nine months. Gains of approximately $7 in the third quarter and $72 for the
first nine months of 2000 were recognized for market adjustments on shares of
Amdocs used for deferred compensation. An offsetting deferred compensation
expense was recorded in operations and support expense.
The third quarter and first nine months of 1999 included charges of
approximately $22 to write down several of Ameritech's cost investments to
conform with SBC methodology. The first nine months of 1999 included gains from
the sale of a portion of Amdocs shares of approximately $92 in a secondary
offering, as well as gains of $52 representing market adjustments on Amdocs
shares used for contributions to the SBC Foundation and deferred compensation.
Results for the first nine months of 1999 also included a gain of approximately
$59 recognized from the sale of SBC's investment in Chile and a gain of
approximately $24 recognized from the sale of discontinued plant.
Other income (expense) - net in future periods will not reflect changes in the
market value of the DECS. See liquidity and capital resources for a discussion
of the sale of Telmex L shares.
Income Taxes in 2000 and 1999 reflect the tax effect of the normalizing items
previously described in the Overview section. These charges increased income
taxes by $525 in the third quarter and by $548 for the first nine months of 2000
and by $25 in the third quarter and $94 for the first nine months of 1999. The
net effective tax rate on these one-time items differed as a result of
nondeductible items included in the charges. Excluding these items, income taxes
for the third quarter and first nine months of 2000 would have been $1,180 and
$3,358. Income taxes for the third quarter and first nine months of 1999 would
have been $1,128 and $3,176 excluding one-time charges. Income taxes were higher
due primarily to higher income before income taxes and an increase in the
effective tax rate due to higher nondeductible items in 2000.
COMPETITIVE AND REGULATORY ENVIRONMENT
Kansas and Oklahoma Long Distance In September 2000, the Oklahoma Corporation
Commission approved SBC's application to provide interLATA long distance service
for calls originating in Oklahoma.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
In October 2000, the Kansas Corporation Commission approved SBC's application to
provide such service for calls originating in Kansas. On October 26, 2000, both
applications were filed with the Federal Communications Commission (FCC) for
approval and the FCC has 90 days to rule on the applications. SBC continues to
seek long distance approval in its other in-region states and has filed
applications with state commissions in Arkansas, California, Missouri and
Nevada.
Illinois Service Standards SBC expects the Illinois Commerce Commission to
impose a $30 fine for failure to satisfy a service repair standard imposed by
the merger with Ameritech. The fine is related to calendar year 2000 performance
and will be imposed through credits to customer bills. SBC expects to begin
issuing the credits in February 2001 and accrued operating expense of $30 in the
second and third quarters of 2000 for that purpose.
Missouri Interconnection Agreement In September 2000, SBC reached a settlement
agreement with MCI WorldCom Inc. (MCI) concerning reciprocal compensation for
calls to Internet service providers under interconnection agreements with
various MCI companies. The settlement did not exceed amounts previously accrued.
Ohio Service Quality Ruling In September 2000, the Public Utilities Commission
of Ohio (PUCO) upheld, in most respects, its July order imposing marketing
restrictions; SBC's request for relief from dividend restrictions remains
pending. In October 2000, the PUCO ordered an outside audit of Ameritech Ohio
service quality covering the period August 1999 to December 2001. In addition,
SBC will be required to pay certain on-going expenses of the PUCO staff in
relation to the Ohio service quality investigation. SBC does not expect the
payment of these expenses to have a material effect on SBC's results of
operations or financial position.
Ameritech Customer Credits In October 2000, SBC announced, as part of both a
voluntary credit program as well as negotiations with a state utility commission
to resolve ongoing service issues in Ameritech areas, that it will provide
credits for lost dial tone or delays in obtaining new service to certain
residential customers in the Ameritech region. Such credits will be recorded as
operating expense as incurred and are expected to total approximately $25 in
2000.
SecurityLink In October 2000, under terms of a consent decree reached with the
FCC, we agreed to enter into an agreement to divest SecurityLink by February
2001 or pay a $1 penalty to the United States government. The FCC found that
certain 1996 and 1997 acquisitions by SecurityLink violated provisions of the
Telecommunications Act of 1996 that prohibit local telephone companies from
owning alarm monitoring businesses. Certain aspects of a potential SecurityLink
divestiture, such as a general decline in the market value of companies in the
security industry and sale under order by the FCC, could negatively impact the
sales price such that proceeds could be less than the carrying value.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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 3 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. We plan to
adopt FAS 133 on January 1, 2001 as a one-time, non-cash cumulative effect of
accounting change. However, because of our minimal use of derivatives, we do not
expect that adoption of this standard will have a significant effect on our
financial position or results of operations.
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 the fourth quarter of 2000. SAB 101 addresses, among other
items, when revenue relating to nonrefundable, up-front fees should be
recognized. We expect to defer the recognition of revenue and direct expenses
related to up-front fees with no significant effect on operating or net income.
Acquisitions and Dispositions See Note 9 of Notes to Consolidated Financial
Statements for a discussion of acquisitions and dispositions made during 2000.
Wireless Transactions See Note 10 of Notes to Consolidated Financial Statements
for a discussion of the wireless joint venture with BellSouth.
Voluntary Enhanced Pension and Retirement Program See Note 11 of Notes to
Consolidated Financial Statements for a discussion of the Voluntary Enhanced
Pension and Retirement Program.
Pending Transactions In August 2000, SBC and SpectraSite Communications, Inc.
(SpectraSite) announced an agreement under which we will grant the exclusive
rights to sublease space on our 3,900 communications towers to SpectraSite.
SpectraSite has also agreed to build or buy an estimated 800 new towers for us
over the next five years. We will receive total consideration of $1,308 in a
combination of cash and SpectraSite common stock. The transaction will close
incrementally beginning in the fourth quarter and continuing for over one year.
The payments we receive at closing will represent prepayments on the operating
leases with SpectraSite and will be recognized in revenue over the life of the
leases. Cingular (see Note 10 of Notes to Consolidated Financial Statements)
will sublease space on the towers from SpectraSite and will have expansion
rights on a majority of the existing towers.
In September 2000, SBC, Bell Canada International Inc. (BCI) and Telmex
announced revisions to the June 2000 agreement between Telmex and BCI governing
the formation of a new, facilities-based communications company which will serve
as the three companies' principal vehicle for expansion in Latin America. We
will take an 11.4% stake in the new company by contributing our investment in
ATL. When the contribution is made, we will account for our investment in the
new company as a cost investment. The agreement is expected to close in the
fourth quarter.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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
Marketing Agreements 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.
In September 2000, SBC announced an agreement making Covad Communications
(Covad) an in-region and out-of-region DSL provider for SBC. SBC will begin
marketing both symmetric business service DSL and asymmetric consumer service
DSL provided by Covad throughout the United States. The companies will work
together on network, provisioning and product planning activities needed to
support the agreement. In November 2000, SBC purchased a minority ownership
position (approximately 6%) in Covad, after receiving regulatory approval.
LIQUIDITY AND CAPITAL RESOURCES
SBC had $545 in cash and cash equivalents available at September 30, 2000.
During the first nine months 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 $4,000, all
of which may be used to support commercial paper borrowings. SBC had no
borrowings outstanding under these lines of credit as of September 30, 2000.
Commercial paper borrowings as of September 30, 2000 and December 31, 1999
totaled $5,915 and $2,623.
SBC's investing activities during the first nine months of 2000 consisted of
$9,202 in construction and capital expenditures, primarily in the wireline and
wireless segments. Investing activities during the first nine months of 2000
also included asset dispositions of $3,534, primarily related to the sale of
SBC's interests in MATAV and Netcom GSM, and asset acquisitions of $5,306,
primarily the approximate $3,600 acquisition of Sterling discussed above.
Investing activities during the first nine months of 1999 included asset
dispositions of $1,448, primarily related to additional proceeds from the sale
of Telecom Corp of New Zealand Limited shares, and asset acquisitions of $4,792
related to Bell Canada, Comcast and Cellular Communications.
In September 2000, proceeds of $520 were received on the sale of Telmex L
shares. The proceeds were primarily used to purchase a mandatorily exchangeable
debt securities note issued by a financial institution with characteristics that
will essentially offset future mark to market adjustments on the DECS. SBC
recorded a pre-tax gain of $238 on the sale.
Short-term borrowings increased $4,278 primarily to fund the acquisition of
Sterling. SBC also spent $1,457 on the repurchase of shares of its common stock
under the repurchase plan announced in January 2000. As of October 31, 2000, SBC
has repurchased a total of approximately 41 million shares of its common stock
of the 100 million shares authorized to be repurchased. Financing activities
during the first nine months of 1999 included new short-term borrowings and
long-term debt proceeds to finance SBC's investment in Bell Canada and the
acquisition of Comcast and Cellular Communications. In 1999, subsequent to the
completion of the acquisitions of Comcast and Cellular Communications, SBC
retired
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
LIQUIDITY AND CAPITAL RESOURCES - Continued
virtually all of Comcast's and Cellular Communications' long-term debt
in the amount of $1,415. Cash paid for dividends in the first nine months of
2000 was $2,560, or 3.9% higher than in the first nine months of 1999 due to an
increase in dividends paid per share to $0.76125 from $0.73125.
In the second quarter of 2000, SBC issued approximately $2,015 of one-year
variable rate notes with interest payable quarterly. The interest rate is reset
quarterly based on the three-month London Interbank Offer Rate (LIBOR) minus
five basis points. At the end of the third quarter, the three-month LIBOR rate
was 6.81%.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
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 related to financial
instruments 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 joint venture with BellSouth Corporation, known as
Cingular Wireless, 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.
SEPTEMBER 30, 2000
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Dollars in millions except per share amounts
During the third quarter of 2000, non-employee directors acquired from the
Company shares of common stock 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 or her annual retainer or fees in the form of SBC
shares or deferred stock units (DSUs) that are convertible into SBC shares. Each
Director also receives an annual grant of DSUs. During this period, an aggregate
of 5,522 SBC shares and DSUs were acquired by non-employee directors at prices
ranging from $40.81 to $50.00, in each case the fair market value of the shares
on the date of acquisition. 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 July 6, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events and
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
In the report, SBC disclosed that it had filed a Certificate of Ownership
and Merger to merge its capital funding subsidiary, SBC Communications
Capital Corporation, with and into SBC.
On July 7, 2000, SBC filed a Form 8-K, reporting on Item 2. Acquisition or
Disposition of Assets. In the report, SBC disclosed that it had exercised
its right to sell its 50% ownership in MagyarCom to Deutsche Telekom.
On July 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 second quarter 2000 earnings.
On August 17, 2000, SBC filed a Form 8-K, reporting on Item 7. Financial
Statements and Exhibits. In the report, SBC disclosed pro forma financial
statements relating to the wireless joint venture with BellSouth
Corporation.
On August 28, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events
and Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits. In the report, SBC disclosed that it had commenced a new
Medium-Term Notes program for the sale of up to $7,500 Medium-Term Notes.
On October 3, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events.
In the report, SBC disclosed that SBC and BellSouth Corporation closed a
transaction to combine their domestic wireless operations.
<PAGE>
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2000
Item 6. Exhibits and Reports on Form 8-K - Continued
Dollars in millions except per share amounts
On October 12, 2000, SBC filed a Form 8-K, reporting on Item 2. Acquisition
or Disposition of Assets and Item 7. Financial Statements and Exhibits. In
the report, SBC disclosed that SBC and BellSouth Corporation closed a
transaction to contribute to their joint venture called Cingular Wireless
substantially all of their respective domestic wireless voice and wireless
data businesses.
<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.
November 9, 2000 /s/ Donald E. Kiernan
---------------------
Donald E. Kiernan
Senior Executive Vice President
and Chief Financial Officer