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 June 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 July 31, 2000, 3,389,562,318 common shares were outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
SBC COMMUNICATIONS INC.
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CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Landline local service $ 5,476 $ 4,876 $ 10,612 $ 9,446
Wireless subscriber 1,648 1,444 3,148 2,766
Network access 2,673 2,551 5,340 5,060
Long distance service 780 902 1,584 1,811
Directory advertising 967 849 1,849 1,820
Other 1,667 1,646 3,250 3,177
------------------------------------------------------------------------------------------
Total operating revenues 13,211 12,268 25,783 24,080
------------------------------------------------------------------------------------------
Operating Expenses
Operations and support 7,896 7,048 15,129 13,867
Depreciation and amortization 2,317 1,993 4,580 3,935
------------------------------------------------------------------------------------------
Total operating expenses 10,213 9,041 19,709 17,802
------------------------------------------------------------------------------------------
Operating Income 2,998 3,227 6,074 6,278
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Other Income (Expense)
Interest expense (416) (347) (772) (704)
Equity in net income of affiliates 189 182 389 354
Other income (expense) - net 142 (23) 183 (100)
------------------------------------------------------------------------------------------
Total other income (expense) (85) (188) (200) (450)
------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative Effect
of Accounting Change 2,913 3,039 5,874 5,828
------------------------------------------------------------------------------------------
Income Taxes 1,062 1,101 2,201 2,117
------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting
Change 1,851 1,938 3,673 3,711
------------------------------------------------------------------------------------------
Cumulative Effect of Accounting Change, net of tax - - - 207
------------------------------------------------------------------------------------------
Net Income $ 1,851 $ 1,938 $ 3,673 $ 3,918
==========================================================================================
Earnings Per Common Share:
Income Before Cumulative Effect of Accounting
Change $ 0.54 $ 0.57 $ 1.08 $ 1.09
Net Income $ 0.54 $ 0.57 $ 1.08 $ 1.15
------------------------------------------------------------------------------------------
Earnings Per Common Share - Assuming Dilution:
Income Before Cumulative Effect of Accounting
Change $ 0.54 $ 0.56 $ 1.07 $ 1.07
Net Income $ 0.54 $ 0.56 $ 1.07 $ 1.13
------------------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding (in millions) 3,396 3,411 3,396 3,409
------------------------------------------------------------------------------------------
Dividends Declared Per Common Share $ 0.25375 $ 0.24375 $ 0.50750 $ 0.48750
==========================================================================================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
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<CAPTION>
SBC COMMUNICATIONS INC.
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
--------------------------------------------------------------------------------
June 30, December 31,
-------------- -------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 813 $ 495
Accounts receivable - net of allowances for
uncollectibles of $1,095 and $1,099 9,538 9,378
Prepaid expenses 837 651
Deferred income taxes 461 767
Other current assets 824 639
--------------------------------------------------------------------------------
Total current assets 12,473 11,930
--------------------------------------------------------------------------------
Property, plant and equipment - at cost 120,756 116,332
Less: accumulated depreciation and amortization 72,711 69,761
--------------------------------------------------------------------------------
Property, Plant and Equipment - Net 48,045 46,571
--------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated
Amortization of $1,357 and $1,115 5,899 4,737
Goodwill - Net of Accumulated
Amortization of $314 and $210 5,168 2,059
Investments in Equity Affiliates 10,918 10,648
Other Assets 8,688 7,270
--------------------------------------------------------------------------------
Total Assets $ 91,191 $ 83,215
================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 9,812 $ 3,374
Accounts payable and accrued liabilities 14,883 15,103
Dividends payable 864 836
--------------------------------------------------------------------------------
Total current liabilities 25,559 19,313
--------------------------------------------------------------------------------
Long-Term Debt 15,927 17,475
--------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 6,018 4,821
Postemployment benefit obligation 9,781 9,612
Unamortized investment tax credits 354 389
Other noncurrent liabilities 4,177 3,879
--------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 20,330 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 12,471 12,453
Retained earnings 15,764 13,798
Guaranteed obligations of employee stock ownership plans (46) (106)
Deferred compensation - LESOP (66) (73)
Treasury shares (at cost) (1,887) (1,717)
Accumulated other comprehensive loss (1,294) (1,062)
--------------------------------------------------------------------------------
Total shareowners' equity 28,375 26,726
--------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 91,191 $ 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)
--------------------------------------------------------------------------
Six months ended
June 30,
-------------------
2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 3,673 $ 3,918
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,580 3,935
Undistributed earnings from investments in
equity affiliates (142) (150)
Provision for uncollectible accounts 415 403
Amortization of investment tax credits (35) (41)
Deferred income tax expense 558 324
Cumulative effect of accounting change, net of tax - (207)
Changes in operating assets and liabilities:
Accounts receivable (575) 401
Other current assets (371) (3)
Accounts payable and accrued liabilities (99) 291
Other - net (1,069) (1,178)
--------------------------------------------------------------------------
Total adjustments 3,262 3,775
--------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,935 7,693
--------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (5,341) (4,483)
Investments in affiliates (124) (38)
Proceeds from short-term investments - 5
Dispositions 216 1,427
Acquisitions (3,841) (3,653)
Other - 2
---------------------------------------------------------------------------
Net Cash Used in Investing Activities (9,090) (6,740)
---------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 4,604 512
Issuance of long-term debt 1,031 738
Repayment of long-term debt (794) (406)
Issuance of common shares - 231
Issuance of preferred shares in subsidiaries - 3
Purchase of treasury shares (892) -
Issuance of treasury shares 172 145
Dividends paid (1,698) (1,635)
Other 50 -
--------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 2,473 (412)
--------------------------------------------------------------------------
Net increase in cash and cash equivalents 318 541
--------------------------------------------------------------------------
Cash and cash equivalents beginning of year 495 599
--------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 813 $ 1,140
==========================================================================
Cash paid during the six months ended June 30 for:
Interest $ 848 $ 759
Income taxes, net of refunds $ 1,560 $ 725
<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 Retained Employee Stock Compensation Treasury Comprehensive
Shares Par 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 - - 3,673 - - - -
Other comprehensive loss - - - - - - (232)
Dividends to shareowners - - (1,724) - - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 60 - - -
Cost of LESOP trust shares allocated
to employee accounts - - - - 7 - -
Purchase of treasury shares - - - - - (892) -
Issuance of treasury shares - (73) - - - 722 -
Other - 91 17 - - - -
------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $ 3,433 $ 12,471 $ 15,764 $ (46) $ (66) $ (1,887) $ (1,294)
=======================================================================================================================-
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA
At June 30, or for the six months then ended: 2000 1999
--------------------------------------------------- ---------- ----------
<S> <C> <C>
Debt ratio ..................................... 46.70% 46.43%
Network access lines in service (000)........... 61,233 59,948
Resold lines (000).............................. 1,578 1,330
Access minutes of use (000,000)................. 140,134 129,380
Wireless customers (000)........................ 12,221 9,323
Number of employees ............................ 219,000 201,650
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
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 GAAP 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.
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 six
months ended June 30, 2000 and 1999 include net income and adjustments to
shareowners' equity for foreign currency translation adjustment and net
unrealized gain (loss) on securities.
Following is SBC's comprehensive income:
<TABLE>
<CAPTION>
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Three months ended Six months ended
June 30, June 30,
------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 1,851 $ 1,938 $ 3,673 $ 3,918
Other comprehensive income, net of tax:
Foreign currency translation adjustment (101) (80) (211) (490)
Net unrealized gain (loss) on securities:
Unrealized gain (loss) on available for
sale securities (24) 1 25 -
Less: reclassification adjustment for
gains included in net income (8) - (46) (5)
-------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities (32) 1 (21) (5)
-------------------------------------------------------------------------------------
Other comprehensive loss (133) (79) (232) (495)
-------------------------------------------------------------------------------------
Total comprehensive income $ 1,718 $ 1,859 $ 3,441 $ 3,423
=====================================================================================
</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 the operations throughout the merged
company. These reviews included the formation of teams that performed
comprehensive evaluations of companywide operations. Based on these merger
integration reviews, we made certain strategic decisions and significant
integration of operations and consolidation of some administrative and
support functions occurred resulting in one-time charges.
One-time charges incurred include costs related to various regulatory and
legal issues, merger approval costs and other related costs, as well as costs
related to the strategic decisions we made. We did not incur any of these
one-time charges in the second quarter or first six months of 2000 or 1999.
Remaining accruals for anticipated cash expenditures related to these
decisions totaled $413 at June 30, 2000 and $755 at December 31, 1999.
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
------------------------------------------------------------------
Dollars in millions except per share amounts
6. SUBSIDIARY FINANCIAL INFORMATION We do not provide separate financial
statements and other disclosures for PAC as we have determined that such
information is not material to the holders of the Trust Originated Preferred
Securities, which have been guaranteed by SBC. See Note 8 for a discussion of
conforming items on the segments and subsidiaries. This information is
provided as a supplement only. The following table presents summarized
financial information for PAC:
------------------------------------------------------------------------
PAC June 30, December 31,
2000 1999
------------------------------------------------------------------------
Balance Sheets
Current assets $ 3,268 $ 3,022
Noncurrent assets 15,566 15,334
Current liabilities 5,106 4,944
Noncurrent liabilities 9,864 10,284
========================================================================
------------------------------------------------------------------------
Six months ended June 30, 2000 1999
------------------------------------------------------------------------
Income Statements
Operating revenues $ 5,864 $ 5,919
Operating income 1,516 1,481
Income before cumulative effect of accounting
changes 815 788
Net income 815 570
========================================================================
We do not provide separate financial statements and other disclosures for
Southwestern Bell Telephone Company (SWBell) or Pacific Bell Telephone
Company (PacBell) as we have determined that such information is not material
to the holders of certain SWBell and PacBell outstanding debt securities,
which have been guaranteed by SBC. See Note 8 for a discussion of conforming
items on the segments and subsidiaries. This information is provided as a
supplement only. The following tables present summarized financial
information for SWBell and PacBell:
------------------------------------------------------------------------
SWBell June 30, December 31,
2000 1999
------------------------------------------------------------------------
Balance Sheets
Current assets $ 2,440 $ 2,453
Noncurrent assets 13,950 13,978
Current liabilities 5,186 5,127
Noncurrent liabilities 7,910 8,403
========================================================================
------------------------------------------------------------------------
Six months ended June 30, 2000 1999
------------------------------------------------------------------------
Income Statements
Operating revenues $ 5,758 $ 5,578
Operating income 1,320 1,553
Income before cumulative effect of accounting
changes 712 865
Net income 712 592
========================================================================
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
------------------------------------------------------------------
Dollars in millions except per share amounts
------------------------------------------------------------------------
PacBell June 30, December 31,
2000 1999
------------------------------------------------------------------------
Balance Sheets
Current assets $ 2,566 $ 2,318
Noncurrent assets 14,037 13,620
Current liabilities 4,930 4,539
Noncurrent liabilities 8,323 8,680
========================================================================
------------------------------------------------------------------------
Six months ended June 30, 2000 1999
------------------------------------------------------------------------
Income Statements
Operating revenues $ 5,106 $ 4,790
Operating income 1,240 1,232
Income before cumulative effect of accounting
changes 625 641
Net income (loss) 625 (369)
========================================================================
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 six months ended
June 30, 2000 and 1999 are shown in the table below.
-----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------
Numerators
Numerator for basic earnings per share:
Income before cumulative effect of
accounting change $ 1,851 $ 1,938 $ 3,673 $ 3,711
-----------------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 2 1 3 2
-----------------------------------------------------------------------------
Numerator for diluted earnings per share $ 1,853 $ 1,939 $ 3,676 $ 3,713
=============================================================================
Denominators
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding (000,000) 3,396 3,411 3,396 3,409
-----------------------------------------------------------------------------
Dilutive potential common shares (000,000):
Stock options 34 44 31 44
Other stock-based compensation 8 6 8 6
-----------------------------------------------------------------------------
Denominator for diluted earnings per share 3,438 3,461 3,435 3,459
=============================================================================
Basic earnings per share:
Income before cumulative effect of
accounting change $ 0.54 $ 0.57 $ 1.08 $ 1.09
Cumulative effect of accounting change - - - 0.06
-------------------------------------------------------------------------------
Net income $ 0.54 $ 0.57 $ 1.08 $ 1.15
===============================================================================
Diluted earnings per share:
Income before cumulative effect of
accounting change $ 0.54 $ 0.56 $ 1.07 $ 1.07
Cumulative effect of accounting change - - - 0.06
-------------------------------------------------------------------------------
Net income $ 0.54 $ 0.56 $ 1.07 $ 1.13
===============================================================================
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
------------------------------------------------------------------
Dollars in millions except per share amounts
Under the Financial Accounting Standards Board's proposed Exposure Draft
issued in September 1999, "Business Combinations and Intangible Assets", SBC
would begin reporting an earnings per share amount which would exclude all
goodwill charges (amortization expense and impairment losses). Goodwill
charges related to investments in equity affiliates are currently included in
the equity in net income of affiliates line item of the income statement.
The effect of goodwill charges, including investments in equity affiliates
goodwill charges, on diluted earnings per share was $0.03 and $0.08 for the
three and six months ended June 30, 2000 and $0.01 and $0.02 for the three
and six months ended June 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.
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 includes
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 shown
separately in the international segment.
Normalized results for 2000 include the following items:
o Pension settlement gains of $124 ($80 net of tax) in the second quarter and
$374 ($241 net of tax) in the first six months primarily related to
employees who terminated employment during 1999. SBC was required to record
these second quarter gains as a result of revising our estimates of total
lump-sum payments to be made during 2000 from a non-management pension
plan. These second quarter and first six month gains were primarily in the
wireline segment.
o Costs of $239 ($153 net of tax) in the second quarter and $380 ($270 net of
tax) in the first six 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 six 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 include the following items:
o Elimination of income of $52 ($28 net of tax) in the second quarter and
$118 ($67 net of tax) in the first six 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 six 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.
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 second quarter of 2000 and 1999 and for the six months ended
June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
June 30, 2000 customers revenues income taxes
---------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline $ 9,929 $ 60 $ 2,017
Wireless 2,069 - 278
Information and entertainment 1,060 25 372
International 107 - 194
Corporate, adjustments & eliminations 47 (85) 167
Normalizing adjustments (1) - (115)
------------------------------------------------------------------------------
Total $ 13,211 $ - $ 2,913
==============================================================================
------------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
June 30, 1999 customers revenues income taxes
---------------------------------------------------------------------------
Wireline $ 9,358 $ 87 $ 2,287
Wireless 1,618 - 270
Information and entertainment 959 25 264
International 41 3 198
Corporate, adjustments & eliminations 59 (115) (32)
Normalizing adjustments 233 - 52
------------------------------------------------------------------------------
Total $ 12,268 $ - $ 3,039
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Revenues
At June 30, 2000 or for the six from external Intersegment Income before Segment
months ended customers revenues income taxes assets
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wireline $ 19,518 $ 114 $ 4,152 $ 59,743
Wireless 3,930 - 590 12,316
Information and entertainment 2,069 55 650 3,698
International 168 - 433 13,081
Corporate, adjustments & eliminations 99 (169) 187 2,353
Normalizing adjustments (1) - (138) -
--------------------------------------------------------------------------------------
Total $ 25,783 $ - $ 5,874 $ 91,191
======================================================================================
--------------------------------------------------------------------------------------
Revenues
At June 30, 1999 or for the six from external Intersegment Income before Segment
months ended customers revenues income taxes assets
--------------------------------------------------------------------------------------
Wireline $ 18,339 $ 159 $ 4,380 $ 52,486
Wireless 3,063 - 403 9,387
Information and entertainment 2,005 56 588 4,075
International 116 8 348 13,339
Corporate, adjustments & eliminations 113 (223) (54) (342)
Normalizing adjustments 444 - 163 -
--------------------------------------------------------------------------------------
Total $ 24,080 $ - $ 5,828 $ 78,945
======================================================================================
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
------------------------------------------------------------------
Dollars in millions except per share amounts
Corporate, adjustments and eliminations include corporate activities, the
elimination of intersegment transactions and other adjustments. Included in
other adjustments are differences in accounting between subsidiaries and
consolidated financial statements for pension and postretirement benefits and
the treatment of conforming accounting adjustments arising out of the pooling
of interests transactions with Ameritech, SNET and PAC that were required to
be treated as cumulative effect of accounting changes by the subsidiaries.
9. ACQUISITION OF STERLING In March 2000, SBC acquired Sterling, a provider of
electronic business integration solutions, in an all cash tender offer valued
at approximately $3.6 billion. 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 $132 in March 2000. We
included the results of operations in the consolidated financial statements
from the date of the acquisition.
10.PENDING TRANSACTIONS In April 2000, SBC and BellSouth Corporation
(BellSouth) announced an agreement to combine their domestic wireless
operations. Assuming that all of the assets are contributed as provided for
in the agreement, ownership in the new company will be 60% for SBC and 40%
for BellSouth with control shared equally. SBC expects to account for its
interest under the equity method of accounting. SBC expects that the basis of
its investment will be approximately the same as the book value of SBC's
domestic wireless assets. The new wireless company will be managed
independently with a four-seat board of directors (two seats from each
company). The transaction requires the approval of the Federal Communications
Commission as well as the review of the United States Department of Justice.
Divestitures of some overlapping properties will be required. The pending
acquisitions of properties to be included in the joint venture along with the
pending dispositions of properties that overlap with BellSouth are not
expected to have a material effect on SBC's domestic wireless operations. We
expect to close the transaction by the end of 2000.
In July 2000, SBC exercised its right to sell its interest in MATAV to
Deutsche Telekom, SBC's partner in the investment, for approximately $2.2
billion. The transaction closed in August 2000 with a pre-tax gain of
approximately $1.1 billion. The proceeds from the sale of SBC's interest
in MATAV are anticipated to be used to repay commercial paper borrowings.
Tele Danmark and SBC are in negotiations to sell our interests in Netcom GSM,
a wireless telecommunications provider in Norway, to a third party. If we
accept the outstanding offer, our direct and indirect pre-tax gain would
exceed $500.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
---------------------
<TABLE>
<CAPTION>
Overview Financial results for SBC Communications Inc. (SBC) for the second
quarter and first six months of 2000 and 1999 are summarized as follows:
------------------------------------------------------------------------------------------
Second Quarter Six-Month Period
------------------------- --------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 13,211 $ 12,268 7.7% $ 25,783 $ 24,080 7.1%
Operating expenses 10,213 9,041 13.0 19,709 17,802 10.7
Operating income 2,998 3,227 (7.1) 6,074 6,278 (3.2)
Income before income taxes and
cumulative effect of accounting
change 2,913 3,039 (4.1) 5,874 5,828 0.8
Income before cumulative
effect of accounting change 1,851 1,938 (4.5) 3,673 3,711 (1.0)
Cumulative effect of
accounting change - - - - 207 -
Net income 1,851 1,938 (4.5) 3,673 3,918 (6.3)
==========================================================================================
</TABLE>
SBC reported net income of $1,851, or $0.54 per share assuming dilution, in the
second quarter of 2000 and $3,673, or $1.07 per share assuming dilution, for the
first six months of 2000 compared to $1,938, or $0.56 per share assuming
dilution, in the second quarter of 1999 and $3,918, or $1.13 per share assuming
dilution, for the first six months of 1999.
The first six 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 second quarter and first six months
of 2000 and 1999 also included several items that SBC normalizes for management
purposes.
Normalized results for 2000 include the following items:
o Pension settlement gains of $124 ($80 net of tax) in the second quarter and
$374 ($241 net of tax) in the first six months primarily related to employees
who terminated employment during 1999. SBC was required to record these
second quarter gains as a result of revising our estimates of total lump-sum
payments to be made during 2000 from a non-management pension plan. These
second quarter and first six month gains were primarily in the wireline
segment.
o Costs of $239 ($153 net of tax) in the second quarter and $380 ($270 net of
tax) in the first six 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 six 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).
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
---------------------------------
Normalized results for 1999 include the following items:
o Elimination of income of $52 ($28 net of tax) in the second quarter and $118
($67 net of tax) in the first six 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 six 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 $1,924, or $0.56 per share assuming dilution, in
the second quarter of 2000 and $3,834, or $1.12 per share assuming dilution, for
the first six months of 2000 compared to $1,910, or $0.55 per share assuming
dilution, in the second quarter of 1999 and $3,617, or $1.05 per share assuming
dilution, for the first six months of 1999.
The primary factors contributing to the increase in revenues were growth in
demand for data communications and wireless services and products. These
increases were offset by increased operating expenses related to the merger
integration process with Ameritech and investments in new products and services,
including the Digital Subscriber Line (DSL) rollout and SBC's national expansion
initiative. The national expansion initiative is SBC's plan to have a local
presence in the top 30 metropolitan markets beyond its traditional regions.
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.
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.
--------------------------------------------------------------------------------
Second Quarter Six-Month Period
-----------------------------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------
Operating revenues
Local service $ 5,481 $ 4,885 12.2% $ 10,621 $ 9,463 12.2%
Network access 2,696 2,576 4.7 5,386 5,104 5.5
Long distance service 727 886 (17.9) 1,491 1,784 (16.4)
Other 1,085 1,098 (1.2) 2,134 2,147 (0.6)
--------------------------------------------- ------------------
Total Operating Revenues 9,989 9,445 5.8 19,632 18,498 6.1
--------------------------------------------- ------------------
Operating expenses
Operations and support 5,795 5,193 11.6 11,221 10,253 9.4
Depreciation and
amortization 1,890 1,684 12.2 3,677 3,326 10.6
--------------------------------------------- ------------------
Total Operating Expenses 7,685 6,877 11.7 14,898 13,579 9.7
--------------------------------------------- ------------------
Operating Income 2,304 2,568 (10.3) 4,734 4,919 (3.8)
--------------------------------------------- ------------------
Interest Expense 311 293 6.1 628 585 7.4
--------------------------------------------- ------------------
Other Income (Expense) - Net 24 12 - 46 46 -
--------------------------------------------- ------------------
Income Before Income Taxes $ 2,017 $ 2,287 (11.8) $ 4,152 $ 4,380 (5.2)
================================================================================
Local service revenues increased $596, or 12.2%, in the second quarter and
$1,158, or 12.2%, for the first six months of 2000. Approximately $272 of
the increase in the second quarter and $382 in the first six months of
2000 was attributable to increases in demand for data-related services,
primarily from business customers. Approximately $140 of the data-related
revenues in the second quarter and $171 in the first six months of 2000
were associated with operations of Sterling, acquired in March 2000.
Wholesale revenues accounted for approximately $81 of the second-quarter
increase and $142 of the increase in the first six months of 2000.
Vertical services revenues, which include custom calling services, such as
Caller ID, Call Waiting, voice mail and other enhanced services, increased
by approximately 10% in the second quarter and the first six months of
2000. Vertical services contributed approximately $79 to the
second-quarter increase in local service revenues and $157 in the first
six months of 2000.
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 $58 in the second
quarter and $112 in the first six months of 2000. However, these
regulatory actions decreased intrastate network access revenues by
approximately $36 in the second quarter and $75 in the first six months of
2000 and decreased long distance revenues by approximately $9 in the
second quarter and $20 in the first six months of 2000. The Texas Public
Utility Commission has
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
---------------------------------
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 increased $120, or 4.7%, in the second quarter and
$282, or 5.5%, for the first six months of 2000, partially due to growth
in access demand. Total access minutes of use rose 7.5% to 70.1 billion in
the second quarter and 8.3% to 140.1 billion in the first six months of
2000. Higher network usage by alternative providers of intraLATA toll
services contributed to the increase in network access revenues by
approximately $36 in the second quarter and $78 in the first six months of
2000. Demand for special access services increased revenue by
approximately $112 in the second quarter and $232 in the first six months
of 2000. Continued demand for higher capacity data line offerings
increased second-quarter 2000 revenues by approximately $39 and increased
revenues for the first six months of 2000 by approximately $80.
Revenues from access-demand growth were largely offset by the impact of
rate reductions and price caps from both state and federal regulatory
agencies. These rate reductions and price caps caused a decrease in
second-quarter revenues of approximately $107 and $196 in the first six
months of 2000. The state rate reductions were primarily in Texas and
Michigan.
Long distance service revenues decreased $159, or 17.9%, in the second
quarter and $293, or 16.4%, for the first six months of 2000. Long
distance service revenues decreased by approximately $101 in the second
quarter and $196 for the first six months of 2000 due to the competitive
losses as a result of implementing dialing parity, which enables customers
to make intraLATA toll calls using a competing carrier. The negative
effect of dialing parity was partially offset by increased network access
revenues for usage of our network by alternative providers. The decrease
was also partially offset by an increase of approximately $7 in the second
quarter and $18 for the first six months of 2000 due to price increases in
Illinois, Indiana, Michigan and Ohio. The continued introduction of
extended area service plans, as described above in local service,
decreased long distance revenues by approximately $9 in the second quarter
and $20 in the first six months of 2000, which increased local service
revenues by the same amounts.
Other operating revenues decreased $13, or 1.2%, in the second quarter and
$13, or 0.6%, for the first six months of 2000. Equipment sales increases,
primarily consumer, of approximately $35 in the second quarter and $55 in
the first six months of 2000 were offset by declines in the payphone
business of approximately $53 in the second quarter and $43 in the first
six months of 2000. Sales of other nonregulated products and services were
flat in the second quarter and down slightly in the first six months of
2000.
Operations and support expenses increased $602, or 11.6%, in the second
quarter and $968, or 9.4%, for the first six months of 2000. Approximately
$236 of second quarter and $349 of the first six months increases were
related to costs associated with the DSL rollout. DSL lines in service in
the second quarter increased by approximately 198,000. Operations and
support expenses also increased approximately $138 in the second quarter
and $255 in the first six months of 2000 as a result of costs associated
with network integration and E-Commerce services, of which $93 for the
second quarter and $104 for the first six months were related to
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
---------------------------------
Sterling. In addition, SBC's national expansion initiative increased
expenses by approximately $71 in the second quarter and $103 in the first
six months of 2000.
Depreciation and amortization expenses increased $206, or 12.2%, in the
second quarter and $351, or 10.6%, for the first six months of 2000.
Overall higher plant levels increased depreciation expense by $70 in the
second quarter and $154 in the first six months of 2000. The March 2000
acquisition of Sterling also caused an increase of approximately $84 in
the second quarter and $92 in the first six months of 2000. Amortization
of capitalized software increased approximately $46 in the second quarter
and $97 in the first six months of 2000.
Wireless
Wireless provides wireless telecommunications services, including local and long
distance services, and sells wireless equipment.
--------------------------------------------------------------------------------
Second Quarter Six-Month Period
---------------------------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------
Operating revenues
Subscriber revenues $ 1,648 $ 1,262 30.6% $ 3,148 $ 2,415 30.4%
Other 421 356 18.3 782 648 20.7
----------------------------------------------- ------------------
Total Operating Revenues 2,069 1,618 27.9 3,930 3,063 28.3
----------------------------------------------- ------------------
Operating expenses
Operations and support 1,373 1,080 27.1 2,567 2,125 20.8
Depreciation and
amortization 288 190 51.6 569 370 53.8
----------------------------------------------- ------------------
Total Operating Expenses 1,661 1,270 30.8 3,136 2,495 25.7
----------------------------------------------- ------------------
Operating Income 408 348 17.2 794 568 39.8
----------------------------------------------- ------------------
Interest Expense 85 36 - 124 84 47.6
----------------------------------------------- ------------------
Other Income (Expense) - Net (45) (42) (7.1) (80) (81) 1.2
----------------------------------------------- ------------------
Income Before Income Taxes $ 278 $ 270 3.0% $ 590 $ 403 46.4%
================================================================================
Subscriber revenues increased $386, or 30.6%, in the second quarter and
$733, or 30.4%, for the first six months of 2000, with approximately half
of the increase due to the acquisitions of Comcast Cellular Corporation
(Comcast), Cellular Communications of Puerto Rico, Inc. (Cellular
Communications) and Radiofone, Inc. Also contributing to the increase was
the net addition of 537,000 customers. At June 30, 2000, SBC had domestic
wireless customers totaling 12,221,000.
Other wireless revenues increased $65, or 18.3%, in the second quarter and
$134, or 20.7%, for the first six months of 2000. The increase was
primarily due to increased outcollect roaming revenues (revenues from
non-SBC wireless customers roaming on SBC's wireless network) due to the
expanded footprint from acquisitions, which was partially offset by a
decline in rates and
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
---------------------------------
usage. Additionally, equipment sales increased due to a 46% increase in
gross customer additions, mainly in the traditional cellular operations.
Operations and support expenses increased $293, or 27.1%, in the second
quarter and $442, or 20.8%, for the first six months of 2000 due primarily
to the acquisitions and 537,000 net additions of new customers as
discussed in subscriber revenues. Equipment costs also increased due to
the increase in equipment sales noted above.
Depreciation and amortization expenses increased $98, or 51.6%, in the
second quarter and $199, or 53.8%, for the first six months of 2000. The
third quarter 1999 acquisitions of Comcast and Cellular Communications
contributed approximately $80 in the second quarter and $164 in the first
six months of 2000 to the increase.
Information and Entertainment
Information and entertainment includes directory operations including
advertising, yellow pages, white pages and electronic publishing, electronic
security and cable television operations.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Second Quarter Six-Month Period
-------------------------------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 1,085 $ 984 10.3% $ 2,124 $ 2,061 3.1%
---------------------------------------------- ------------------
Operating expenses
Operations and support 638 665 (4.1) 1,327 1,363 (2.6)
Depreciation and
amortization 54 46 17.4 107 92 16.3
---------------------------------------------- ------------------
Total Operating Expenses 692 711 (2.7) 1,434 1,455 (1.4)
---------------------------------------------- ------------------
Operating Income 393 273 44.0 690 606 13.9
---------------------------------------------- ------------------
Interest Expense 25 12 - 50 24 -
---------------------------------------------- ------------------
Other Income (Expense) - Net 4 3 33.3 10 6 66.7
---------------------------------------------- ------------------
Income Before Income Taxes $ 372 $ 264 40.9% $ 650 $ 588 10.5%
===================================================================================
</TABLE>
Information and entertainment operating revenues increased $101, or 10.3%,
in the second quarter and $63, or 3.1%, for the first six months of 2000.
The increase in the second quarter was due to a change in the timing of
the publication of directories. The increase for the first six months of
2000 was due primarily to growth in demand for directory advertising
services.
Operations and support expenses decreased $27, or 4.1%, in the second
quarter and decreased $36, or 2.6%, for the first six months of 2000.
These decreases are due primarily to cost savings in the directory
operations from the merger integration process with Ameritech.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
---------------------------------
International
--------------------------------------------------------------------------------
Second Quarter Six-Month Period
----------------------------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------
Operating Revenues $ 107 $ 44 - $ 168 $ 124 35.5%
---------------------------------------------- ------------------
Operating Expenses 118 54 - 207 143 44.8
---------------------------------------------- ------------------
Operating Income (Loss) (11) (10) (10.0)% (39) (19) -
---------------------------------------------- ------------------
Interest Expense 67 71 (5.6) 137 131 4.6
---------------------------------------------- ------------------
Equity in Net Income of
Affiliates 198 171 15.8 397 338 17.5
---------------------------------------------- ------------------
Other Income (Expense) - Net 74 108 (31.5) 212 160 32.5
---------------------------------------------- ------------------
Income Before Income Taxes $ 194 $ 198 (2.0)% $ 433 $ 348 24.4%
================================================================================
Operating revenues increased $63 in the second quarter and $44 for the
first six months of 2000. Ameritech Global Gateway Services (AGGS), a
subsidiary which provides global long distance wholesale transport
services, had increased volume-related long distance revenues which
contributed to the increase approximately $35 in the second quarter, and
$62 for the first six months of 2000. Additionally, in the second quarter,
directory advertising revenues increased approximately $33 due to a change
in the timing of the publication of directories at SBC's German directory
investment, Wer Liefert Was (WLW). These increases were partially offset
by a decrease in management fee revenues.
Operating expenses increased $64 in the second quarter and for the first
six months of 2000. The increase in the cost of long distance related to
AGGS as noted above was $37 for the second quarter and $64 for the first
six months of 2000. Directory shifts at WLW as described above resulted in
increased directory advertising expenses of $25 in the second quarter of
2000.
Equity in net income of affiliates increased $27, or 15.8%, in the second
quarter and $59, or 17.5%, for the first six months of 2000. These
increases were due primarily to increases in equity in net income from
SBC's investments in Telefonos de Mexico, S.A. de C.V. (Telmex), MATAV-a
Hungarian telecommunications company, Telkom SA Limited in South Africa,
and in Bell Canada, which was acquired during the second quarter of 1999,
for a total increase of approximately $55 in the second quarter and $142
for the first six months of 2000. Offsetting the increase was an
investment in ATL-Algar Telecom Leste S.A. (ATL-a Brazilian communications
company) in the first quarter of 2000, which resulted in losses in equity
in net income of approximately $27 in the second quarter and $47 in the
first six months of 2000. Also, the increases were partially offset by
increased losses in equity in net income of approximately $12 in SBC's
investment in Switzerland for the first six months of 2000. Additionally,
SBC's investment in Tele Danmark recognized positive accounting true-ups
related to pension costs and a stronger currency in the first quarter of
1999, which offset the increase in equity in net income by approximately
$24 in the first six months of 2000.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
---------------------------------
SBC plans to contribute its economic interest in ATL to a new company
formed with Telmex and Bell Canada International in Latin America. When
the contribution is made, SBC will account for its investment in ATL as a
cost investment.
SBC exercised its right to sell its interest in MATAV to Deutsche Telekom
for approximately $2.2 billion in July 2000. The transaction closed in
August 2000 with a pre-tax gain of approximately $1.1 billion. Equity in
net income for the second half of 2000 will reflect the disposition of
MATAV; MATAV contributed approximately $46 of equity in net income in the
second half of 1999.
Consolidated Results
Interest expense increased $69, or 19.9%, in the second quarter and $68, or
9.7%, for the first six months of 2000. This increase was due to higher
composite rates and increased debt levels, primarily from borrowings to fund the
acquisition of Sterling. The proceeds from the sale of SBC's interest in MATAV
are anticipated to be used to repay commercial paper borrowings, which should
lower interest expense in the second half of 2000.
Other income (expense) - net increased $165, resulting in income of $142 in the
second quarter of 2000 compared with expense of $23 in the second quarter of
1999. For the first six months of 2000, other income increased $283, resulting
in income of $183 compared with expense of $100 during the first six months of
1999. The increases are primarily due to a decline in the market value of Debt
Exchangeable for Common Stock 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 $229 for
the quarter and $288 year to date. Results for the second quarter and first six
months of 2000 also included gains of approximately $65 recognized for market
adjustments on shares of Amdocs Limited (Amdocs), which were used for deferred
compensation. An offsetting deferred compensation expense was recorded in
operations and support expense. Gains on sales of investments were approximately
$25 for the second quarter and $83 for the first six months of 2000.
The second quarter and first six months of 1999 included gains from the sale of
a portion of Amdocs 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
second quarter and first six months of 1999 also included a gain of
approximately $59 recognized from the sale of SBC's investment in a Chilean
telecommunications company. The first six months of 1999 included a gain of
approximately $24 recognized from the sale of discontinued plant.
Income Taxes in 2000 and 1999 reflect the tax effect of one-time charges
previously described in the Overview section. These charges decreased income
taxes by $42 in the second quarter of 2000, increased income taxes by $23 for
the first six months of 2000 and increased income taxes by $24 in the second
quarter and $69 for the first six months of 1999. The net effective tax rate on
these items differed as a result of nondeductible items included in the charges.
Excluding these items, income taxes for the second quarter and first six months
of 2000 would have been $1,104 and $2,178. Income taxes for the second
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
RESULTS OF OPERATIONS - Continued
quarter and first six months of 1999 would have been $1,077 and $2,048 excluding
one-time charges. Income taxes were higher due primarily to higher income before
income taxes.
COMPETITIVE AND REGULATORY ENVIRONMENT
--------------------------------------
Coalition for Affordable Local and Long Distance Service (CALLS) In March 2000,
members of CALLS - SBC, Verizon Communications (formerly Bell Atlantic Corp. and
GTE Corp.), BellSouth Corp. (BellSouth), AT&T Corp. (AT&T) and Sprint Corp.
(Sprint) proposed a plan to significantly restructure telecommunications
industry federal price cap regulation. In May 2000, the Federal Communications
Commission (FCC) approved the CALLS proposal with an effective date of July 1,
2000. Significant points of the five-year plan include:
o reduction of switched access rates in 2000 (these are the rates that long
distance carriers pay local telephone companies);
o continuation of a productivity factor after 2000 until a targeted average
rate for traffic-sensitive charges is achieved;
o consolidation of the residential and single-line business customers'
presubscribed interexchange carrier charge with the subscriber line charge
into one lower charge on customer local telephone bills;
o creation of an incremental $650 in universal service funding (universal
service funding helps provide telephone service to economically disadvantaged
customers, rural customers, schools and libraries).
The plan is expected to produce initial revenue reductions that are somewhat
larger than those under prior price cap requirements, but eliminate mandatory
annual price cap reductions over the life of the plan, resulting in minimal
future effects on net revenues over the life of the plan compared to the prior
price cap formula. SBC expects a net reduction in 2000 revenues of approximately
$300 as a result of this plan (versus approximately $200 that would have
occurred under prior price cap requirements).
Interconnection In July 2000, the Eighth Circuit Court of Appeals (Court of
Appeals) issued an opinion striking down FCC rules governing the rates incumbent
local exchange carriers (ILECs), such as SBC's wireline subsidiaries, charge
competitors for interconnection and for leasing portions of the incumbents'
telephone networks. The opinion rejected FCC pricing rules that required ILECs
to charge competitors rates based on hypothetical costs and held that prices
should instead be based on actual (but not necessarily historical) costs
incurred by carriers to provide interconnection or access to unbundled network
elements. In addition, the opinion rejected FCC rules governing the amount ILECs
must discount services purchased by competitors for resale to end users, holding
that the discount should be based on actual, not hypothetical, avoided costs.
The Court of Appeals remanded the pricing issues back to the FCC. The Court of
Appeals also reaffirmed its prior conclusion that ILECs cannot be required to
create new combinations of unbundled network elements for competitors, nor to
provide competitors better quality interconnection or access to unbundled
network elements than the ILECs provide to themselves. While favorable, this
ruling is not expected to have an immediate material effect on SBC's results of
operations or financial position.
Texas Long Distance In June 2000, the FCC approved SBC's application to provide
interLATA long distance service for calls originating in Texas. Approval was
effective July 10, 2000 and SBC officially launched service under the
Southwestern Bell brand at that time, offering domestic residential and business
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
--------------------------------------------------
long distance services as well as international calling plans. Over the past
several months, SBC's competitors, including AT&T, Sprint and MCI WorldCom Inc.,
began offering residential local service in parts of Texas and SBC expects
increased competition for this service. SBC continues to seek long distance
approval in its other in-region states and has filed applications with state
commissions in Arkansas, California, Kansas, Missouri, Nevada and Oklahoma.
Michigan Telecommunications Legislation In July 2000, the Michigan legislature
amended the Michigan Telecommunications Act, eliminating the monthly intrastate
end-user common line (EUCL) charge and implementing price caps for
telecommunications services to end users, except those covered by individual
contracts, at May 1, 2000 levels for the earlier of four years or until the
Michigan Public Service Commission (MPSC) determines the market for individual
services is competitive. The law authorizes an expansion of local calling areas
so that many short toll calls could be reclassified as local calls. In addition,
the law gives the MPSC more authority to regulate disputes between
telecommunications companies. SBC expects the EUCL and price cap legislation to
reduce revenues approximately $75 in 2000 ($155 annualized). If the local
calling area portion of the law is implemented in a manner that expands
local-calling areas extensively, without any offsetting price increases, SBC
expects an additional reduction in revenues of approximately $160 in 2000 ($320
annualized). In July 2000, SBC filed suit in federal court challenging the
constitutionality of the law.
Ohio Service Quality Ruling In July 2000, the Public Utilities Commission of
Ohio (PUCO) issued an order finding that SBC violated Ohio's minimum telephone
service standards and requiring SBC to issue approximately $5 in customer
credits and to spend an additional $4 on projects that will benefit customers.
The PUCO's findings related to the timeliness of service installation/repair and
inadequate recordkeeping, among other things. The order also places certain
restrictions on the manner in which SBC employees are able to sell basic,
preferred and inside wire maintenance services. Effective October 1, 2000, the
order precludes the payment of dividends by SBC's Ohio subsidiary to the SBC
parent company without prior PUCO approval. The PUCO also suggested that SBC
restore service in Ohio to appropriate levels or face additional penalties of up
to $122. SBC plans to seek rehearing and clarification of the dividend and
marketing restrictions imposed by the order.
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. SBC plans to
adopt FAS 133 on January 1, 2001 as a one-time, non-cash cumulative effect of
accounting change. The adoption impact will be based on market values at that
date, therefore, SBC cannot estimate the impact. However, because of SBC's
minimal use of derivatives, adoption of this standard is not expected to have a
significant effect on SBC's financial position or results of operations.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Dollars in millions except per share amounts
OTHER BUSINESS MATTERS - Continued
----------------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB 101) which
must be adopted by the fourth quarter of 2000. SAB 101 addresses, among other
items, when revenue relating to nonrefundable, up-front fees should be
recognized. SBC currently is evaluating the impact of SAB 101, but does not
expect it to have a significant effect on net income.
Acquisition See Note 9 of Notes to Consolidated Financial Statements for a
discussion of the acquisition of Sterling.
Pending Transactions See Note 10 of Notes to Consolidated Financial Statements
for a discussion of the agreement with BellSouth, the sale of our interest in
MATAV and the potential sale of our interests in Netcom GSM.
Marketing Agreement In April 2000, SBC entered into a strategic marketing and
sales alliance with Cisco Systems, Inc. (Cisco) to accelerate delivery of
broadband services to customers. Through joint marketing and sales efforts, SBC
will package Cisco equipment with advanced voice, broadband data and network
integration services. The alliance also consists of a series of joint research
and product development activities.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
SBC had $813 in cash and cash equivalents available at June 30, 2000. During the
first six 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 $3,630, all of which may be
used to support commercial paper borrowings. SBC had no borrowings outstanding
under these lines of credit as of June 30, 2000. Commercial paper borrowings as
of June 30, 2000 totaled $6,240. The approximately $2.2 billion of proceeds from
the pending sale of SBC's interest in MATAV are anticipated to be used to repay
commercial paper borrowings.
SBC's investing activities during the first six months of 2000 consisted of
$5,341 in construction and capital expenditures, primarily in the wireline and
wireless segments, and the approximate $3,600 acquisition of Sterling discussed
above.
Short-term borrowings increased $4,604 primarily to fund the acquisition of
Sterling. SBC also spent $892 on the repurchase of shares of its common stock
under the repurchase plan announced in January 2000. As of July 31, 2000, SBC
has repurchased a total of approximately 24 million shares of its common stock
of the 100 million shares authorized to be repurchased. Cash paid for dividends
in the first six months of 2000 was $1,698, or 3.9% higher than in the first six
months of 1999 due to an increase in dividends paid per share to $0.5075 from
$0.4875.
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 6.33%
and is reset quarterly based on the three-month London Interbank Offer Rate
(LIBOR) minus five basis points.
<PAGE>
SBC COMMUNICATIONS INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Dollars in millions except per share amounts
There has been no material change in SBC's market risks 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 agreement with BellSouth Corporation, including
marketing and product development efforts and financial capacity.
Readers are cautioned that other factors discussed in this report, although not
enumerated here, also could materially impact SBC's future earnings.
<PAGE>
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-------------------------------------------------
During the second 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 21,455 SBC shares and DSUs were acquired by non-employee directors at prices
ranging from $42.00 to $46.25, 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 4. Submission of Matters to a Vote of Security Holders
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Annual Meeting of Shareowners
(a) The annual meeting of the shareowners of SBC Communications Inc. (SBC) was
held on April 28, 2000, in San Antonio, Texas. Shareowners representing
2,810,118,488 shares of common stock as of the February 29, 2000 record
date were present in person or were represented at the meeting by proxy.
(b) At the meeting, holders of common shares voted as indicated below to elect
the following persons to the Board of Directors for a three-year term:
SHARES SHARES
DIRECTOR FOR WITHHELD*
-------- --- ---------
Clarence C. Barksdale 2,741,437,263 68,681,225
Royce S. Caldwell 2,744,936,790 65,181,698
Martin K. Eby, Jr. 2,744,175,162 65,943,326
Charles F. Knight 2,728,205,489 81,912,999
Toni Rembe 2,744,211,399 65,907,089
Carlos Slim Helu 2,742,356,310 67,762,178
Patricia P. Upton 2,742,592,850 67,525,638
*Includes shares represented at the meeting by proxy where the shareowner
withheld authority to vote for the indicated director or directors, as
well as shares present at the meeting which were not voted for such
director or directors.
(c) Shareowners ratified the appointment of Ernst & Young LLP as independent
auditors of SBC for the year ended December 31, 2000. The vote was
2,768,075,089 FOR and 20,945,516 AGAINST, with 21,097,883 shares
ABSTAINING.
(d) Shareowners voted not to adopt a shareowner proposal to limit certain
existing pension benefits for outside directors. The vote was 909,030,738
FOR and 1,412,108,724 AGAINST, with 89,804,423 shares ABSTAINING.
<PAGE>
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION-Continued
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
--------
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
On April 10, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events
and Item 7. Financial Statements and Exhibits. In the report, SBC
announced an agreement to combine its domestic wireless operations with
BellSouth Corporation.
On April 26, 2000, SBC filed a Form 8-K, reporting on Item 5. Other
Events. In the report, SBC disclosed a press release announcing first
quarter 2000 earnings and pro forma financial statements relating to the
wireless joint venture with BellSouth Corporation.
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.
<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.
/s/ Donald E. Kiernan
August 10, 2000 --------------------------------
Donald E. Kiernan
Senior Executive Vice President,
Chief Financial Officer and Treasurer