Selected Financial and Operating Data
Dollars in millions except per share amounts
- --------------------------------------------------------------------------------------------------
At December 31 or for the year ended: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Financial Data 1
Operating revenues $ 49,489 $ 46,207 $ 43,106 $ 40,510 $ 37,134
- --------------------------------------------------------------------------------------------------
Operating expenses $ 37,891 $ 34,984 $ 35,504 $ 30,461 $ 27,976
- --------------------------------------------------------------------------------------------------
Operating income $ 11,598 $ 11,223 $ 7,602 $ 10,049 $ 9,158
- --------------------------------------------------------------------------------------------------
Interest expense $ 1,430 $ 1,605 $ 1,550 $ 1,418 $ 1,513
- --------------------------------------------------------------------------------------------------
Equity in net income of affiliates $ 912 $ 613 $ 437 $ 470 $ 216
- --------------------------------------------------------------------------------------------------
Income taxes $ 4,280 $ 4,380 $ 2,451 $ 3,368 $ 2,858
- --------------------------------------------------------------------------------------------------
Income before extraordinary items and
cumulative effect of accounting change $ 6,573 $ 7,735 $ 4,087 $ 5,705 $ 5,362
- --------------------------------------------------------------------------------------------------
Net income (loss) 2 $ 8,159 $ 7,690 $ 4,087 $ 5,795 $ (1,347)
- --------------------------------------------------------------------------------------------------
Earnings per common share:
Income before extraordinary items and
cumulative effect of accounting change $ 1.93 $ 2.27 $ 1.21 $ 1.67 $ 1.57
- --------------------------------------------------------------------------------------------------
Net income (loss) 2 $ 2.39 $ 2.26 $ 1.21 $ 1.70 $ (0.39)
- --------------------------------------------------------------------------------------------------
Earnings per common share-assuming dilution:
Income before extraordinary items and
cumulative effect of accounting change $ 1.90 $ 2.24 $ 1.20 $ 1.66 $ 1.56
- --------------------------------------------------------------------------------------------------
Net income (loss) 2 $ 2.36 $ 2.23 $ 1.20 $ 1.69 $ (0.39)
- --------------------------------------------------------------------------------------------------
Total assets $ 83,215 $ 74,966 $ 69,917 $ 65,765 $ 62,197
- --------------------------------------------------------------------------------------------------
Long-term debt $ 17,475 $ 17,170 $ 17,787 $ 16,536 $ 16,105
- --------------------------------------------------------------------------------------------------
Construction and capital expenditures $ 10,304 $ 8,882 $ 8,856 $ 8,304 $ 6,891
- --------------------------------------------------------------------------------------------------
Free cash flow 3 $ 6,274 $ 4,099 $ 2,723 $ 2,964 $ 3,946
- --------------------------------------------------------------------------------------------------
Dividends declared per common share 4 $ 0.975 $ 0.935 $ 0.895 $ 0.860 $ 0.825
- --------------------------------------------------------------------------------------------------
Book value per common share $ 7.87 $ 6.69 $ 5.26 $ 4.94 $ 4.26
- --------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 6.52 6.79 4.10 5.67 5.80
- --------------------------------------------------------------------------------------------------
Debt ratio 42.9% 47.3% 54.9% 55.6% 59.8%
- --------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding (000,000) 3,409 3,406 3,391 3,409 3,412
- --------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding with dilution (000,000) 3,458 3,450 3,420 3,429 3,430
- --------------------------------------------------------------------------------------------------
End of period common shares
outstanding (000,000) 3,395 3,406 3,398 3,389 3,418
- --------------------------------------------------------------------------------------------------
Operating Data
- --------------------------------------------------------------------------------------------------
Network access lines in service (000) 60,682 58,845 56,616 53,891 51,532
- --------------------------------------------------------------------------------------------------
Access minutes of use (000,000) 264,010 247,597 228,300 208,230 184,384
- --------------------------------------------------------------------------------------------------
Wireless customers (000) 5 11,151 8,686 7,556 6,018 4,814
- --------------------------------------------------------------------------------------------------
Number of employees 204,530 200,380 202,440 185,400 182,610
- --------------------------------------------------------------------------------------------------
[FN]
1 Certain one-time adjustments are included in the results for each year
presented. See Results of Operations for a summary of the 1999, 1998 and 1997
one-time adjustments and the impact of these items on income before
extraordinary items and cumulative effect of accounting change and net
income. In 1996, results include the incremental operating impacts
attributable to the operations of the overlapping Ameritech Corporation
(Ameritech) wireless properties sold in 1999. Excluding these items, SBC
Communications Inc. (SBC) reported an adjusted income before cumulative
effect of accounting changes of $5,643, or $1.65 diluted earnings per share,
and an adjusted net income of $5,733, or $1.67 diluted earnings per share.
The 1995 results include (i) work force restructuring credit, (ii) gain on
exchange of cellular interests and (iii) incremental operating impacts
attributable to the operations of the overlapping Ameritech wireless
properties sold in 1999. Excluding these items, SBC reported an adjusted
income before extraordinary loss of $5,216, or $1.52 diluted earnings per
share, and an adjusted net loss of $1,493, or $0.43 diluted loss per share.
2 Amounts include the following extraordinary items and cumulative effect of
accounting change: 1999, gain on sale of overlapping cellular properties and
change in directory accounting at Ameritech; 1998, early retirement of debt
and change in directory accounting at Southern New England Telecommunications
Corporation (SNET); 1996, change in directory accounting at Pacific Telesis
Group (PAC); and 1995, discontinuance of regulatory accounting.
3 Free cash flow is net cash provided by operating activities less construction
and capital expenditures.
4 Dividends declared by SBC's Board of Directors; these amounts do not include
dividends declared and paid by Ameritech, SNET and PAC prior to their
respective mergers.
5 All periods exclude customers from the overlapping Ameritech wireless
properties sold in 1999.
</FN>
Management's Discussion and Analysis of Financial Condition and Results of
Operations Dollars in millions except per share amounts
SBC Communications Inc. (SBC) is a holding company whose subsidiaries and
affiliates operate in the communications services industry. SBC's subsidiaries
and affiliates provide wireline and wireless telecommunications services and
equipment, directory advertising, electronic security services and cable
television services both domestically and worldwide.
The consolidated financial results reflect mergers of SBC subsidiaries with
Ameritech Corporation (Ameritech) in 1999, Southern New England
Telecommunications Corporation (SNET) in 1998 and Pacific Telesis Group (PAC) in
1997 as pooling of interests (see Note 2 of Notes to Consolidated Financial
Statements).
This discussion should be read in conjunction with the consolidated financial
statements and the accompanying notes.
Results of Operations
Summary
Financial results, including percentage changes from the prior year, are
summarized as follows:
- -------------------------------------------------------------------------------------------------
Percent Change
-------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Operating revenues $ 49,489 $ 46,207 $ 43,106 7.1% 7.2%
Operating expenses 37,891 34,984 35,504 8.3 (1.5)
Income before extraordinary items and
cumulative effect of accounting change 6,573 7,735 4,087 (15.0) 89.3
Extraordinary items 1,379 (60) - - -
Cumulative effect of accounting change 207 15 - - -
Net income 8,159 7,690 4,087 6.1 88.2
=================================================================================================
In 1999 and 1998, SBC reflected a cumulative effect of accounting change related
to accounting for directory revenues and expenses (see Note 1 of Notes to
Consolidated Financial Statements). In 1999, SBC recognized an extraordinary
gain from the sale of overlapping cellular properties sold in October (see Note
15 of Notes to Consolidated Financial Statements). In 1998, SBC incurred an
extraordinary loss related to the early retirement of debt.
Reported results for 1999, 1998 and 1997 also include one-time items that SBC
normalizes for management purposes. Normalized results in 1999 include the
following adjustments:
o After-tax charges totaling $1.5 billion including, among other items,
recognition of impairment of long-lived assets, adjustments to the estimate
of allowance for doubtful accounts at Ameritech, estimation of deferred
taxes on international investments, wireless conversion costs and other
merger integration costs as discussed in Note 2 of Notes to Consolidated
Financial Statements.
o Elimination of income of $119 from the incremental impacts of overlapping
wireless properties sold in October 1999.
o After-tax pension settlement gains of $368 recorded in the fourth quarter
associated with lump sum pension payments that exceeded the projected
service and interest costs.
o After-tax gains of $77 recognized from the sale of property by an
international equity affiliate.
o Reduction of a portion of a first quarter 1998 after-tax charge of $27 to
cover the cost of consolidating security monitoring centers and
company-owned cellular retail stores.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
Dollars in millions except per share amounts
Normalized results in 1998 include the following adjustments:
o After-tax gain of $1,012 from the sale of Telecom Corporation of New Zealand
Limited (TCNZ) shares.
o After-tax charges related to strategic initiatives totaling $268 resulting
from the merger integration process with SNET.
o After-tax gains of $219 from the sale of certain non-core businesses,
principally the required disposition of SBC's investment in Mobile Telephone
Networks (MTN), a cellular company in South Africa.
o Elimination of income of $123 from the incremental impacts of overlapping
wireless properties sold in October 1999.
o After-tax charge of $64 to cover the cost of consolidating security
monitoring centers and company-owned wireless retail stores.
o After-tax gain of $102 from the sale of certain telephone and directory
assets.
Normalized results in 1997 include the following adjustments:
o After-tax charges of $1.6 billion related to strategic initiatives resulting
from the merger integration process with PAC.
o After-tax charge of $87 for SBC's share of the costs of a work force
restructuring at Belgacom SA (Belgacom).
o After-tax charges of $304 for ongoing merger integration costs (see Note 2
of Notes to Consolidated Financial Statements).
o After-tax first quarter settlement gains of $90 at PAC associated with lump
sum pension payments that exceeded the projected service and interest costs
for 1996 retirements.
o After-tax gain of $58 from the sale of SBC's interests in Bell
Communications Research, Inc. (Bellcore).
o Elimination of income of $88 from the incremental impacts of overlapping
wireless properties sold in October 1999.
Excluding these items, 1999 income before extraordinary gain and cumulative
effect of accounting change would have been $7,439, or 12.5% higher than 1998
earnings of $6,611. The corresponding diluted per share amounts would be $2.15
in 1999, or 12.0% higher than $1.92 in 1998. In 1998, income before
extraordinary loss and cumulative effect of accounting change would have been
13.3% higher than 1997 earnings of $5,836. The corresponding diluted per share
amounts would have been 12.3% higher than $1.71 in 1997.
Excluding these items, the 1999 and 1998 increases in income before
extraordinary items and cumulative effect of accounting change were due
primarily to broad-based growth in demand across SBC's operations. Results for
1999 include operations related to the third quarter acquisitions of Comcast
Cellular Corporation (Comcast) and Cellular Communications of Puerto Rico, Inc.
(Cellular Communications). In addition, SBC's international investments
experienced growth due to the acquisitions of Bell Canada in June 1999 and Tele
Danmark A/S (Tele Danmark) in January 1998, as well as growth in 1999 and 1998
from SBC's investment in Telefonos de Mexico, S.A. de C.V. (Telmex).
Segment Results
As a result of the Ameritech merger and to better reflect the broadened scope of
its operations, SBC adjusted its segment reporting structure in 1999. SBC now
has four reportable segments that reflect the current management of its
business: wireline, wireless, information and entertainment, and 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 expands on what was previously the directory segment, and
includes all directory operations from advertising, yellow pages, white pages
and electronic publishing and Ameritech's electronic security and cable
television operations. All international investment operations have been removed
from the other segment and are shown separately in the international segment.
The miscellaneous items that formerly were included in the other segment are
immaterial and have been reclassified to corporate, adjustments and eliminations
(see Note 7 of Notes to Consolidated Financial Statements).
The normalized segment results include the 1999 effects of conforming accounting
methodologies between SBC and Ameritech. Among other items, non-cash adjustments
were made to conform accounting for pension and postretirement benefits between
the companies and to immediately expense certain items routinely deferred and
amortized by Ameritech, including sales commissions and leased customer security
and paging equipment. The pension and postretirement adjustments include the
effects of conforming the adoption date for postretirement accounting, methods
of recognizing actuarial gains and synchronization of estimates related to the
current year's benefit plans. The conforming accounting changes for 1999 and
prior were recorded as a cumulative effect of accounting change at the segments.
This cumulative effect of accounting change was retroactively restated to the
appropriate year in SBC's consolidated results. Segment results for periods
after 1999 also will include these conforming entries and be comparable to 1999
results.
Normalized income before income taxes, extraordinary items and cumulative effect
of accounting change for each segment for 1999, 1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------
Percent Change
---------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Wireline $ 8,052 $ 7,318 $ 6,558 10.0% 11.6%
Wireless 918 564 372 62.8 51.6
Information and entertainment 1,641 1,590 1,350 3.2 17.8
International 706 453 512 55.8 (11.5)
Corporate, adjustments & eliminations 364 435 375 - -
- ----------------------------------------------------------------------------
Normalized Income Before Income Taxes,
Extraordinary Items and Cumulative
Effect of Accounting Change $ 11,681 $ 10,360 $ 9,167 12.8% 13.0%
=================================================================================================
Changes in income before income taxes in the wireline, wireless and information
and entertainment segments primarily reflect increases in operating income
discussed below. Changes in income before income taxes for the international
segment result primarily from the changes in equity in net income of affiliates
and other income (expense) - net discussed below; changes in this line also
impacted the wireline segment.
The normalizing items impacting the wireline segment include the 1999 one-time
adjustments to the estimate of allowance for doubtful accounts, strategic
initiatives resulting from the merger integration process and other items offset
by 1999 pension settlement gains. One-time adjustments in 1998 include charges
for merger integration costs related to the SNET merger, gain from the sale of
certain telephone and directory assets and the first quarter consolidation of
certain Ameritech operations. The 1997 one-time adjustments include costs for
strategic initiatives related to the merger integration process with PAC,
pension settlement gains and gains from the sale of SBC's interests in Bellcore.
The wireless segment's normalizing items include 1999 adjustments to convert
Ameritech's wireless customers to SBC's network platform and merger integration
costs offset by recognition of pension settlement gains, the 1999, 1998 and 1997
incremental impacts of the overlapping cellular properties, the 1998 charge to
cover the costs of consolidating company-owned cellular retail stores and the
1999 reduction of this charge. In addition, one-time items affecting the
wireless segment in 1997 include PAC merger integration costs. The information
and entertainment segment includes one-time charges in 1999, including
recognition of impairment of long-lived assets, adjustments to the estimate of
allowance for doubtful accounts and other merger integration costs offset by the
recognition of pension settlement gains, the 1998 charge to cover the costs of
consolidating security monitoring centers and the 1999 reduction of this charge.
In addition, 1997 one-time items included PAC merger integration costs.
The international segment's normalizing items include the 1999 gains related to
sales by an international equity affiliate, 1998 gains on sales of certain
non-core businesses, principally the required disposition of SBC's MTN
investment, and the sale of TCNZ shares. Also, 1997 included a one-time item for
SBC's share of the costs of a work force restructuring at Belgacom.
The following table provides a summary by segment of the net increase (decrease)
of the normalizing items on income before income taxes, extraordinary items and
cumulative effect of accounting change for 1999, 1998 and 1997:
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Wireline $ 73 $ 178 $ 1,966
Wireless 6 (99) (60)
Information and entertainment 523 (23) 75
International 129 (1,811) 86
Corporate, adjustments & eliminations 97 - 562
- ----------------------------------------------------------------------------
Total Normalizing Impacts $ 828 $ (1,755) $ 2,629
============================================================================
Operating Income Components of normalized operating income by segment for 1999,
1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------
Percent Change
---------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Wireline $ 9,125 $ 8,588 $ 7,702 6.3% 11.5%
Wireless 1,280 931 647 37.5 43.9
Information and entertainment 1,684 1,624 1,384 3.7 17.3
International (8) (78) (43) (89.7) 81.4
Corporate, adjustments & eliminations 442 422 458 - -
- ----------------------------------------------------------------------------
Total Normalized Operating Income $ 12,523 $ 11,487 $ 10,148 9.0% 13.2%
=================================================================================================
Components of segment operating revenues and expenses and discussion of the
segment results for 1999, 1998 and 1997 follow.
Operating Revenues SBC's normalized operating revenues increased $3,637, or
8.0%, in 1999 and $2,890, or 6.8%, in 1998. Components of operating revenues by
segment for 1999, 1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------
Percent Change
---------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Wireline $ 37,576 $ 35,419 $ 33,656 6.1% 5.2%
Wireless 6,764 5,629 5,023 20.2 12.1
Information and entertainment 4,777 4,345 3,819 9.9 13.8
International 147 149 122 (1.3) 22.1
Corporate, adjustments & eliminations (304) (219) (187) - -
- ----------------------------------------------------------------------------
Total Normalized Operating Revenues $ 48,960 $ 45,323 $ 42,433 8.0% 6.8%
=================================================================================================
Wireline
Wireline normalized operating revenues increased $2,157, or 6.1%, in 1999 and
$1,763, or 5.2%, in 1998. Components of wireline operating revenues for 1999,
1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------
Percent Change
---------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Local service $ 19,126 $ 17,239 $ 15,864 10.9% 8.7%
Network access:
Interstate 7,544 6,960 6,939 8.4 0.3
Intrastate 2,645 2,717 2,762 (2.6) (1.6)
Long distance service 3,471 3,679 3,616 (5.7) 1.7
Other 4,790 4,824 4,475 (0.7) 7.8
- ----------------------------------------------------------------------------
Total Wireline Revenues $ 37,576 $ 35,419 $ 33,656 6.1% 5.2%
=================================================================================================
Local service revenues increased $1,887, or 10.9%, in 1999 and $1,375, or
8.7%, in 1998 due primarily to increases in demand, which totaled
approximately $1,245 in 1999 and $1,270 in 1998, including increases in
access lines, vertical services and data-related services revenues. In
addition, revenues from two network integration companies acquired by SBC
in the fourth quarter of 1998 and the second quarter of 1999 contributed
approximately $578 to the increase in 1999 and $25 in 1998. The number of
access lines increased by 3.1% in 1999 and by 3.9% in 1998. Approximately
39% of access line growth in 1999 and 35% in 1998 was due to sales of
additional access lines to existing residential customers. In 1999 and
1998, approximately 33% and 31% of the access line growth was in
California, 19% and 23% was in Texas and 9% and 12% was in Illinois.
Access lines in California, Texas and Illinois account for approximately
60% of SBC's access lines in both 1999 and 1998. Vertical services
revenues, which include custom calling services, such as Caller ID, Call
Waiting, voice mail and other enhanced services, increased by
approximately 14% and totaled more than $3.3 billion in 1999 and increased
by approximately 20% and totaled more than $2.9 billion in 1998.
Local service revenues also increased as a result of regulatory actions
that decreased one or more other types of operating revenues. In 1999, the
introduction of extended area service plans, the introduction of the
California High Cost Fund (CHCF) and the September 1999 Texas Universal
Service Fund (TUSF) rate rebalancing collectively increased local service
revenues by approximately $185 and decreased long distance revenues by
approximately $112 and intrastate network access revenues by approximately
$87, with a net decrease on wireline operating revenues of approximately
$14. In 1998, the introduction of extended area service plans and the CHCF
increased local service revenues by approximately $73 and decreased long
distance revenues by approximately $43 and intrastate network access
revenues by approximately $24, with a net increase on wireline operating
revenues of approximately $6. The state public utility commissions (PUCs)
have stated that the CHCF and the TUSF are intended to directly subsidize
the provision of service to high-cost areas and allow Pacific Bell
Telephone Company (PacBell) and Southwestern Bell Telephone Company
(SWBell) to set competitive rates for other services. The increases in
local service revenues were partially offset by decreases due to rate
reductions under various PUC price cap orders of approximately $194 in
1999 and $53 in 1998.
Network access Interstate network access revenues increased $584, or 8.4%,
in 1999 and $21, or 0.3%, in 1998. Included in the results is a decrease
of approximately $66 due to a conforming item related to costs routinely
deferred by Ameritech (see discussion under Segment Results above for
further information on the effect of these conforming items). Excluding
this conforming item, interstate network access revenues increased $650,
or 9.3%, in 1999 and $21, or 0.3%, in 1998 due largely to increases in
special access, demand for access services by interexchange carriers and
growth in revenues from end-user charges attributable to an increasing
access line base, which collectively resulted in an increase of
approximately $795 in 1999 and $521 in 1998. In addition, customer number
portability cost recovery, net of a Federal Communications Commission
(FCC) retroactive rate decrease in the second quarter of 1999, contributed
approximately $183 in 1999. Partially offsetting these increases were the
effects of rate reductions of approximately $296 in 1999 and $336 in 1998
related to the FCC's productivity factor adjustment and access reform.
Additional decreases in 1998 totaling approximately $114 resulted from an
increase in universal service fund net payments implemented in the first
quarter of 1998 that exceeded the 1997 net payments of long-term support.
The net federal universal fund payments and receipts will be exogenous
factors in future federal price cap filings.
Intrastate network access revenues decreased $72, or 2.6%, in 1999 and
$45, or 1.6%, in 1998. These decreases were due largely to state
regulatory rate reductions, including reduction of cellular
interconnection rates and the intrastate rate reduction by the Texas
legislature as discussed under Regulatory Environment, of approximately
$144 in 1999 and $105 in 1998 and the effects of the TUSF and CHCF
described in local service above totaling approximately $87 in 1999 and
$24 in 1998. These decreases were partially offset by increases in demand,
including usage by alternative intraLATA, toll carriers of approximately
$200 in 1999 and $179 in 1998.
Long distance service revenues decreased $208, or 5.7%, in 1999 and
increased $63, or 1.7%, in 1998. Long distance service revenues decreased
in 1999 and 1998 by approximately $202 and $36 due to price competition
from alternative intraLATA toll carriers and the effects of implementing
dialing parity. Decreases also resulted from the effects of regulatory
shifts of approximately $112 in 1999 and approximately $43 in 1998
discussed in local service above related to the TUSF, CHCF and
introduction of extended area service plans and rate reductions in Kansas
and California of approximately $24 in 1999. These decreases were
partially offset by approximately $128 in 1999 and $133 in 1998 due to
increased demand at Ameritech's long distance unit, certified to provide
long distance service outside SBC's region, increased demand and toll
messages for SNET All Distance and increased demand at PacBell in 1998.
Other operating revenues decreased $34, or 0.7%, in 1999 and increased
$349, or 7.8%, in 1998. Other operating revenues increased due to sales
from nonregulated products and services, including customer premise
equipment and network integration sales totaling approximately $91 in 1999
and $263 in 1998 and revenues from other wireline business initiatives,
primarily Internet services totaling approximately $59 in 1999 and $83 in
1998. These increases were offset in 1999 and partially offset in 1998 by
a decline in the public telephone business totaling approximately $133 in
1999 and $36 in 1998. In addition, 1999 results include a decrease for the
shift of certain directory revenues to the information and entertainment
segment in the first quarter of 1999 totaling approximately $30.
Wireless
Wireless normalized operating revenues increased $1,135, or 20.2%, in 1999 and
$606, or 12.1%, in 1998. Components of wireless operating revenues for 1999,
1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------
Percent Change
----------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Subscriber $ 5,307 $ 4,538 $ 4,121 16.9% 10.1%
Other 1,457 1,091 902 33.5 21.0
- ---------------------------------------------------------------------------
Total Wireless Revenues $ 6,764 $ 5,629 $ 5,023 20.2% 12.1%
=================================================================================================
Subscriber revenues consist of local service, incollect roaming (revenues
from SBC wireless customers roaming outside their home area) and wireless
long distance. Wireless subscriber revenues increased $769, or 16.9%, in
1999 and $417, or 10.1%, in 1998 due primarily to growth in the number of
customers of 28.4% in 1999 and 15.0% in 1998. The growth in customers
includes approximately 1,237,000 customers of Comcast and Cellular
Communications acquired in 1999. California Personal Communications
Services (PCS) operations also contributed to the customer growth. These
increases were partially offset by declines in average revenue per
customer. SBC had domestic wireless customers totaling 11,151,000 and
8,686,000 at December 31, 1999 and 1998.
Other wireless revenues relate primarily to outcollect roaming (revenues
from non-SBC wireless customers roaming on SBC's wireless network) and
equipment sales and increased $366, or 33.5%, in 1999 and $189, or 21.0%,
in 1998. The increases were primarily attributable to growth in outcollect
roaming revenues, as well as equipment sales in the California PCS
operations.
Information and Entertainment
Information and entertainment normalized operating revenues increased $432, or
9.9%, in 1999 and $526, or 13.8%, in 1998. Information and entertainment
operating revenues for 1999, 1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------
Percent Change
----------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Total Information and
Entertainment Revenues $ 4,777 $ 4,345 $ 3,819 9.9% 13.8%
=================================================================================================
Information and entertainment operating revenues increased in 1999 and 1998
primarily from increased demand for directory advertising services. The 1999
increase also includes approximately $107 related to the change in directory
accounting at Ameritech and approximately $57 for changes in the directory
publishing schedule. In addition, 1999 directory revenues increased due to the
shift of certain directory revenues from the wireline segment totaling
approximately $30. Cable revenues increased approximately $51 in 1999 due
primarily to customer growth. Growth in the number of customers, including
through acquisitions, increased security revenues approximately $179 in 1998. In
addition, 1998 directory revenues increased approximately $150 due to revision
of a partnership agreement covering the publication of directories.
Operating Expenses SBC's normalized operating expenses, which include operations
and support and depreciation and amortization expenses, increased $2,601, or
7.7%, in 1999 and $1,551, or 4.8%, in 1998. Components of operating expenses by
segment for 1999, 1998 and 1997 are as follows:
- ----------------------------------------------------------------------------------------------------
Percent Change
------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
Wireline $ 28,451 $ 26,831 $ 25,954 6.0% 3.4%
Wireless 5,484 4,698 4,376 16.7 7.4
Information and entertainment 3,093 2,721 2,435 13.7 11.7
International 155 227 165 (31.7) 37.6
Corporate, adjustments & eliminations (746) (641) (645) - -
- ----------------------------------------------------------------------------------
Total Normalized Operating Expenses $ 36,437 $ 33,836 $ 32,285 7.7% 4.8%
====================================================================================================
Operations and support SBC's normalized operations and support expenses
increased $1,979, or 7.5%, in 1999 and $1,112, or 4.4%, in 1998. Components of
operations and support expenses by segment for 1999, 1998 and 1997 are as
follows:
- ----------------------------------------------------------------------------------------------------
Percent Change
------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
Wireline $ 21,625 $ 20,391 $ 19,796 6.1% 3.0%
Wireless 4,557 3,991 3,769 14.2 5.9
Information and entertainment 2,899 2,520 2,286 15.0 10.2
International 138 209 147 (34.0) 42.2
Corporate, adjustments & eliminations (920) (791) (790) - -
- ----------------------------------------------------------------------------------
Total Normalized Operations and
Support $ 28,299 $ 26,320 $ 25,208 7.5% 4.4%
====================================================================================================
Wireline operations and support expenses increased $1,234, or 6.1%, in
1999 and $595, or 3.0%, in 1998. The 1999 results include $91 related to
the treatment of conforming accounting methodologies between SBC and
Ameritech. The conforming items include non-cash adjustments made to
conform accounting for pension and postretirement benefits between the
companies and to immediately expense certain items routinely deferred and
amortized by Ameritech, including sales commissions (see discussion under
Segment Results above for further information of the effect of these
conforming items). The increase includes costs of approximately $460 in
1999 and $21 in 1998 associated with business initiatives and other
products, primarily Digital Subscriber Lines (DSL), Internet and voice
mail. Additionally, operations and support expenses increased
approximately $341 in 1999 and $214 in 1998 as a result of increased wages
and salaries, materials and operating taxes, and by approximately $575 in
1999 primarily as a result of the acquisition of two network integration
companies in 1998 and 1999. Operations and support expenses also increased
by approximately $83 in 1999 related to costs associated with software
right-to-use fees including digital network deployment initiatives and by
approximately $288 in 1999 and $297 in 1998 as a result of costs
associated with reciprocal compensation for the termination of Internet
traffic.
Operations and support expense increases were partially offset by
approximately $278 in 1999 and $317 in 1998 due to lower contract labor
costs, employee benefits and costs associated with customer number
portability. These reductions primarily resulted from the realization of
merger initiative benefits. The 1998 decrease was partially offset by
costs of approximately $262 related to progress in the PAC and SNET merger
implementation process including centralizing support functions and other
merger initiatives. Also partially offsetting the increases in operations
and support was the change in accounting for software costs (see Note 16
of Notes to Consolidated Financial Statements) which required
approximately $345 of software costs to be capitalized rather than
expensed in 1999. The 1997 results include the recognition of 1997 pension
settlement gains relating to 1997 retirees since the merger with PAC
totaling approximately $136.
Wireless operations and support expenses increased $566, or 14.2%, in 1999
and $222, or 5.9%, in 1998 due primarily to growth in the number of
customers, including the acquisitions of Comcast and Cellular
Communications discussed in subscriber revenues above. The 1999 results
also were impacted by increased incollect roaming expenses and software
costs capitalized rather than expensed in 1999.
Information and entertainment operations and support expenses increased
$379, or 15.0%, in 1999 and $234, or 10.2%, in 1998. The 1999 results
include $116 of conforming charges related to sales commissions and leased
customer equipment that SecurityLink from Ameritech, Inc. (SecurityLink)
previously deferred and amortized (see discussion of conforming items
under Segment Results above). The change in directory accounting at
Ameritech discussed in information and entertainment operating revenues
above caused expenses to increase by approximately $103. Electronic
security and cable television expenses increased in 1999 and 1998 due
primarily to growth-related employee increases, while directory
employee-related expenses declined partially offsetting the costs of
increased demand and changes in the schedule of published directories.
Depreciation and amortization SBC's normalized depreciation and amortization
expense increased $622, or 8.3%, in 1999 and $439, or 6.2%, for 1998. Components
of normalized depreciation and amortization expense by segment for 1999, 1998
and 1997 are as follows:
- ----------------------------------------------------------------------------------------------------
Percent Change
------------------
1999 vs. 1998 vs.
1999 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
Wireline $ 6,826 $ 6,440 $ 6,158 6.0% 4.6%
Wireless 927 707 607 31.1 16.5
Information and entertainment 194 201 149 (3.5) 34.9
International 17 18 18 (5.6) -
Corporate, adjustments & eliminations 174 150 145 - -
- ----------------------------------------------------------------------------------
Total Depreciation and Amortization $ 8,138 $ 7,516 $ 7,077 8.3% 6.2%
====================================================================================================
Depreciation and amortization expense is primarily in the wireline and wireless
segments. In 1999, overall higher plant levels increased depreciation expense by
$326 in the wireline segment and $67 in the wireless segment. Depreciation and
amortization expenses also increased by $142 due to the third quarter
acquisitions of Comcast and Cellular Communications. A new software accounting
standard (see Note 16 of Notes to Consolidated Financial Statements) also
contributed $52 to the increase in 1999. Overall higher plant levels in 1998
increased depreciation expense by $329 in the wireline segment and $88 in the
wireless segment. Amortization expense at SecurityLink increased $38 in 1998 due
to acquisitions. The increase in 1998 was partially offset by reduced
depreciation of $42 on certain wireline analog switching equipment written off
in 1997.
A full year of operations from the wireless acquisitions, along with additional
capital expenditures as a part of the rapid deployment of advanced data
services, is expected to increase depreciation and amortization expense by
approximately $250 in 2000.
Interest expense on a consolidated basis for 1999 decreased by $175, or 10.9%,
in 1999 and increased by $55, or 3.5%, in 1998. The 1999 decrease was due
primarily to reductions in interest expense resulting from lower average debt
levels due to debt retirements in 1998 and early 1999. The 1998 increase was due
primarily to higher average debt levels early in 1998 and lower capitalized
interest in the wireless segment in 1998 than in 1997.
Equity in net income of affiliates increased $299 in 1999 and $176 in 1998. The
1999 increase includes $131 of gains related to the sale of property by SBC's
Israeli equity affiliate and reflects increased equity in net income of $108
from investments in Telmex and Tele Danmark. The new investment in Bell Canada
along with increased earnings at MATAV contributed $71 to the increase. These
increases were partially offset by $83 of reduced earnings from the sale of
SBC's investment in TCNZ and lower earnings from Telkom SA Limited (Telkom) and
Belgacom. Investments in domestic wireless partnerships contributed $17 to the
increase.
The 1998 increase includes $132 from inclusion of the first year of earnings
from Tele Danmark and earnings growth at Belgacom, offset by reduced earnings
from TCNZ, which was sold in April 1998. Also contributing to the increase was
$92 from Telmex, Telkom, domestic wireless partnerships and MATAV. These
increases were partially offset by increased losses of $53 from wireless start
up costs in Switzerland and long distance start up costs in Switzerland, France
and Israel.
SBC's earnings from foreign affiliates will continue to be sensitive to exchange
rate changes in the value of the respective local currencies. SBC's foreign
investments are recorded under United States' generally accepted accounting
principles, which include adjustments for the purchase method of accounting and
exclude certain adjustments required for local reporting in specific countries,
such as inflation adjustments. Equity earnings in 2000 will reflect a full year
of operations from SBC's investment in Bell Canada (see Note 15 of Notes to
Consolidated Financial Statements for discussion of the Bell Canada investment).
Other income (expense) - net in 1999, 1998 and 1997 includes amounts that SBC
management normalized for evaluating results. Normalizing adjustments for the
incremental impacts of overlapping wireless properties sold in October 1999 were
$24 in 1999, $31 in 1998 and $21 in 1997. Amounts for 1998 include gains of
$2,071 related to various sales of investments and assets, primarily the sale of
TCNZ and the required disposition of MTN. Amounts for 1997 also reflect gains of
$96 from the sale of SBC's interests in Bellcore and $26 in charges related to
strategic initiatives, primarily writeoffs of nonoperating plant. Excluding
these items, other income (expense) - net was expense of $205 in 1999, $156 in
1998 and $0 in 1997.
Results for 1999 include a gain from the sale of a portion of Amdocs Limited
(Amdocs), an SBC equity investee, of approximately $92 and gains of
approximately $63 representing dividends and market adjustments on Amdocs shares
used for contributions to the SBC Foundation and deferred compensation. Results
for 1999 also include a gain of approximately $59 recognized from the sale of
SBC's investment in Chile and a gain of approximately $81 recognized from the
sales of certain discontinued plant and other investments. These gains were
offset by increased expenses related to higher appreciation in the market value
of Telmex L shares underlying certain SBC debt redeemable in either cash or
Telmex L shares than in the comparable periods of 1998, net of gains recognized
from the sale of certain Telmex L shares, of approximately $296 and
approximately $76 in dividends paid on preferred securities issued by Ameritech
subsidiaries, losses on forward exchange contracts and other nonoperating items.
In addition, higher wireless minority interest and lower interest income
resulted in approximately $160 net expense.
During 1998, SBC recognized expenses of approximately $237 related to an
impairment of an international investment and investments in certain wireless
technologies, primarily wireless video, and approximately $154 related to the
combination of dividends paid on preferred securities owned by Ameritech
subsidiaries, losses on forward exchange contracts and debt redemption costs.
Partially offsetting these expenses was other income related to a special
dividend of approximately $158 received from Amdocs and gains of approximately
$127 recognized on the sale and the charitable contribution of SBC's
available-for-sale investment in Telewest Communications plc.
Results for 1997 include gains of approximately $95 recognized from the sale of
all or portions of certain international investments and royalty payments
associated with software developed by Amdocs and other investment gains totaling
approximately $82. Partially offsetting these gains was the net activity related
to market movement on Telmex L shares of approximately $47 and the combination
of dividends paid on preferred securities owned by Ameritech subsidiaries and
losses on forward exchange contracts totaling approximately $34. In addition,
higher minority interest and lower interest income resulted in approximately $96
net expense.
Income taxes for 1999, 1998 and 1997 reflect the tax effect of certain one-time
charges related to strategic initiatives resulting from SBC's comprehensive
review of operations after completion of the Ameritech, SNET and PAC mergers,
gains related to the sale of various assets and businesses and other items, and
pension settlement gains (see further discussion of these items under Segment
Results). The net effective tax rate on these items differed as a result of
nondeductible items included in the charges and valuation adjustments to certain
deferred tax assets. Excluding these items, income taxes for 1999, 1998 and 1997
would have been $4,242, $3,749 and $3,331. Income taxes for 1999, 1998 and 1997
were higher due primarily to higher income before income taxes.
Extraordinary items In 1999, SBC recorded an extraordinary gain of $1,379, net
of taxes of $960, related to the sale of overlapping wireless properties in
October (see Note 15 of Notes to Consolidated Financial Statements). In 1998,
SBC recorded an extraordinary loss of $60 related to the repurchase of $684 of
long-term debt.
Cumulative effect of accounting change As discussed in Note 1 of Notes to
Consolidated Financial Statements, Ameritech's directory publishing subsidiary,
effective January 1, 1999, and SNET effective January 1, 1998, changed their
methods of recognizing directory publishing revenues and related expenses (see
Note 1 of Notes to Consolidated Financial Statements). The cumulative after-tax
effect of applying the new method to prior years was recognized as of January 1,
1999 and 1998 as a one-time, non-cash gain applicable to continuing operations
of $207, or $0.06 per share and $15, or $0.01 per share, net of deferred taxes
of $125 and $11.
Operating Environment and Trends of the Business
Regulatory Environment
Overview
The telecommunications industry is in a period of dynamic transition from a
tightly regulated industry overseen by multiple regulatory bodies to a
market-driven industry monitored by state and federal agencies. SBC's wireline
telecommunications subsidiaries remain subject to regulation by state regulatory
commissions for intrastate services and by the FCC for interstate services.
Consolidation of companies is occurring within the marketplace for local
telephone service and across other communications services, such as long
distance, wireless, electronic security, cable television, Internet and other
data transmission. Companies operating in some of these markets also are
expanding into others, such as the provision of local service by long distance
companies, and companies in previously unrelated industries, such as
entertainment, are expanding into communications and communications companies
are expanding into these unrelated industries. Additionally, new technologies
also are affecting the way people view and use communications services.
The telecommunications industry also is changing internationally, as
government-owned telephone monopolies are being privatized in many countries and
competitive entrants are authorized. United States-controlled companies have
acquired or formed investments, joint ventures or strategic relationships with
these newly privatized companies or their new competitors involving any or all
of the range of telecommunications services. Foreign-controlled companies have
also acquired or formed such relationships with United States companies.
SBC is aggressively representing its interests before federal and state
regulatory bodies, courts, Congress and state legislatures. SBC will continue to
evaluate the competitive nature of its business and develop appropriate
competitive, legislative and regulatory strategies.
Trends
National-Local
In 1999, SBC began to implement a "National-Local" strategy in conjunction with
its acquisition of Ameritech. Under the "National-Local" strategy SBC will seek
to become a competitive local exchange carrier (CLEC) and offer local exchange
services in 30 new markets across the country in combination with other major
national and international operations. SBC expects to introduce service in nine
new markets in 2000, and is required by the FCC to enter the remaining 21
markets by midyear 2002 (see Ameritech Merger discussion below). This
"National-Local" strategy is part of SBC's overall strategy to expand from a
regional company to a company that provides communications services and products
nationally and globally.
Broadband Initiative
In October 1999, as the first post-Ameritech merger initiative, SBC announced
plans to offer broadband services to approximately 80% of SBC's United States
wireline customers over the next three years (Project Pronto). SBC will invest
an estimated $6 billion in fiber, electronics and other technology for this
broadband initiative. The build-out will include moving many customers from the
existing copper network to a new fiber network. Over the deployment period,
marketing costs will be incurred depending on the rate of customer sign-ups and
installations. An ongoing assessment of the carrying value and economic useful
life of the existing network facilities will continue (see Note 5 of Notes to
Consolidated Financial Statements).
Wireline
Federal Regulation
Through affiliates, SBC offers landline interLATA long distance services to
customers in selected areas outside its wireline subsidiaries' operating areas.
Further, through a subsidiary, SBC offers interLATA long distance services to
customers in Connecticut. Under the Telecommunications Act of 1996 (Telecom
Act), before being permitted to offer landline interLATA long distance service
in any state within the 12-state region encompassed by the regulated operating
areas of SWBell, PacBell, Ameritech and Nevada Bell (these areas with the
addition of SNET are referred to as SBC's 13-state area), SBC must apply for and
obtain state-specific approval from the FCC. The FCC's approval, which involves
consultation with the United States Department of Justice and the appropriate
state commission, requires favorable determinations that SBC's wireline
subsidiaries have entered into interconnection agreement(s) that satisfy a
14-point "competitive checklist" with predominantly facilities-based carrier(s)
that serve residential and business customers or, alternatively, the
subsidiaries have a statement of terms and conditions effective in that state
under which they offer the "competitive checklist" items. The FCC also must make
favorable public interest and structural separation determinations in connection
with each application. See "State Regulation" for status of the state
applications.
Ameritech Merger On October 8, 1999, SBC and Ameritech completed the merger of
an SBC subsidiary with Ameritech (see Note 2 of Notes to Consolidated Financial
Statements for a discussion of the merger with Ameritech).
The FCC issued an order approving the transaction, subject to certain
conditions, including fostering out-of-region competition, promoting advanced
services, opening local markets to competition and improving residential
services. These FCC conditions require specific performance and reporting
provisions and contain enforcement provisions that could potentially trigger
more than $2 billion in payments, as described below, if certain goals are not
met. The following is a brief summary of the major conditions:
Out-of-Region Competition - Within 30 months from the merger closing, SBC
must enter 30 new markets as a facilities-based competitive provider of
local services to business and residential customers. Failure to achieve
entrance into 30 markets within the 30-month time frame could result in a
fine of $40 for each market missed.
Promoting Advanced Services - SBC established separate subsidiaries to
provide advanced services, such as DSL. These subsidiaries are required to
use the same processes for the ordering and provisioning of SBC wireline
services as competitors, pay an equivalent price for facilities and services
and locate at least 10% of their advanced service facilities in low-income
areas. In addition, SBC will provide data CLECs the economic equivalent of
line sharing by providing them a second line at a 50% discount for the
purposes of providing advanced services.
Opening Local Markets to Competition - SBC will file performance measurement
data reflecting 20 different categories for each state in its 13-state area
with the FCC and relevant state commissions on a monthly basis. These
performance measurements address functions that may have a particularly
direct effect on SBC's local competitors and their customers such as SBC's
response to competitors' requests for information and interconnection. If
these performance goals are not met, payments of up to $1.1 billion over
three years could be triggered.
SBC will develop and deploy, with CLEC input, uniform electronic operational
support systems (OSS) throughout its 13-state area that support the
pre-ordering, ordering, provisioning, maintenance, repair and billing of
resold local services and unbundled network elements. The OSS will include
uniform application-to-application interfaces and graphical user interfaces.
Payments of up to $20 could be triggered if deployment targets are not met.
SBC will restructure OSS charges to eliminate any flat rate upfront charge
for the right to use SBC's standard interfaces for accessing OSS. In
addition, SBC will provide free training and OSS expert teams for CLECs with
annual revenues under $300.
Improving Residential Service - SBC will not charge residential customers
minimum monthly long distance fees for at least three years after entering
the long distance business in that market. In addition, SBC will offer a
low-income Lifeline universal service plan to low-income residential
customers in each state in its 13-state area.
The effects of these conditions on results of operations is still being
evaluated. However, SBC expects to incur approximately $500 in additional
expenses, exclusive of potential penalty payments, in 2000 to comply with these
conditions.
Unbundled Network Elements In August 1996, the FCC issued rules by which
competitors could connect with local exchange companies' (LECs) networks,
including those of SBC's subsidiaries. Among other items, the rules addressed
unbundling of network elements, pricing for interconnection and unbundled
elements and resale of retail telecommunications services. The FCC rules were
appealed by numerous parties, including SBC. In January 1999, the United States
Supreme Court (Supreme Court) ruled that the Telecom Act gives the FCC the
authority to set guidelines for states to follow in setting prices under the
Telecom Act, reinstated the FCC rules allowing those seeking to interconnect to
"pick and choose" specific provisions from previous interconnection agreements
and upheld FCC rules forbidding incumbent LECs from separating already combined
network elements. The Supreme Court also ordered the FCC to review its
unbundling rules that required major local telephone carriers, such as SBC's
subsidiaries, to lease to competitors, at a discount, parts of their phone
networks, including the telephone lines that run to customers' homes, switching
equipment that routes calls and directory and operator assistance.
In November 1999, the FCC adopted an order providing that the major local
telephone carriers must continue leasing certain parts of their phone network to
competitors at a discount. This order provides revised rules that expand the
definitions of certain unbundled network elements. The FCC did rule that
directory and operator assistance no longer has to be leased at a discount. The
order also limits discounted access to switches serving customers with four or
more lines under certain conditions. In addition, the FCC declined to expand its
regulation to include mandatory leasing of high speed Internet and data
equipment. Although the effect of this order on SBC's results of operations and
financial position cannot be determined at this time, it is expected to be
unfavorable.
Reciprocal Compensation is billed to SBC's wireline subsidiaries by CLECs for
the termination of certain local exchange traffic to CLEC customers. SBC
believes that under the Telecom Act the state commissions have authority to
order reciprocal compensation only for intrastate local traffic, while the FCC
has authority over interstate and interexchange traffic. SBC believes most
Internet traffic is interexchange and interstate. Several state commissions have
taken the position that a connection to the Internet is intrastate or local
traffic and ordered SBC to pay reciprocal compensation to certain CLECs pursuant
to existing contracts. In February 1999, the FCC declared that Internet traffic
is not intrastate or local traffic, but instead is primarily interstate, subject
to interstate jurisdiction. However, the FCC found that existing federal law
does not address to what extent, if any, compensation should be paid to CLECs
that deliver Internet traffic to Internet service providers and initiated a
proceeding to establish such rules. Pending the completion of that proceeding,
the FCC held that state commissions, interpreting existing contracts and
consistent with federal law, might nevertheless order payment of reciprocal
compensation for Internet traffic in certain circumstances. The FCC's February
1999 decision was appealed by MCI WorldCom, Inc. (MCI), US West, Inc. (US West)
and GTE Corporation (GTE). In its appeal, MCI disputed that a connection to the
Internet is part of interstate communication. US West and GTE appealed the FCC's
conclusion that states may require reciprocal compensation for such traffic
pending completion of FCC rulemaking. These appeals are pending in the United
States Court of Appeals for the District of Columbia Circuit.
In June 1999, the United States Court of Appeals for the Seventh Circuit (7th
Circuit) issued an opinion affirming an order of the Illinois Commerce
Commission (ICC) directing Ameritech to pay reciprocal compensation on Internet
traffic under existing interconnection agreements. The 7th Circuit only reviewed
whether the ICC's determination that the parties intended that calls to Internet
Service Providers would be subject to reciprocal compensation violated federal
law. The 7th Circuit declined to review any contract issues and concluded that
the ICC's determination did not violate federal law as it was expressly
permitted under the February 1999 FCC ruling regarding reciprocal compensation.
SBC has sought a rehearing of the 7th Circuit Court decision.
Other appeals of reciprocal compensation decisions currently are pending before
the United States Circuit Courts of Appeals for the Fifth and Tenth Circuits,
the United States Circuit Court of Appeals for the Sixth Circuit (6th Circuit)
and United States District Courts in Indiana, Ohio and California. In August
1999, the Michigan District Court affirmed an order of the Michigan Public
Service Commission (MPSC) directing Ameritech to pay reciprocal compensation
under existing interconnection agreements. Relying upon the FCC's declaratory
ruling, the Michigan District Court concluded that the FCC had left the issue of
reciprocal compensation to be determined by state commissions and therefore
deferred to the MPSC's decision. SBC has appealed that decision to the 6th
Circuit. In July 1999, the United States District Court in Wisconsin dismissed
SBC's appeal without deciding the merits of the case. SBC appealed that
dismissal to the 7th Circuit.
SBC records expense for amounts sought by certain CLECs for the termination of
Internet traffic to Internet service providers.
Digital Subscriber Line is a high-speed data service principally used for
Internet access. In June 1998, SBC filed a petition with the FCC requesting
relief for DSL from pricing, unbundling and resale regulatory restrictions. The
FCC denied the petition and declared that incumbents, such as the SBC's wireline
subsidiaries, must offer such services for resale at a discount and must offer
unbundled access to the equipment used in DSL provisioning to the extent
possible. SBC filed a petition with the FCC for reconsideration of this order.
In November 1999, the FCC issued an order requiring the regional holding
companies (RHCs), such as SBC, to share phone lines with data CLECs. Using a
technology called line sharing, the RHCs split the frequency of a telephone line
so the Internet service is carried on a portion of it. This ruling is not
expected to have a material effect on SBC's financial position or results of
operations.
Federal Access Rates In May 1999, the United States Court of Appeals for the
District of Columbia Circuit (Court of Appeals) ruled that the FCC failed to
adequately explain certain changes to part of the price cap formula used to
calculate the access rates local carriers, such as SBC's subsidiaries, charge
long distance carriers. In a subsequent order, the Court of Appeals stayed this
decision until April 1, 2000. In November 1999, the FCC issued a further notice
of proposed rulemaking (FNPR) and SBC and numerous other local exchange and
interexchange carriers have proposed a solution to the issues in this docket
that would temporarily maintain the current price cap formula and reduce it
markedly after traffic sensitive rates are reduced. The effect of any future
final decision on SBC's results of operations and financial position cannot be
determined at this time.
Pricing Flexibility In August 1999, the FCC adopted an order and an FNPR on
interstate access charge reform issues. Under the order, Phase I flexibility
will permit a LEC, such as one of SBC's subsidiaries, to offer volume and term
discounts under contract for certain access services after the LEC has
demonstrated that competitors have made substantial investments in facilities in
the LEC's market areas. Phase II flexibility will permit a LEC to have special
access and dedicated transport services removed from price caps entirely after
the LEC demonstrates that a greater level of competitive investment exists.
Although the effect of this order and FNPR on SBC's results of operations and
financial position cannot be determined at this time, it is expected to be
favorable.
Acquisitions of Security Services Assets In 1998, the FCC issued a Memorandum
Opinion and Order to Show Cause relating to four asset acquisitions by
SecurityLink in 1996 and 1997. The FCC found that Ameritech had gained
"financial control" over the entities from which SecurityLink acquired the
security services assets, in violation of the 1996 Act, and required that,
within 30 days after issuance of the Order, Ameritech show cause why the FCC
should not require SecurityLink to divest the assets acquired in this
transaction. Previously, the FCC had ruled that the 1996 transaction was
permissible under the Telecom Act, and the District of Columbia Circuit Court
(D.C. Circuit Court) had vacated and remanded this decision to the FCC.
Ameritech filed a response with the FCC, contending that divestiture would not
be an appropriate remedy. The FCC's decision on these Orders to Show Cause is
pending.
The effects of the FCC decisions on the above topics are dependent on many
factors including, but not limited to, the ultimate resolution of the pending
appeals; the number and nature of competitors requesting interconnection,
unbundling or resale; and the results of the state regulatory commissions'
review and handling of related matters within their jurisdictions. Accordingly,
SBC is not able to assess the impact of the FCC orders and proposed rulemaking
at this time.
State Regulation
The following provides an overview of state regulation in the 13 states in which
SBC's wireline subsidiaries operated at December 31, 1999:
- -----------------------------------------------------------------------------------------------
Number of
Signed
Alternative Wireline Long Distance Application
State Regulation 1 Dialing Parity 2 Interconnection Status
Agreements 3
- -----------------------------------------------------------------------------------------------
Arkansas Yes Yes 66 Decision expected in 2000 4
- -------------------------------- ------------------- ---------------- ----------------------------
California Yes, through Yes 140 Decision expected in 2000 4
12/2001
- -------------------------------- ------------------- ---------------- ----------------------------
Connecticut Yes, through Yes 18 Long distance service
3/2001 provided 5
- -------------------------------- ------------------- ---------------- ----------------------------
Illinois Yes Yes 48 Filing planned in 2000 6
- -------------------------------- ------------------- ---------------- ----------------------------
Indiana Yes, interim Yes 45 Filing planned in 2000 6
- -------------------------------- ------------------- ---------------- ----------------------------
Kansas Yes Yes 60 Decision expected in 2000 4
- -------------------------------- ------------------- ---------------- ----------------------------
Michigan Yes Yes 27 Filing planned in 2000 6
- -------------------------------- ------------------- ---------------- ----------------------------
Missouri Yes Yes 74 Decision expected in 2000 4
- -------------------------------- ------------------- ---------------- ----------------------------
Nevada Yes Yes 31 Filing planned in 2000 6
- -------------------------------- ------------------- ---------------- ----------------------------
Ohio Yes Yes 51 Filing planned in 2000 6
- -------------------------------- ------------------- ---------------- ----------------------------
Oklahoma Pending Yes 74 Decision expected in 2000 4
- -------------------------------- ------------------- ---------------- ----------------------------
Texas Yes Yes 204 State approval received in
1999; FCC decision
expected in 2000
- -------------------------------- ------------------- ---------------- ----------------------------
Wisconsin Yes Yes 35 Filing planned in 2000 6
- -------------------------------- ------------------- ---------------- ----------------------------
Notes:
1 Alternative regulation is other than rate of return regulation.
2 In a January 1999 decision, the Supreme Court ruled that the FCC had the
authority to issue rules implementing intrastate and intraLATA dialing
parity. Dialing parity allows customers to subscribe to an intraLATA toll
carrier just as they do for long distance services.
3 Interconnection agreements are signed with CLECs for the purpose of allowing
the CLECs to exchange local calls with the incumbent telephone company and,
at the CLEC's option, to resell services and obtain unbundled network
elements.
4 Awaiting determination by state commissions on SBC's compliance with the
14-point competitive checklist. FCC approval is required subsequent to state
determination.
5 Restricted from providing interLATA long distance service originating in any
of the other 12 states in its 13-state area.
6 Will require approval by the state commission and the FCC.
The following presents highlights of certain regulatory developments:
Texas Long Distance Application In December 1999, the Texas Public Utility
Commission (TPUC) unanimously approved SWBell's interLATA long distance
application and formally declared that the local phone market in Texas is open
to competition, noting that SWBell has met the 14-point checklist requirements
of the Telecom Act. SWBell's long distance application was filed with the FCC in
January 2000 and the FCC has 90 days from that time to rule on the application.
Texas Legislation In May 1999, the Texas legislature adopted Senate Bill 560, as
amended. The bill, which became law on September 1, 1999, extends incentive
regulation indefinitely, provides more pricing flexibility on certain products
offered by SWBell, such as Caller ID, operator service and directory assistance,
and allows SWBell to package some services in ways attractive to customers. The
bill also required SWBell to reduce the intrastate switched access rate it
charges to long distance carriers by 1 cent on September 1, 1999 and by 2
additional cents on the earlier of either SWBell's entry into the long distance
market or July 1, 2000. The 2-cent reduction in intrastate access rates,
assuming a July 1, 2000 effective date, is expected to result in a reduction of
intrastate network access revenues of approximately $72 for 2000.
California Property Tax Investigation In 1992, PacBell entered into a settlement
with tax authorities and others, which fixed a specific methodology for valuing
utility property for tax purposes for a period of eight years. As a result, the
California Public Utilities Commission (CPUC) opened an investigation to
determine if any property tax savings that may result from the settlement
agreement should be returned by PacBell to its customers. In January 2000, the
CPUC ruled the property tax changes resulting from the settlement are not
subject to refund. This ruling is not expected to have a material effect on
SBC's financial position or results of operations.
California Ruling In December 1999, a CPUC administrative judge ruled that
PacBell must pay $44 in penalties and contact customers for potential refunds
for alleged overly aggressive and deceptive marketing practices related to
packages of enhanced services such as Caller ID and call forwarding. SBC
believes the findings in this decision are unwarranted and appealed the ruling
to the CPUC in January 2000.
Competition
Wireline
Competition continues to increase for telecommunications and information
services. Recent changes in legislation and regulation have increased the
opportunities for alternative communications service providers. Technological
advances have expanded the types and uses of services and products available. As
a result, SBC faces increasing competition as well as new opportunities in
significant portions of its business.
Recent state legislative and regulatory developments allow increased competition
for local exchange services. Companies wishing to provide competitive local
service have filed numerous applications with each of the state commissions
throughout SBC's 13-state area and the commission of each state has been
approving these applications since late 1995. Under the Telecom Act, companies
seeking to interconnect to SBC's wireline subsidiaries' networks and exchange
local calls must enter into interconnection agreements with SBC. These
agreements are then subject to approval by the appropriate state commission. SBC
has reached approximately 873 wireline interconnection agreements with
competitive local service providers, and most have been approved by the relevant
state commission. AT&T Corp. (AT&T), MCI and other competitors are reselling SBC
local exchange services, and as of December 31, 1999, there were approximately
1.6 million SBC access lines supporting services of resale competitors
throughout SBC's 13-state area, primarily in Texas, California and Illinois.
Many competitors have placed facilities in service and have begun advertising
campaigns and offering services. SBC also was granted facilities-based and
resale operating authority in certain territories served by other LECs and
expects to begin offering local exchange service to these areas in late 2000.
In California, the CPUC authorized facilities-based local services competition
effective January 1996 and resale competition effective March 1996. While the
CPUC has established local competition rules and interim prices, several issues
still remain to be resolved, including final rates for resale. PacBell has
incurred substantial costs implementing local competition and number
portability. In November 1998, the CPUC issued a decision authorizing PacBell to
recover local competition implementation costs and a proceeding is pending to
determine the amount of those costs that are recoverable. In June 1999, the CPUC
issued a ruling recategorizing certain PacBell services, including the
maintenance of inside wiring, calling card, collect and person to person calls
and the provisioning of directory assistance to interexchange carriers, as
competitive products thereby allowing greater pricing flexibility. In its
ruling, the CPUC approved an increase in the maximum price for both inside wire
repair services and interexchange directory assistance.
In Texas, the TPUC set rates in December 1997 that SWBell may charge for access
and interconnection to its telephone network. The TPUC decision set pricing for
dozens of network components and completed a consolidated arbitration between
SWBell and six of its wholesale customers, including AT&T and MCI.
In Illinois, the ICC approved Advantage Illinois in 1994, providing a framework
for regulating Ameritech by capping prices for noncompetitive services. In this
order, the ICC approved a price cap on the monthly line charge for residential
customers and residential calling rates within local calling areas for an
initial five year period that ended in October 1999. Per the order, an
application for review was submitted in March 1998. This review is pending. The
price cap on residential rates will remain in effect until the review is
completed or the price cap is overridden by legislation.
In Missouri, the Missouri Public Service Commission (MSC) issued orders on a
consolidated arbitration hearing with AT&T and MCI and in a separate arbitration
on selected items with Metropolitan Fiber Systems (which is now owned by MCI).
Among other terms, the orders established discount rates for resale of SWBell
services and prices for unbundled network elements. SWBell appealed the
interconnection agreement resulting from the first AT&T/MCI arbitration
proceeding in November 1997. A second arbitration process to address other
interconnection issues with AT&T has concluded, and the MSC ordered that a
conforming interconnection agreement be filed. SWBell appealed this second order
in April 1998. In a consolidated decision issued in August 1999, affecting both
appeals, a federal district court in Missouri affirmed most portions of the
MSC's orders, finding, among other things, that the MSC's pricing decisions were
not unlawful and remanding decisions on certain fiber and unbundling issues back
to the MSC. In September 1999, SWBell appealed this decision to the United
States Court of Appeals for the Eighth Circuit.
In Oklahoma, the Oklahoma Corporation Commission (OCC) approved a rule in
October 1999 creating alternative regulation for companies who opt into the
alternative regulation rule, including SWBell. Under the rule, which was
approved as an emergency rule and signed by the governor of Oklahoma, SWBell, in
order to opt into alternative regulation, was required to file an application
with the OCC for approval of its transition plan. The plan was approved by the
OCC in December 1999. When SWBell opts into the alternative regulation rule,
SWBell will be regulated under price cap regulation instead of rate of return
regulation. Under the emergency rule, SWBell plans to implement one element of
the transition plan, network infrastructure deployment, including DSL and switch
replacement. The cost of full deployment is currently estimated at $200 in total
capital expenditures over the next three years. Other items under SWBell's
transition plan will be implemented only if the Oklahoma legislature adopts the
alternative regulation rule and the rule becomes law. These other items include
promotional discounts on unbundled network elements provided to competitors,
pricing flexibility and ratepayer benefits. The ratepayer benefits include
SWBell's obligation to pay $30 into an education information technology fund as
well as waiver of the Oklahoma universal access fund surcharge for five years.
SWBell's current fund surcharge is approximately $2 annually and SWBell will pay
the current assessment into the fund even though it has waived collection of
this amount from customers. The OCC alternative regulation rule has been
submitted to the Oklahoma legislature for approval in the session that begins in
February 2000. If the rule is not approved into law, SWBell will not be
obligated to complete the infrastructure deployment and, at that time, will
determine if implementation will continue.
In Indiana, the Indiana Court of Appeals (Indiana Court) issued a decision in
October 1999 reversing a portion of the 1997 Indiana Utility Regulatory
Commission (IURC) Opportunity Indiana (OI) order, which had directed Ameritech
to reduce rates for basic residential and business services and remanded the
rate issue to the IURC. In addition, the Indiana Court affirmed the IURC's order
requiring Ameritech to comply with the infrastructure investment commitments
made in OI. Ameritech has sought rehearing of this portion of the Indiana
Court's decision. Ameritech will continue to operate under the other provisions
of the OI order and will continue charging basic local rates at current levels.
SBC's wireline subsidiaries expect increased competitive pressure in 2000 and
beyond from multiple providers in various markets, including facilities-based
CLECs, interexchange carriers and resellers. At this time, management is unable
to assess the effect of competition on the industry as a whole, or financially
on SBC, but expects both losses of market share in local service and gains
resulting from new business initiatives, vertical services and new service
areas. Competition also continues to intensify in SBC's intraLATA long distance
markets. For example, it is estimated that providers other than PacBell now
serve more than half of the business intraLATA long distance customers in
PacBell's service areas. In addition, intraLATA toll dialing parity, implemented
throughout SBC's 13-state area, will continue to increase competition in
intraLATA long distance markets.
Wireless
SBC's wireless subsidiaries currently provide analog and digital wireless
products and services to approximately 11.2 million customers across the nation,
making SBC one of the three largest wireless providers in the United States. SBC
offers service in 23 of the 35 largest United States' metropolitan areas.
Companies that were granted licenses in areas where SBC also provides wireless
service include subsidiaries and affiliates of AT&T, Sprint Corporation and
other RHCs. Significant competition from PCS providers exists in SBC's major
markets. Competition has been based upon both price and service packaging, such
as unlimited calling plans, and has contributed to SBC's decline in average
subscriber revenue per wireless customer.
Under the Telecom Act of 1996, SBC may offer interLATA long distance over its
wireless network both inside and outside the regulated operating areas. SBC has
entered the wireless long distance markets, and offers wireless long distance
service in all of its wireless service areas.
SBC also has state-approved interconnection agreements to receive reciprocal
compensation from interexchange carriers and other local service providers
accessing its wireless networks in all states where it provides wireless
services.
Information and Entertainment
SBC's directory subsidiaries face competition from over 100 publishers of
printed directories in their operating areas. Direct and indirect competition
also exists from other advertising media, including newspapers, radio,
television and direct mail providers, as well as from directories offered over
the Internet.
SBC's cable subsidiary offers cable television service in more than 80
communities in the Midwest and faces competition from other cable television
providers in those areas.
SBC's SecurityLink competes with other companies across North America as a
provider of security systems.
International
Telmex was granted a concession in 1990, which expired in August 1996, as the
sole provider of long distance services in Mexico. Several large competitors
have received licenses to compete with Telmex and have begun operations. As of
December 31, 1999, Telmex had approximately 84% of the long distance market in
Mexico. Telmex's share of international long distance traffic is expected to
decline significantly when the proportional return mechanism, which guarantees
Telmex the same percentage of incoming traffic as outgoing traffic, expires.
Mexican regulators postponed the elimination of the proportional return
mechanism, which had been scheduled for year-end 1999. The mechanism may expire
in 2000, but regulators have not yet provided a definitive time frame for the
expiration. Aggressive local competition is expected in 2000, primarily in the
business segment.
SBC has an investment in the Hungarian telecommunications company, MATAV. MATAV
provides domestic and international long distance telephone service throughout
Hungary and local telephone service in certain designated areas of Hungary.
MATAV has a concession agreement that provides for exclusivity until December
2001. There are discussions taking place with the Hungarian government to
shorten the exclusivity period; this would require MATAV's approval. Once the
exclusivity period expires, MATAV will experience aggressive competition,
especially in the domestic and international long distance markets.
Other Business Matters
New Accounting Standards In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), which will require all derivatives to be recorded on the
balance sheet at fair value, and will require changes in the fair value of the
derivatives to be recorded in net income or comprehensive income. FAS 133 must
be adopted for years beginning after June 15, 2000, with earlier adoption
permitted. SBC currently is evaluating the impact of the change in accounting
required by FAS 133, but is not able to quantify the effect at this time (see
Note 16 of Notes to Consolidated Financial Statements for a discussion of the
new accounting standard on software costs).
Acquisitions During 1999, SBC and Telmex each acquired a 50% interest in
Cellular Communications. The total transaction was valued at $827, including
assumption of approximately $370 in debt.
In November 1999, SBC announced it has agreed to acquire Radiofone, Inc.
(Radiofone) for approximately 8 million shares of SBC common stock. The
transaction is expected to be completed in the second quarter of 2000, pending
regulatory approvals. Radiofone serves more than 200,000 wireless customers in
Louisiana and Michigan and approximately 300,000 paging customers in 11 states.
In January 2000, SBC and Telmex acquired a stake in Brazilian wireless provider
ATL - Algar Telecom Leste S.A. (ATL), which serves customers in the Brazilian
states of Rio de Janeiro and Espirito Santo. As part of the transaction,
Williams Communications Group Inc. will reduce its stake to a 50% economic
interest in ATL. SBC and Telmex will have the opportunity to subsequently
increase their investment to a 50% stake in ATL, but cannot do so until 2004.
Until then, Algar Telecom retains an investment in ATL, as well as voting and
board control of ATL, in accordance with Brazilian regulations.
See Note 15 of Notes to Consolidated Financial Statements for a discussion of
the Comcast and Bell Canada acquisitions.
SBC's Year 2000 Project SBC performed a four-step methodology to address the
Year 2000 issue consisting of inventory and assessment, hardware and software
fixes, testing and deployment. All phases of the Year 2000 project were
completed by December 31, 1999. SBC's network and operating systems successfully
passed through the Year 2000 date change. Employees monitored the network and
supporting systems and experienced no Year 2000-related problems. SBC spent
approximately $475 on the entire project, with approximately $227 spent in 1999.
Liquidity and Capital Resources
SBC had $495 of cash and cash equivalents available at December 31, 1999.
Commercial paper borrowings as of December 31, 1999 totaled $2,623 out of $6
billion authorized. SBC has entered into agreements with several banks for
committed lines of credit totaling $2,880, all of which may be used to support
commercial paper borrowings (see Note 8 of Notes to Consolidated Financial
Statements). SBC had no borrowings outstanding under these lines of credit as of
December 31, 1999.
Cash From Operating Activities During 1999, as in 1998 and 1997, SBC's primary
source of funds continued to be cash generated from operations, as shown in the
Consolidated Statements of Cash Flows. Net cash provided by operating activities
exceeded SBC's construction and capital expenditures during 1999, 1998 and 1997;
this excess is referred to as free cash flow, a supplemental measure of
liquidity. SBC generated free cash flow of $6,274, $4,099 and $2,723 in 1999,
1998 and 1997.
In addition, SBC will incur additional expenses totaling approximately $2
billion in 2000 related to the FCC merger conditions, the merger initiatives,
including Project Pronto and obtaining approval to begin offering long distance.
Cash From Investing Activities To provide high-quality communications services
to its customers, SBC, particularly its wireline and wireless operations, must
make significant investments in property, plant and equipment. The amount of
capital investment is influenced by demand for services and products, continued
growth and regulatory commitments.
SBC's capital expenditures totaled $10,304, $8,882 and $8,856 for 1999, 1998 and
1997. Capital expenditures in the wireline segment increased by 17.2% in 1999
compared with 1998 due primarily to DSL, digital and broadband network upgrades,
capitalized software accounting rule changes and regulatory commitments. The
wireline segment's capital expenditures were relatively unchanged in 1998. The
wireless segment's capital expenditures were relatively unchanged in 1999 and
decreased in 1998 due primarily to completion of the 1997 initial build-out of
the PCS network and conversion of SBC's largest cellular markets to digital
during 1997.
See Note 15 of Notes to Consolidated Financial Statements for a discussion of
the acquisitions and dispositions.
In 2000, management expects total capital spending to be between $13 billion and
$14 billion. Capital expenditures in 2000 will be used to continue the evolution
of the wireline subsidiaries' networks, including amounts estimated for Project
Pronto, SBC's broadband initiative, and continued build-out of SBC's wireless
markets.
Cash From Financing Activities Dividends declared by the Board of Directors of
SBC were $0.975 per share in 1999, $0.935 per share in 1998, and $0.895 per
share in 1997. These per share amounts do not include dividends declared and
paid by Ameritech, SNET and PAC prior to their respective mergers. The total
dividends paid by SBC, Ameritech, SNET or PAC were $3,312 in 1999, $3,177 in
1998 and $3,015 in 1997. SBC's dividend policy considers both the expectations
and requirements of shareowners, internal requirements and long-term growth
opportunities.
In December 1999, SBC called approximately $31 of debt that was scheduled to
mature in December 2004. During 1999, subsequent to the completion of the
acquisitions of Comcast and Cellular Communications, SBC retired $1,415 of
Comcast's and Cellular Communications' long-term debt with no effect on net
income. In May 1999, SBC issued $750 of 6.25% unsecured Eurodollar notes, due
May 2009, with proceeds used to fund its investment in Bell Canada.
During 1998, SBC redeemed $2,789 of long-term debt, including mortgage bonds.
Also in 1998, SBC issued $2,150 of notes and debentures. In February 1998, SBC
also issued $750 of 5.88% unsecured Eurodollar notes, due February 2003, with
proceeds used primarily to fund its investment in Tele Danmark.
Total debt increased during 1997 due primarily to the issuance of medium-term
notes and debentures and debt redeemable either in cash or Telmex L shares.
In April 1998, an SBC subsidiary issued, through private placement, 3,250 shares
of stated rate auction preferred stock (STRAPS) in four separate series. Net
proceeds from these issuances totaled $322.
In June 1997 and December 1999, one of SBC's wholly owned subsidiaries issued
$250 and $100 of preferred stock in private placements. In January 2000, SBC's
Board of Directors authorized the repurchase of up to 100 million shares of
SBC's common stock.
SBC expects to fund ongoing capital expenditures, the repurchase of stock and
merger initiative expenses with cash provided by operations and incremental
borrowings.
Other SBC's total capital consists of debt (long-term debt and debt maturing
within one year), Trust Originated Preferred Securities and shareowners' equity.
Total capital increased $3,453 in 1999 and $3,292 in 1998. The increase in 1999
was due to 1999 earnings, partially offset by lower debt levels. The increase in
1998 was primarily due to 1998 earnings, partially offset by lower debt levels.
SBC's debt ratio was 42.9%, 47.3% and 54.9% at December 31, 1999, 1998 and 1997.
The debt ratio is affected by the same factors that affect total capital.
Market Risk
SBC is exposed to market risks primarily from changes in interest rates, foreign
currency exchange rates, and certain equity stock prices. In managing exposure
to these fluctuations, SBC may engage in various hedging transactions that have
been authorized according to documented policies and procedures. SBC does not
use derivatives for trading purposes, to generate income or to engage in
speculative activity. SBC's capital costs are directly linked to financial and
business risks. SBC seeks to manage the potential negative effects from market
volatility and market risk. The majority of SBC's financial instruments are
medium- and long-term fixed rate notes and debentures. Fluctuations in market
interest rates can lead to significant fluctuations in the fair value of these
notes and debentures. It is the policy of SBC to manage its debt structure and
foreign exchange exposure in order to manage capital costs, control financial
risks and maintain financial flexibility over the long term. Where appropriate,
SBC will take actions to limit the negative effect of interest and foreign
exchange rates, liquidity and counterparty risks on shareowner value.
Quantitative Information About Market Risk
- ------------------------------------------------------------------------
Foreign Exchange Risk Sensitivity Analysis
- ----------------------------------------------------------------------
U.S. Dollar Value Net Underlying
of Net Foreign Foreign Currency
Exchange Transaction
December 31, 1999 Contracts Exposures
- ----------------------------------------------------------------------
Total Exposure - Japanese Yen $ 142 $ 142
======================================================================
Note: There is no net exposed long/short currency position and no foreign
exchange loss from a 10% depreciation of the U.S. dollar.
The preceding table describes the effects of a change in the value of the
Japanese yen given a hypothetical 10% depreciation of the U.S. dollar. Since the
identified exposure is fully covered with forward contracts, changes in the
value of the U.S. dollar which affect the value of the underlying foreign
currency commitment are fully offset by changes in the value of the foreign
currency contract. If the underlying currency transaction exposure changed, the
resulting mismatch would expose the company to currency risk of the foreign
exchange contract. For this reason, all contracts are related to firm
commitments and matched by maturity and currency.
Interest Rate Sensitivity The principal amount by expected maturity, average
interest rate and fair value of SBC's liabilities that are exposed to interest
rate risk are described in Notes 8 and 9 of Notes to Consolidated Financial
Statements. Following are SBC's interest rate derivatives subject to interest
rate risk:
- ----------------------------------------------------------------------------------------------------
Maturity
- ----------------------------------------------------------------------------------------------------
Fair
After Value
2000 2001 2002 2003 2004 2004 Total 12/31/99
- ----------------------------------------------------------------------------------------------------
Interest Rate Derivatives
- ----------------------------------------------------------------------------------------------------
Interest Rate Swaps:
- ----------------------------------------------------------------------------------------------------
Receive Fixed/Pay Variable
Notional Amount - - $130 $315 $200 $150 $795 $(20)
Variable Rate Payable 1 6.3% 6.9% 7.0% 7.1% 7.1% 7.2%
Weighted Average Fixed
Rate Receivable 6.1% 6.1% 6.1% 6.1% 6.0% 6.0%
- ----------------------------------------------------------------------------------------------------
Receive Variable/Pay Fixed
Notional Amount $10 $120 $5 - - $250 $385 $6
Fixed Rate Payable 6.5% 6.5% 6.5% 6.5% 6.5% 6.5%
Weighted Average Variable
Rate Receivable 2 6.4% 7.0% 7.1% 7.1% 7.2% 7.3%
- ----------------------------------------------------------------------------------------------------
Lease Obligations:
- ----------------------------------------------------------------------------------------------------
Variable Rate Leases 3 - $42 - - $81 - $123 $123
Average Interest Rate 3 6.7% 7.1% 7.2% 7.3% 7.3% -
====================================================================================================
<FN>
1 Interest payable based on Three Month London Interbank Offer Rate (LIBOR)
plus or minus a spread.
2 Interest receivable based on Three Month Commercial Paper Index published by
Federal Reserve.
3 Average interest rate based on current and implied forward rates for One
Month LIBOR plus 30 basis points. The lease obligations require interest
payments only until maturity.
</FN>
In 1999, a $50 interest rate swap contract, linked to the variable rate debt,
matured and interest rate swap contracts of $13 linked to variable rate lease
obligations were exited with minimal effect on net income.
There has been no material change in the updated market risks since December 31,
1998.
Qualitative Information About Market Risk
Foreign Exchange Risk From time to time SBC makes investments in businesses in
foreign countries, is paid dividends, receives proceeds from sales or borrows
funds in foreign currency. Before making an investment, or in anticipation of a
foreign currency receipt, SBC often will enter into forward foreign exchange
contracts. The contracts are used to provide currency at a fixed rate. SBC's
policy is to measure the risk of adverse currency fluctuations by calculating
the potential dollar losses resulting from changes in exchange rates that have a
reasonable probability of occurring. SBC covers the exposure that results from
changes that exceed acceptable amounts. SBC does not speculate in foreign
exchange markets.
Equity Risk SBC has equity price risk exposure from certain outstanding employee
stock options linked to Vodafone AirTouch ADRs which are not significant (see
Note 13 of Notes to Consolidated Financial Statements).
Interest Rate Risk SBC issues debt in fixed and floating rate instruments.
Interest rate swaps are used for the purpose of controlling interest expense by
managing the mix of fixed and floating rate debt. SBC does not seek to make a
profit from changes in interest rates. SBC manages interest rate sensitivity by
measuring potential increases in interest expense that would result from a
probable change in interest rates. When the potential increase in interest
expense exceeds an acceptable amount, SBC reduces risk through the issuance of
fixed rate instruments and purchasing derivatives.
Cautionary Language Concerning Forward-Looking Statements
Information set forth in this report contains forward-looking statements that
are subject to risks and uncertainties. SBC claims the protection of the safe
harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
The following factors could cause SBC's future results to differ materially from
those expressed in the forward-looking statements:
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.
Readers are cautioned that other factors discussed in this report, although not
enumerated here, also could materially impact SBC's future earnings.
SBC Communications Inc.
Consolidated Statements of Income
Dollars in millions except per share amounts
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Operating Revenues
Landline local service $ 19,003 $ 17,196 $ 15,961
Wireless subscriber 5,851 5,265 4,852
Network access 10,094 9,575 9,491
Long distance service 3,456 3,673 3,616
Directory advertising 4,266 3,929 3,615
Other 6,819 6,569 5,571
- ----------------------------------------------------------------------------------------------------
Total operating revenues 49,489 46,207 43,106
- ----------------------------------------------------------------------------------------------------
Operating Expenses
Operations and support 29,338 27,143 27,727
Depreciation and amortization 8,553 7,841 7,777
- ----------------------------------------------------------------------------------------------------
Total operating expenses 37,891 34,984 35,504
- ----------------------------------------------------------------------------------------------------
Operating Income 11,598 11,223 7,602
- ----------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (1,430) (1,605) (1,550)
Equity in net income of affiliates 912 613 437
Other income (expense) - net (227) 1,884 49
- ----------------------------------------------------------------------------------------------------
Total other income (expense) (745) 892 (1,064)
- ----------------------------------------------------------------------------------------------------
Income Before Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Change 10,853 12,115 6,538
- ----------------------------------------------------------------------------------------------------
Income taxes 4,280 4,380 2,451
- ----------------------------------------------------------------------------------------------------
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change 6,573 7,735 4,087
- ----------------------------------------------------------------------------------------------------
Extraordinary items, net of tax 1,379 (60) -
Cumulative effect of accounting change, net of tax 207 15 -
- ----------------------------------------------------------------------------------------------------
Net Income $ 8,159 $ 7,690 $ 4,087
====================================================================================================
Earnings Per Common Share:
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change $ 1.93 $ 2.27 $ 1.21
Net Income $ 2.39 $ 2.26 $ 1.21
====================================================================================================
Earnings Per Common Share-Assuming Dilution:
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change $ 1.90 $ 2.24 $ 1.20
Net Income $ 2.36 $ 2.23 $ 1.20
====================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
SBC Communications Inc.
Consolidated Balance Sheets
Dollars in millions except per share amounts
- -----------------------------------------------------------------------------------------------------
December 31,
-------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 495 $ 599
Accounts receivable - net of allowances for uncollectibles of
$1,099 and $810 9,378 9,783
Prepaid expenses 651 843
Deferred income taxes 767 685
Other current assets 639 787
- -----------------------------------------------------------------------------------------------------
Total current assets 11,930 12,697
- -----------------------------------------------------------------------------------------------------
Property, Plant and Equipment - Net 46,571 44,194
- -----------------------------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated Amortization of
$1,325 and $1,111 6,796 5,161
- -----------------------------------------------------------------------------------------------------
Investments in Equity Affiliates 10,648 7,412
- -----------------------------------------------------------------------------------------------------
Other Assets 7,270 5,502
- -----------------------------------------------------------------------------------------------------
Total Assets $ 83,215 $ 74,966
- -----------------------------------------------------------------------------------------------------
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 3,374 $ 4,178
Accounts payable and accrued liabilities 15,103 13,253
Dividends payable 836 809
- ------------------------------------------------------------------------------------------------------
Total current liabilities 19,313 18,240
- ------------------------------------------------------------------------------------------------------
Long-Term Debt 17,475 17,170
- ------------------------------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 4,821 2,846
Postemployment benefit obligation 9,612 9,193
Unamortized investment tax credits 389 474
Other noncurrent liabilities 3,879 3,269
- ------------------------------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 18,701 15,782
- ------------------------------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable Preferred
Securities Of Subsidiary Trusts# 1,000 1,000
- ------------------------------------------------------------------------------------------------------
Shareowners' Equity
Preferred shares ($1 par value, 10,000,000 authorized: none issued) - -
Common shares ($1 par value, 7,000,000,000 authorized: issued
3,433,124,836 at December 31, 1999 and 3,433,762,063 at December 31, 1998) 3,433 3,434
Capital in excess of par value 12,453 12,439
Retained earnings 13,798 8,948
Guaranteed obligations of employee stock ownership plans (ESOP) (106) (261)
Deferred compensation - leveraged ESOP (LESOP) (73) (82)
Treasury shares (37,752,621 at December 31, 1999 and
28,217,018 at December 31, 1998, at cost) (1,717) (882)
Accumulated other comprehensive income (1,062) (822)
- ------------------------------------------------------------------------------------------------------
Total shareowners' equity 26,726 22,774
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 83,215 $ 74,966
======================================================================================================
<FN>
#The trusts contain assets of $1,030 in principal amount of the Subordinated Debentures of Pacific Telesis
Group.
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
SBC Communications Inc.
Consolidated Statements of Cash Flows
Dollars in millions, increase (decrease) in cash and cash equivalents
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 8,159 $ 7,690 $ 4,087
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,553 7,841 7,777
Undistributed earnings from investments in equity affiliates (471) (256) (172)
Provision for uncollectible accounts 1,136 896 938
Amortization of investment tax credits (85) (96) (115)
Deferred income tax expense 1,061 840 553
Gain on sale of Telecom Corporation of New Zealand shares - (1,543) -
Extraordinary items, net of tax (1,379) 60 -
Cumulative effect of accounting change, net of tax (207) (15) -
Changes in operating assets and liabilities:
Accounts receivable (731) (2,257) (1,281)
Other current assets 335 310 (661)
Accounts payable and accrued liabilities 2,054 1,175 1,994
Other - net (1,847) (1,664) (1,541)
- -------------------------------------------------------------------------------------------------------------
Total adjustments 8,419 5,291 7,492
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 16,578 12,981 11,579
- -------------------------------------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (10,304) (8,882) (8,856)
Investments in affiliates 51 (77) (29)
Purchase of short-term investments (26) (42) (916)
Proceeds from short-term investments 31 355 1,029
Dispositions 4,867 2,727 1,000
Acquisitions (5,198) (3,261) (2,190)
Other 2 11 13
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (10,577) (9,169) (9,949)
- -------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (787) (589) (761)
Issuance of other short-term borrowings - 2 1,079
Repayment of other short-term borrowings - (8) (805)
Issuance of long-term debt 738 2,890 2,246
Repayment of long-term debt (2,301) (2,860) (999)
Early extinguishment of debt and related call premiums (31) (765) (6)
Purchase of fractional shares - - (15)
Issuance of common shares 313 464 308
Issuance of preferred shares 103 322 250
Purchase of treasury shares (1,169) (498) (87)
Issuance of treasury shares 318 308 293
Dividends paid (3,287) (3,131) (2,966)
Other (2) 3 13
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (6,105) (3,862) (1,450)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (104) (50) 180
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 599 649 469
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Year $ 495 $ 599 $ 649
=============================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
SBC Communications Inc.
Consolidated Statements of Shareowners' Equity
Dollars and shares in millions except per share amounts
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Common Stock
Balance at beginning of year 3,434 $ 3,434 3,428 $ 3,428 3,430 $ 3,430
Purchase of shares (8) (8) (13) (13) (25) (25)
Issuance of shares 7 7 19 19 23 23
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year 3,433 $ 3,433 3,434 $ 3,434 3,428 $ 3,428
===============================================================================================================
Capital in Excess of Par Value
Balance at beginning of year $ 12,439 $ 12,375 $ 12,468
Purchase of shares (398) (487) (576)
Issuance of shares 215 370 406
Other 197 181 77
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year $ 12,453 $ 12,439 $ 12,375
===============================================================================================================
Retained Earnings
Balance at beginning of year $ 8,948 $ 4,429 $ 3,338
Net income ($2.39, $2.26 and $1.21 per share) 8,159 7,690 4,087
Dividends to shareowners
($0.975, $0.935 and $0.895 per share) (3,312) (3,177) (3,015)
Other 3 6 19
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year $ 13,798 $ 8,948 $ 4,429
===============================================================================================================
Guaranteed Obligations of ESOP
Balance at beginning of year $ (261) $ (409) $ (535)
Reduction of debt associated with ESOP 155 148 126
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year $ (106) $ (261) $ (409)
===============================================================================================================
Deferred Compensation - LESOP
Balance at beginning of year $ (82) $ (119) $ (161)
Cost of LESOP trust shares allocated to employees 9 37 42
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year $ (73) $ (82) $ (119)
===============================================================================================================
Treasury Shares
Balance at beginning of year (28) $ (882) (30) $ (730) (41) $ (985)
Purchase of shares (23) (1,169) (12) (498) (3) (87)
Issuance of shares 13 334 14 346 14 335
Other - - - - - 7
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year (38) $ (1,717) (28) $ (882) (30) $ (730)
===============================================================================================================
Accumulated Other Comprehensive Income,
net of tax
Balance at beginning of year $ (822) $ (1,111) $ (821)
Foreign currency translation adjustment,
net of taxes of $290, $37 and $(38) (336) 224 (287)
Reclassification adjustment to net income for
cumulative translation adjustment on securities sold - 56 -
Unrealized gains (losses) on available-for-sale securities 113 69 (3)
Less reclassification adjustment for gains
included in net income (17) (60) -
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (240) 289 (290)
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year $ (1,062) $ (822) $ (1,111)
===============================================================================================================
Total Comprehensive Income
Net income $ 8,159 $ 7,690 $ 4,087
Other comprehensive income (loss) per above (240) 289 (290)
- ---------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 7,919 $ 7,979 $ 3,797
===============================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Note 1. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include the
accounts of SBC Communications Inc. and its majority-owned subsidiaries
(SBC). The statements reflect mergers of SBC's subsidiaries with Pacific
Telesis Group (PAC), Southern New England Telecommunications Corporation
(SNET) and Ameritech Corporation (Ameritech) as poolings of interests (see
Note 2). SBC's subsidiaries and affiliates operate in the communications
services industry, providing wireline and wireless telecommunications
services and equipment, directory advertising, electronic security services
and cable television services both domestically and worldwide.
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
SBC's year end.
The preparation of financial statements in conformity with United States'
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Certain amounts in prior period financial statements have been
reclassified to conform to the current year's presentation.
Income Taxes - Deferred income taxes are provided for temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.
Investment tax credits earned prior to their repeal by the Tax Reform Act of
1986 are amortized as reductions in income tax expense over the lives of the
assets which gave rise to the credits.
Cash Equivalents - Cash and cash equivalents include all highly liquid
investments with original maturities of three months or less and the
carrying amounts approximate fair value.
Deferred Charges - Directory advertising costs are deferred until the
directory is published and advertising revenues related to these costs are
recognized.
Revenue Recognition/Cumulative Effect of Accounting Change - SBC recognizes
revenues as earned. Certain revenues derived from local telephone and
wireless services are billed monthly in advance and are recognized the
following month when services are provided. Revenues derived from other
telecommunications services, principally network access, long distance and
wireless airtime usage, are recognized monthly as services are provided.
Ameritech's directory publishing subsidiary, prior to January 1, 1999, and
SNET prior to January 1, 1998, 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, for Ameritech and January 1, 1998, for
SNET the accounting was changed to the "issue basis" method of accounting,
which recognizes the revenues and expenses at the time the related directory
is published. The change in methodology was made because the issue basis
method is generally followed in the publishing industry, including by SBC's
other directory subsidiaries and better reflects the operating activity of
the business. The cumulative after-tax effect of applying the changes in
method to prior years was recognized as of January 1, 1999 and 1998 as
one-time, non-cash gains of $207, or $0.06 per share and $15, or $0.01 per
share, net of deferred taxes of $125 and $11. Had the current method been
applied during prior periods, income before extraordinary items and
cumulative effect of accounting change would not have been materially
affected.
Notes to Consolidated Financial Statements, continued
Dollars in millions except per share amounts
Property, Plant and Equipment - Property, plant and equipment is stated at
cost. The cost of additions and substantial improvements to property, plant
and equipment is capitalized. The cost of maintenance and repairs of
property, plant and equipment is charged to operating expenses. Property,
plant and equipment is depreciated using straight-line methods over their
estimated economic lives, generally ranging from 3 to 50 years. Certain
subsidiaries follow composite group depreciation methodology; accordingly,
when a portion of their depreciable property, plant and equipment is retired
in the ordinary course of business, the gross book value is charged to
accumulated depreciation; no gain or loss is recognized on the disposition
of this plant.
Intangible Assets - Intangible assets consist primarily of wireless cellular
and Personal Communications Services (PCS) licenses, customer lists and the
excess of consideration paid over net assets acquired in business
combinations. These assets are being amortized using the straight-line
method, over periods generally ranging from 5 to 40 years. At December 31,
1999 and 1998, amounts included in net intangible assets for licenses were
$3,713 and $2,660. Management periodically reviews the carrying value and
lives of all intangible assets based on expected future cash flows.
Advertising Costs - Costs for advertising products and services or corporate
image are expensed as incurred.
Foreign Currency Translation - Local currencies generally are considered the
functional currency for SBC's share of foreign investments, except in
countries considered highly inflationary. SBC translates its share of
foreign assets and liabilities at current exchange rates. Revenues and
expenses are translated using average rates for the year. The resulting
foreign currency translation adjustments are recorded as a separate
component of accumulated other comprehensive income. Other transaction gains
and losses resulting from exchange rate changes on transactions denominated
in a currency other than the local currency are included in earnings as
incurred.
Derivative Financial Instruments - SBC does not invest in derivatives for
trading purposes. From time to time, as part of its risk management
strategy, SBC uses derivative financial instruments, including interest rate
swaps, to hedge exposures to interest rate risk on debt obligations, and
foreign currency forward exchange contracts to hedge exposures to changes in
foreign currency rates for transactions related to its foreign investments.
Derivative contracts are entered into for hedging of firm commitments only.
SBC currently does not recognize the fair values of these derivative
financial investments or their changes in fair value in its financial
statements. Interest rate swap settlements are recognized as adjustments to
interest expense in the consolidated statements of income when paid or
received. Foreign currency forward exchange contracts are set up to coincide
with firm commitments. Gains and losses are deferred until the underlying
transaction being hedged occurs, and then are recognized as part of that
transaction (see Note 9).
Note 2. Completion of Mergers
In October 1999, SBC and Ameritech completed the merger of an SBC subsidiary
with Ameritech in a transaction in which each share of Ameritech common
stock was exchanged for 1.316 shares of SBC common stock (equivalent to
approximately 1,446 million shares). Ameritech became a wholly owned
subsidiary of SBC effective with the merger and the transaction has been
accounted for as a pooling of interests and a tax-free reorganization.
Financial statements for prior periods have been restated to include the
accounts of Ameritech. Transaction costs related to the merger were $77 ($48
net of tax). Of this total $25 ($16 net of tax) is included in expenses in
1999 and $52 ($32 net of tax) in 1998.
Operating revenues, income before extraordinary items and cumulative effect
of accounting change and net income of the separate companies on a
pre-merger basis for the last three periods are presented below:
-------------------------------------------------------------------------------------------
Nine Months
Ended
September 30, Year Ended December 31,
---------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
Operating revenues:
SBC $ 22,477 $ 28,777 $ 26,681
Ameritech 13,912 17,154 15,998
Adjustments 203 276 427
-------------------------------------------------------------------------------------------
Combined $ 36,592 $ 46,207 $ 43,106
===========================================================================================
Income before extraordinary items and
cumulative effect of accounting change:
SBC $ 3,569 $ 4,068 $ 1,674
Ameritech 1,438 3,606 2,296
Adjustments (161) 61 117
-------------------------------------------------------------------------------------------
Combined $ 4,846 $ 7,735 $ 4,087
===========================================================================================
Net income:
SBC $ 3,569 $ 4,023 $ 1,674
Ameritech 1,645 3,606 2,296
Adjustments (161) 61 117
-------------------------------------------------------------------------------------------
Combined $ 5,053 $ 7,690 $ 4,087
===========================================================================================
Combined results include the effect of retroactively conforming accounting
methodologies between SBC and Ameritech. Among other items, non-cash
adjustments were made to conform accounting for pension and postretirement
benefits between the companies and to immediately expense certain items
routinely deferred and amortized by Ameritech, including sales commissions
and leased customer security and paging equipment. The pension and
postretirement adjustments include the effects of conforming the adoption
date for postretirement accounting, methods of recognizing actuarial gains
and conforming the estimate methods used related to the current year's
benefit plans.
In October 1998, SBC and SNET completed the merger of an SBC subsidiary with
SNET in a transaction in which each share of SNET common stock was exchanged
for 1.7568 shares of SBC common stock (equivalent to approximately 120
million shares). SNET became a wholly owned subsidiary of SBC effective with
the merger, and the transaction was accounted for as a pooling of interests
and a tax-free reorganization.
In April 1997, SBC and PAC completed the merger of an SBC subsidiary with
PAC in a transaction in which each outstanding share of PAC common stock was
exchanged for 1.4629 shares of SBC common stock (equivalent to approximately
626 million shares). With the merger, PAC became a wholly owned subsidiary
of SBC. The transaction was accounted for as a pooling of interests and a
tax-free reorganization.
Post-Merger Initiatives
Upon completion of each merger, SBC performed an evaluation and review of
operations throughout the merged company. These reviews included the
formation of teams that performed comprehensive evaluations of companywide
operations (review teams). Based on these merger integration reviews,
certain strategic decisions were made and significant integration of
operations and consolidation of some administrative and support functions
occurred resulting in one-time charges. The following table summarizes the
charges incurred for each merger related to these reviews and decisions:
--------------------------------------------- --- ----------- --- --------- -- ---------
Pre-tax charges Ameritech SNET PAC
--------------------------------------------- --- ----------- --- --------- -- ---------
Reorganization $ 582 $ 82 $ 839
Impairments/asset valuation 690 321 965
Wireless conversion 220 - -
Regulatory and legal 164 - 165
Merger approval costs 31 - 281
Other items and estimates of other
obligations 79 - -
Pacific and Southwestern video
curtailment/purchase commitments - - 698
--------------------------------------------- --- ----------- --- --------- -- ---------
Total one-time charges $ 1,766 $ 403 $ 2,948
============================================= === =========== === ========= == =========
After-tax charges Ameritech SNET PAC
--------------------------------------------- --- ----------- --- --------- -- ---------
Reorganization $ 379 $ 50 $ 517
Impairments/asset valuation 472 199 667
Wireless conversion 143 - -
Regulatory and legal 102 - 101
Merger approval costs 19 - 176
Other items and estimates of other
obligations 342 - -
Pacific and Southwestern video
curtailment/purchase commitments - - 438
--------------------------------------------- --- ----------- --- --------- -- ---------
Total one-time charges $ 1,457 $ 249 $ 1,899
============================================= === =========== === ========= == =========
One-time charges incurred in the third and fourth quarter of 1999 totaled
$1,766 ($1,457 net of tax). These charges included costs related to various
regulatory and legal issues, merger approval costs and other related costs
of $274 ($174 net of tax). In addition, these charges included costs related
to strategic decisions reached by the review teams of $1,492 ($1,283 net of
tax) in 1999. Charges in the fourth quarter of 1998 for the SNET merger and
the second quarter of 1997 for the PAC merger of $403 ($249 net of tax) and
$2 billion ($1.3 billion net of tax) also related to the strategic decisions
reached by the review teams. At December 31, 1999, 1998 and 1997, remaining
accruals for anticipated cash expenditures related to the PAC and SNET
decisions were approximately $52, $323 and $432. Anticipated cash
expenditures related to the decisions for the Ameritech merger totaled $703
at December 31, 1999.
Reorganization - SBC is centralizing several key functions that will support
the wireline operations including network planning, strategic marketing and
procurement. It also is consolidating a number of corporatewide support
activities, including research and development, information technology,
financial transaction processing and real estate management. These
initiatives continue to result in the creation of some jobs and the
elimination and realignment of others, with many of the affected employees
changing job responsibilities and in some cases assuming positions in other
locations.
SBC recognized net charges of approximately $582 ($379 net of tax) during
the fourth quarter of 1999, $82 ($50 net of tax) during the fourth quarter
of 1998 and $839 ($517 net of tax) during 1997 in connection with these
initiatives. The charges were comprised mainly of postemployment benefits,
primarily related to severance, and costs associated with closing duplicate
operations, primarily contract cancellations. Other charges arising out of
the mergers related to relocation, retraining and other effects of
consolidating certain operations are being recognized in the periods those
charges are incurred. The fourth quarter 1999 charge is net of $45 ($29 net
of tax) of reversals of accruals made in connection with the SNET and PAC
mergers that were related to plans now superseded by the current
reorganization plans.
Impairments/Asset Valuation - As a result of SBC's merger integration plans,
strategic review of domestic operations and organizational alignments, SBC
reviewed the carrying values of the long-lived assets in the third and
fourth quarter of 1999, the fourth quarter of 1998 and the second quarter of
1997. The reviews were conducted companywide, although the 1998 review
focused primarily on SNET and the 1999 review focused primarily on
Ameritech. These reviews included estimating remaining useful lives and cash
flows and identifying assets to be abandoned. Where this review indicated
impairment, fair market values, including, in some cases, discounted cash
flows as an estimate of fair value, related to those assets were analyzed to
determine the amount of the impairment. As a result of these reviews, SBC
wrote off certain assets and recognized impairments to the value of other
assets with a combined charge of $690 ($472 net of tax) in the third and
fourth quarter of 1999, $321 ($199 net of tax) in the fourth quarter of 1998
and $965 ($667 net of tax) in the second quarter of 1997.
The 1999 adjustments include an impairment of $300 ($224 net of tax) related
to Ameritech's security business. This impairment adjustment, taken as a
reduction in goodwill of $300, reflects a reduction of the investment to
fair market value based upon the value of comparable businesses. In
connection with this adjustment, SBC shortened the estimated life of the
remaining goodwill on the security business from 40 to 15 years. As a result
of these adjustments, SBC estimates amortization expense will increase by
$10 to $15 annually for the remaining life of the goodwill. Also in 1999,
SBC performed a review of the allowance for doubtful accounts at the
Ameritech subsidiaries and recognized a charge of $212 ($135 after tax).
This charge resulted from adjusting Ameritech's estimation methods to the
method utilized by SBC. Other 1999 adjustments consist primarily of
valuation adjustments on certain analog switching equipment at Ameritech and
certain cost investments.
The 1998 impairments and writeoffs primarily related to recognition of an
impairment of the assets supporting SNET's video and telephony operations,
and also included charges for required changes in wireless equipment,
inventory and sites. The 1997 impairments and writeoffs related primarily to
the wireless digital television operations in southern California, certain
analog switching equipment in California, certain rural and other
telecommunications equipment in Nevada, selected wireless equipment,
duplicate or obsolete equipment, cable within commercial buildings in
California, certain nonoperating plant and other assets.
Wireless Conversion - In December 1999, Ameritech notified its wireless
customers that the current wireless network platform (Code Division Multiple
Access or CDMA) would be converted to the network platform utilized by SBC
(Time Division Multiple Access or TDMA). As part of the conversion, SBC sold
the CDMA network assets and is leasing it back over the conversion period. A
charge of $220 ($143 net of tax) was recognized in the fourth quarter to
recognize the loss on the sale and leaseback and to replace the customers'
CDMA handsets.
Other Items and Estimates of Other Obligations - SBC performed reviews of
Ameritech's and PAC's accounting operations and applied consistent
accounting techniques between the merging companies. As a result, SBC
recognized charges in 1999 and 1997 related to the impact of several
regulatory and legal rulings of $164 ($102 net of tax) and $165 ($101 net of
tax). Also in 1997, SBC recognized a charge of $281 ($176 net of tax) for
PAC merger approval costs. In 1999 SBC incurred a charge of $31 ($19 net of
tax) for Ameritech merger approval costs. In 1999 charges for deferred taxes
on Ameritech's international investments of $289, net charges related to the
routine deferral of certain costs and revenues by Ameritech of $62 ($40
after tax) and other miscellaneous items of $17 ($13 net of tax) were
recognized.
Pacific and Southwestern Video Curtailment/Purchase Commitments - SBC also
announced in 1997 that it was scaling back its limited direct investment in
video services in the areas also served by Pacific Bell Telephone Company
(PacBell) and Southwestern Bell Telephone Company (SWBell). As a result of
this curtailment, SBC halted construction on the Advanced Communications
Network (ACN) in California. As part of an agreement with the ACN vendor,
SBC paid the liabilities of the ACN trust that owned and financed ACN
construction, incurred costs to shut down all construction previously
conducted under the trust and received certain consideration from the
vendor. In the second quarter of 1997, SBC recognized net expense of $553
($346 net of tax) associated with these activities. During the third quarter
of 1997, SBC recorded the corresponding short-term debt of $610 previously
incurred by the ACN trust on its balance sheet.
Additionally, SBC curtailed certain other video-related activities including
discontinuing its broadband network video trials in Richardson, Texas, and
San Jose, California, substantially scaling back its involvement in the
Tele-TV joint venture and withdrawing its operations in territory served by
SWBell from the Americast venture. During 1999, SBC negotiated a settlement
with its Americast partners related to the withdrawal. The settlement did
not have a material impact on SBC's financial condition or results of
operations. The collective impact of these decisions and actions by SBC
resulted in a charge of $145 ($92 net of tax) in the second quarter of 1997.
Note 3. Subsidiary Financial Information
SBC has not provided separate financial statements and other disclosures for
PAC as management has determined that such information is not material to
the holders of the Trust Originated Preferred Securities (TOPrS) (see Note
9), which have been guaranteed by SBC. See Note 7 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 at December 31, or for the year then ended:
------------------------------------------------------------------------------------
PAC 1999 1998 1997
------------------------------------------------------------------------------------
Balance Sheets
Current assets $ 3,022 $ 3,037 $ 2,835
Noncurrent assets 15,334 15,428 14,150
Current liabilities 4,944 5,278 4,513
Noncurrent liabilities 10,284 10,482 10,413
====================================================================================
Income Statements
Operating revenues $ 11,747 $ 11,305 $ 10,101
Operating income (loss) 2,866 2,612 (166)
Income (loss) before extraordinary loss and
cumulative effect of accounting changes 1,521 1,240 (546)
Net income (loss) 1,303 1,180 (224)
=====================================================================================
SBC has not provided separate financial statements and other disclosures for
SWBell or PacBell as management has determined that such information is not
material to the holders of certain SWBell and PacBell outstanding debt
securities, which have been guaranteed by SBC. See Note 7 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 1999 1998 1997
--------------------------------------------------------------------------------------------
Balance Sheets
Current assets $ 2,453 $ 2,538 $ 2,452
Noncurrent assets 13,978 13,241 12,562
Current liabilities 5,127 4,679 3,686
Noncurrent liabilities 8,403 7,838 8,310
============================================================================================
Income Statements
Operating revenues $ 11,173 $ 10,752 $ 10,116
Operating income 2,815 2,794 2,192
Income before cumulative effect of accounting change 1,540 1,527 1,187
Net income 1,267 1,527 1,187
============================================================================================
--------------------------------------------------------------------------------------------
PacBell 1999 1998 1997
--------------------------------------------------------------------------------------------
Balance Sheets
Current assets $ 2,318 $ 2,431 $ 2,337
Noncurrent assets 13,620 12,662 12,002
Current liabilities 4,539 4,445 3,599
Noncurrent liabilities 8,680 7,388 7,953
============================================================================================
Income Statements
Operating revenues $ 9,718 $ 9,406 $ 8,726
Operating income 2,259 2,299 483
Income before extraordinary loss and
cumulative effect of accounting changes 1,161 1,137 -
Net income 151 1,077 345
============================================================================================
Note 4. Earnings Per Share
A reconciliation of the numerators and denominators of basic earnings per
share and diluted earnings per share for income before extraordinary items
and cumulative effect of accounting change for the years ended December 31,
1999, 1998 and 1997 are shown in the table below:
-------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------
Numerators
Numerator for basic earnings per share:
Income before extraordinary items and
cumulative effect of accounting change $ 6,573 $ 7,735 $ 4,087
Dilutive potential common shares:
Other stock-based compensation 4 4 3
-------------------------------------------------------------------------------------------
Numerator for diluted earnings per share $ 6,577 $ 7,739 $ 4,090
===========================================================================================
Denominators
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding (000,000) 3,409 3,406 3,391
Dilutive potential common shares
(000,000):
Stock options 42 38 25
Other stock-based compensation 7 6 4
-------------------------------------------------------------------------------------------
Denominator for diluted earnings per share 3,458 3,450 3,420
===========================================================================================
Basic earnings per share
Income before extraordinary items and
cumulative effect of accounting change $ 1.93 $ 2.27 $ 1.21
Extraordinary items 0.40 (0.02) -
Cumulative effect of accounting change 0.06 0.01 -
-------------------------------------------------------------------------------------------
Net income $ 2.39 $ 2.26 $ 1.21
===========================================================================================
Diluted earnings per share
Income before extraordinary items and
cumulative effect of accounting change $ 1.90 $ 2.24 $ 1.20
Extraordinary items 0.40 (0.02) -
Cumulative effect of accounting change 0.06 0.01 -
-------------------------------------------------------------------------------------------
Net income $ 2.36 $ 2.23 $ 1.20
===========================================================================================
Note 5. Property, Plant and Equipment
Property, plant and equipment is summarized as follows at December 31:
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
Land $ 589 $ 590
Buildings 10,284 10,269
Central office equipment 43,335 40,874
Cable, wiring and conduit 48,785 46,499
Other equipment 11,241 9,626
Under construction 2,098 1,920
--------------------------------------------------------------------------
116,332 109,778
Accumulated depreciation and amortization 69,761 65,584
--------------------------------------------------------------------------
Property, plant and equipment-net $ 46,571 $ 44,194
==========================================================================
SBC's depreciation expense as a percentage of average depreciable plant was
7.4%, 7.2% and 7.4% for 1999, 1998 and 1997.
Certain facilities and equipment used in operations are leased under
operating or capital leases. Rental expenses under operating leases for
1999, 1998 and 1997 were $707, $683 and $606. At December 31, 1999, the
future minimum rental payments under noncancelable operating leases for the
years 2000 through 2004 were $366, $304, $220, $160 and $165 and $623
thereafter. Capital leases are not significant.
In October 1999, as the first post-Ameritech merger initiative, SBC launched
an initiative to provide advanced broadband services to many of its United
States wireline customers (Project Pronto) over the next three years. Since
the launch of Project Pronto, SBC has incurred $20 ($13 net of tax) related
to network placement costs. The launch of Project Pronto and the Federal
Communications Commission's recent rulings on data services and unbundled
network element pricing led SBC to review and evaluate the carrying value of
its network plant in its traditional wireline operations in the fourth
quarter of 1999 and determine that an impairment did not exist. Project
Pronto will result in the migration of certain customers to new network
services. As this migration occurs, SBC will monitor, review and assess both
the carrying value and economic useful lives of the currently existing
network facilities. This assessment may result in an impairment of the
future carrying value of the existing facilities or the shortening of some
of its economic lives. Should that occur, material charges to future
operations in the wireline segment may be required.
Note 6. Equity Investments
Investments in equity affiliates are accounted for under the equity method
and include the June 1999 purchase of a 20% interest of Bell Canada, the
largest supplier of telecommunications services in Canada, and the 1998
acquisition of a 41.6% equity interest of Tele Danmark A/S (Tele Danmark),
the national communications provider in Denmark (see Note 15). SBC currently
is able to elect six of twelve members of the Tele Danmark Board of
Directors, including the Chairman, who would cast any tie-breaking vote.
Investments in equity affiliates also includes SBC's investment in Telefonos
de Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications
company. SBC is a member of a consortium that holds all of the AA shares of
Telmex stock, representing voting control of the company. Another member of
the consortium, Carso Global Telecom, S.A. de C.V., has the right to appoint
a majority of the directors of Telmex. SBC also owns L shares which have
limited voting rights. Throughout 1999, 1998 and 1997, SBC sold portions of
its L shares mainly in response to open market share repurchases by Telmex,
so that its total equity investment remained below 10% of Telmex's total
equity capitalization. At December 31, 1999 and 1998 SBC held an approximate
8.9% and 9.8% equity interest in Telmex.
Other major equity investments held by SBC include a 17.5% interest in
Belgacom S.A. (Belgacom), the national communications provider in Belgium,
an 18% interest in Telkom SA Limited (Telkom), the state-owned
telecommunications company of South Africa, a 29.8% interest in MATAV, the
national communications provider in Hungary, a 15% interest in Cegetel, a
joint venture providing a broad range of telecommunications offerings in
France and minority ownership of several domestic wireless properties.
The following table is a reconciliation of SBC's investments in equity
affiliates:
-------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------
Beginning of year $ 7,412 $ 4,453 $ 4,226
Additional investments 3,702 3,159 1,076
Equity in net income 912 613 437
Dividends received (445) (344) (254)
Currency translation adjustment (707) 169 (476)
Reclassifications and other adjustments (226) (638) (556)
-------------------------------------------------------------------------------------
End of year $ 10,648 $ 7,412 $ 4,453
=====================================================================================
The currency translation adjustment for 1999 primarily reflects the effect
of exchange rate fluctuations on SBC's investment in Tele Danmark and
Belgacom. Other adjustments for 1999 reflect the sale of Telmex L shares and
the sale of SBC's investment in Chile.
The currency translation adjustment for 1998 primarily reflects the effect
of exchange rate fluctuations on SBC's investment in Tele Danmark partially
offset by exchange rate fluctuations on SBC's investment in Telkom. Other
adjustments for 1998 reflect the sale of Telecom Corporation of New Zealand
Limited (TCNZ) shares, a write-down of an international investment and the
sale of Telmex L shares.
Currency translation adjustments for 1997 primarily reflect the effect of
the exchange rate fluctuations on SBC's investments in Telkom, Belgacom and
MATAV. Other adjustments for 1997 reflect the sale of Telmex L, TCNZ and
MATAV shares, and the change to the cost method of accounting for SBC's 1995
investment in Mobile Telephone Networks (MTN), which was sold during the
third quarter of 1998 (see Note 15).
Undistributed earnings from equity affiliates were $1,788 and $1,317 at
December 31, 1999 and 1998.
The following table presents summarized financial information of significant
investments accounted for using the equity method taking into account all
adjustments necessary to conform to United States' generally accepted
accounting principles, but excluding SBC's purchase adjustments including
goodwill, at December 31, or for the year then ended:
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
Income Statements
Operating revenues $ 32,776 $ 24,232 $ 21,293
Operating income 8,941 6,383 5,254
Net income 4,892 3,515 2,327
============================================================================
Balance Sheets
Current assets $ 13,961 $ 9,793
Noncurrent assets 40,616 29,675
Current liabilities 13,395 12,323
Noncurrent liabilities 23,376 13,500
============================================================================
At December 31, 1999, SBC had goodwill, net of accumulated amortization, of
approximately $5.9 billion related to investments in equity affiliates.
Based on the December 31, 1999 quoted market price, the aggregate market
value of SBC's investment in Tele Danmark was approximately $6.8 billion and
MATAV was approximately $2.2 billion. SBC's investment in Telmex consists of
both publicly traded and nonpublicly traded securities and therefore does
not have a quoted market price. SBC's weighted average share of operating
revenues shown above was 19% in 1999 and 1998 and 17% in 1997.
Note 7. Segment Information
SBC's segments are strategic business units that offer different products
and services and are managed accordingly. SBC evaluates performance based on
income before income taxes adjusted for normalizing (i.e. one-time) items.
Transactions between segments are reported at fair value and the accounting
policies of the segments are the same as those described in Note 1.
As a result of the merger with Ameritech and to better reflect the broadened
scope of its operations, SBC adjusted its segment reporting structure in
1999. SBC now has four reportable segments that reflect the current
management of its business: wireline, wireless, information and
entertainment, and 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 expands on what was previously the directory segment,
and includes all directory operations of the combined company including
advertising, yellow pages, white pages and electronic publishing and
Ameritech's electronic security and cable television operations. All
international investment operations have been removed from the other segment
and are shown separately in the international segment. The miscellaneous
items that formerly were included in the other segment are immaterial and
have been moved to corporate, adjustments and eliminations.
Normalized results in 1999 include the following adjustments:
o After-tax charges totaling $1.5 billion including, among other items,
recognition of impairment of long-lived assets, adjustments to the
estimate of allowance for doubtful accounts, estimation of deferred
taxes on international investments, wireless conversion costs and other
items as discussed in Note 2.
o Elimination of income of $119 from the incremental impacts of
overlapping wireless properties sold in October 1999.
o After-tax pension settlement gains of $368 associated with lump sum
pension payments that exceeded the projected service and interest costs.
o After-tax gains of $77 recognized from the sale of property by an
international equity affiliate.
o An after-tax reduction of $27 of a portion of a first quarter 1998
charge to cover the cost of consolidating security monitoring centers
and company-owned wireless retail stores.
For 1998, normalizing items included the following items:
o After-tax gain of $1,012 for the sale of TCNZ shares.
o After-tax charges of $268 related to strategic initiatives resulting
from the merger integration process with SNET.
o After-tax gains of $219 from the sale of certain non-core businesses,
principally the required disposition of SBC's investment in MTN, a
cellular company in South Africa.
o Elimination of income of $123 from the incremental impacts of
overlapping wireless properties sold in October 1999.
o After-tax gain of $102 from the sale of certain telephone and
directory assets.
o After-tax charge of $64 to cover the cost of consolidating security
monitoring centers and company-owned wireless retail stores.
Normalizing items in 1997 included the following adjustments:
o After-tax charges of $1.6 billion related to strategic initiatives
resulting from the merger integration process with PAC.
o After-tax charge of $87 for SBC's share of the costs of a work force
restructuring at Belgacom.
o After-tax charges of $304 for ongoing merger integration costs (see
Note 2).
o After-tax first quarter settlement gains of $90 at PAC associated
with lump sum pension payments that exceeded the projected service and
interest costs for 1996 retirements.
o Elimination of income of $88 from the incremental impacts of
overlapping wireless properties sold in October 1999.
o After-tax gain of $58 from the sale of SBC's interests in Bell
Communications Research, Inc.
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.
Segment results, including a reconciliation to SBC consolidated results, for
1999, 1998 and 1997 are as follows:
- ----------------------------------------------------------------------------------------------------------------
Information Corporate,
At December 31, 1999 or for and Adjustments Normalizing
the year ended Wireline Wireless Entertainment International & Eliminations Adjustments Total
- ----------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 37,254 $ 6,759 $ 4,686 $ 137 $ 124 $ 529 $ 49,489
Intersegment revenues 322 5 91 10 (428) - -
Depreciation and
amortization 6,826 927 194 17 174 415 8,553
Equity in net income of
affiliates (2) 42 - 739 2 131 912
Interest expense 1,188 227 53 312 (362) 12 1,430
Income before income taxes 8,052 918 1,641 706 364 (828) 10,853
Segment assets 53,692 11,593 4,015 12,615 1,300 - 83,215
Investment in equity method
investees 31 216 48 10,372 (19) - 10,648
Expenditures for additions
to long-lived assets 8,754 988 232 1 329 - 10,304
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Information Corporate,
At December 31, 1998 or for and Adjustments Normalizing
the year ended Wireline Wireless Entertainment International & Eliminations Adjustments Total
- ----------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 35,114 $ 5,628 $ 4,263 $ 132 $ 186 $ 884 $ 46,207
Intersegment revenues 305 1 82 17 (405) - -
Depreciation and
amortization 6,440 707 201 18 150 325 7,841
Equity in net income of
affiliates (6) 25 - 588 6 - 613
Interest expense 1,250 189 42 282 (179) 21 1,605
Income before income taxes 7,318 564 1,590 453 435 1,755 12,115
Segment assets 50,948 9,183 4,193 11,230 (588) - 74,966
Investment in equity method
investees 47 244 34 7,106 (19) - 7,412
Expenditures for additions
to long-lived assets 7,471 978 193 13 227 - 8,882
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Information Corporate,
At December 31, 1997 or for and Adjustments Normalizing
the year ended Wireline Wireless Entertainment International & Eliminations Adjustments Total
- ----------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 33,282 $ 5,022 $ 3,728 $ 103 $ 298 $ 673 $ 43,106
Intersegment revenues 374 1 91 19 (485) - -
Depreciation and
amortization 6,158 607 149 18 145 700 7,777
Equity in net income of
affiliates (4) 9 - 528 (9) (87) 437
Interest expense 1,198 165 54 104 (16) 45 1,550
Income before income taxes 6,558 372 1,350 512 375 (2,629) 6,538
Expenditures for additions
to long-lived assets 7,314 1,066 238 2 236 - 8,856
================================================================================================================
Geographic Information
SBC's investments outside of the United States are primarily accounted for
under the equity method of accounting and do not record in operating
revenues and expenses the revenues and expenses of the individual companies
in which SBC invests. Specifically, less than 1% of total operating revenues
for all years presented are from outside the United States. Long-lived
assets outside the United States consist primarily of the book value of
these investments:
---------------------------------------------------------
December 31, 1999 1998
---------------------------------------------------------
United States $ 48,924 $ 45,493
Canada 3,770 -
Denmark 3,019 3,401
Mexico 906 836
Belgium 831 892
South Africa 708 694
Hungary 532 534
France 459 557
Other foreign countries 129 199
---------------------------------------------------------
Total $ 59,278 $ 52,606
=========================================================
Note 8. Debt
Long-term debt of SBC and its subsidiaries, including interest rates and
maturities, is summarized as follows at December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Notes and debentures
4.37%-6.00% 1999-2007 1 $ 3,056 $ 3,366
6.03%-7.85% 1999-2048 2 13,990 13,568
8.00%-10.50% 1999-2031 577 646
----------------------------------------------------------------------------
17,623 17,580
Unamortized discount-net of premium 236 (101)
----------------------------------------------------------------------------
Total notes and debentures 17,859 17,479
----------------------------------------------------------------------------
Guaranteed obligations of ESOP 3
8.10%-9.40% 2000 88 164
----------------------------------------------------------------------------
Capitalized leases 258 268
----------------------------------------------------------------------------
Total long-term debt, including current maturities 18,205 17,911
Current maturities (730) (741)
----------------------------------------------------------------------------
Total long-term debt $ 17,475 $ 17,170
============================================================================
<FN>
1 Includes $250 of 5.9% debentures maturing in 2038 with a put option by holder in 2005.
2 Includes $125 of 6.35% debentures maturing in 2026 with a put option by holder in 2006.
3 See Note 12.
</FN>
At December 31, 1999, the aggregate principal amounts of long-term debt and
weighted average interest rate scheduled for repayment for the years 2000
through 2004 were $730 (6.4%), $1,466 (6.7%), $1,107 (6.6%), $1,722 (6.0%),
$1,154 (6.5%) with $11,790 (6.9%) due thereafter. As of December 31, 1999,
SBC was in compliance with all covenants and conditions of instruments
governing its debt. Substantially all of SBC's outstanding long-term debt is
unsecured.
In January 2000, SBC guaranteed existing publicly issued debt securities
issued by Ameritech Capital Funding Corporation, Illinois Bell Telephone
Company, Indiana Bell Telephone Company, Inc., Michigan Bell Telephone
Company, The Ohio Bell Telephone Company, PacBell, Southern New England
Telecommunications Corporation, The Southern New England Telephone Company,
SWBell and Wisconsin Bell, Inc. Each guarantee will apply as long as the
individual company remains a wholly owned subsidiary of SBC.
Financing Activities - In December 1999, SBC called approximately $31 of
debt that was scheduled to mature in December 2004. The net income effect of
retiring this debt did not materially impact SBC's financial statements.
During 1999, subsequent to the completion of the acquisitions of Comcast
Cellular Corporation (Comcast) and Cellular Communications of Puerto Rico,
Inc. (Cellular Communications), SBC retired $1,415 of Comcast's and Cellular
Communications' long-term debt with no effect on net income. In May 1999,
SBC issued $750 of 6.25% unsecured Eurodollar notes, due May 2009.
In 1998, SBC issued approximately $2,150 in notes and debentures. The notes
and debentures bear interest rates ranging from 5.65% to 6.88% and mature
between 2001 and 2048. Also, in 1998, SBC issued $750 of 5.88% unsecured
Eurodollar notes, due February 2003. SBC used proceeds from these borrowings
primarily to fund its investment in Tele Danmark.
Debt maturing within one year consists of the following at December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Commercial paper $ 2,623 $ 3,412
Current maturities of long-term debt 730 741
Other short-term debt 21 25
----------------------------------------------------------------------------
Total $ 3,374 $ 4,178
============================================================================
The weighted average interest rate on commercial paper debt at December 31,
1999 and 1998 was 5.72% and 5.43%. SBC has entered into agreements with
several banks for committed lines of credit totaling $2,880 all of which may
be used to support commercial paper borrowings. SBC had no borrowings
outstanding under these lines of credit as of December 31, 1999 or 1998.
Note 9. Financial Instruments
The carrying amounts and estimated fair values of SBC's long-term debt,
including current maturities, and other financial instruments, are
summarized as follows at December 31:
---------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------------
Notes and debentures $ 17,859 $ 17,086 $ 17,479 $ 18,656
TOPrS 1,000 924 1,000 1,029
Preferred stock of subsidiaries 820 820 717 717
Guaranteed obligations of ESOP1 88 94 164 169
=============================================================================================
<FN>
1 See Note 12.
</FN>
The fair values of SBC's notes and debentures, including ESOP obligations,
were estimated based on quoted market prices, where available, or on the net
present value method of expected future cash flows using current interest
rates. The fair value of the TOPrS was estimated based on quoted market
prices. The carrying amounts of preferred stock of subsidiaries and
commercial paper debt approximate fair values. SBC's short-term investments
and customer deposits are recorded at amortized cost and the carrying
amounts approximate fair values.
Preferred Stock Issuances by Subsidiaries - In April 1998, an SBC subsidiary
issued through private placement 3,250 shares of stated rate auction
preferred stock (STRAPS). Net proceeds from these issuances totaled $322.
Dividends accrue on the STRAPS at varying rates, which are adjusted
periodically through separate auctions on each series. Dividends are
cumulative from the date of issuance. The dividend rates for each series
ranged from 4.39% to 5.05% as of December 31, 1999.
In June 1997 and December 1999, one of SBC's wholly owned subsidiaries
issued $250 and $100 of preferred stock in private placements. The holders
of the preferred stock may require SBC's subsidiary to redeem the shares
after May 20, 2004. Holders receive quarterly dividends based on a rolling
three-month London Interbank Offer Rate (LIBOR). The dividend rate for the
December 31, 1999 payment was 6.28%.
As of December 31, 1999, a wholly owned subsidiary had outstanding $85 of
Series A Preferred Stock (7.04%, subject to mandatory redemption in 2001)
and $60 of Series B Preferred Stock (variable rate, 4.60% as of December 31,
1999, not subject to mandatory redemption).
The preferred stock of subsidiaries discussed above is included in other
noncurrent liabilities on the consolidated balance sheet.
Pacific Telesis Financing I and II (the Trusts) were formed in 1996 for the
exclusive purpose of issuing preferred and common securities representing
undivided beneficial interests in the Trusts and investing the proceeds from
the sales of TOPrS in unsecured subordinated debt securities of PAC. Under
certain circumstances, dividends on TOPrS could be deferred for up to a
period of five years. As of December 31, 1999, the Trusts held subordinated
debt securities of PAC in principal amounts of $516 and $514 with interest
rates of 7.56% and 8.50%. The TOPrS are priced at $25 per share, have an
original 30-year maturity that may be extended up to 49 years, are callable
in 2001 at par and are included on the balance sheet as
corporation-obligated mandatorily redeemable preferred securities of
subsidiary trusts. The proceeds were used to retire short-term indebtedness,
primarily commercial paper. SBC has guaranteed payment of the obligations of
the TOPrS.
Derivatives - SBC enters into foreign currency contracts to hedge exposure
to adverse exchange risk. SBC also uses interest rate swaps to manage
interest rate exposure. Related gains and losses are reflected in net
income. The carrying amounts and estimated fair values of SBC's derivative
financial instruments are summarized as follows at December 31:
---------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------------
Carrying/ Carrying/
Notional Fair Notional Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------------
Foreign exchange contracts-long $ - $ 142 $ - $ -
Foreign exchange contracts-short - - - 765
Interest rate swaps 1,180 (14) 458 (27)
Equity swaps - - 13 26
=============================================================================================
Prior to its merger with an SBC subsidiary, PAC issued stock options to its
employees during a spinoff of certain wireless properties. Some of these
options were still outstanding when PAC merged with an SBC subsidiary in
1997 (see Note 13). SBC had used equity swaps to hedge the equity price risk
related to these spunoff operations employee stock options. However, in 1999
SBC evaluated the related risk level and exited all of its related equity
swap contracts, receiving cash for the appreciated value of the contracts
and recognizing a minimal gain.
Note 10. Income Taxes
Significant components of SBC's deferred tax liabilities and assets are as
follows at December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Depreciation and amortization $ 6,865 $ 6,104
Equity in foreign affiliates 540 457
Deferred directory expenses 524 383
Other 1,254 216
----------------------------------------------------------------------------
Deferred tax liabilities 9,183 7,160
----------------------------------------------------------------------------
Employee benefits 2,418 2,416
Currency translation adjustments 586 333
Allowance for uncollectibles 222 168
Unamortized investment tax credits 147 132
Other 1,850 1,631
----------------------------------------------------------------------------
Deferred tax assets 5,223 4,680
----------------------------------------------------------------------------
Deferred tax assets valuation allowance 99 143
----------------------------------------------------------------------------
Net deferred tax liabilities $ 4,059 $ 2,623
============================================================================
The decrease in the valuation allowance is the result of an evaluation of
the uncertainty associated with the realization of certain deferred tax
assets. The valuation allowance is maintained in deferred tax assets for
certain unused federal and state loss carryforwards.
The components of income tax expense are as follows:
---------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Federal:
Current $ 2,883 $ 3,151 $ 1,781
Deferred-net 814 671 363
Amortization of investment tax credits (85) (96) (115)
---------------------------------------------------------------------------
3,612 3,726 2,029
---------------------------------------------------------------------------
State and local:
Current 421 485 232
Deferred-net 247 169 190
---------------------------------------------------------------------------
668 654 422
---------------------------------------------------------------------------
Total $ 4,280 $ 4,380 $ 2,451
===========================================================================
A reconciliation of income tax expense and the amount computed by applying
the statutory federal income tax rate (35%) to income before income taxes,
extraordinary items and cumulative effect of accounting change is as
follows:
--------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------
Taxes computed at federal statutory rate $ 3,798 $ 4,240 $ 2,288
Increases (decreases) in income taxes resulting from:
Amortization of investment tax credits over the life of
the plant that gave rise to the credits (55) (62) (75)
State and local income taxes-net of federal income tax benefit 440 424 274
Other-net 97 (222) (36)
--------------------------------------------------------------------------------------------------
Total $ 4,280 $ 4,380 $ 2,451
==================================================================================================
Note 11. Employee Benefits
Pensions - Substantially all employees of SBC are covered by one of various
noncontributory pension and death benefit plans. Management employees
participate in either cash balance or defined lump sum pension plans. The
pension benefit formula for most nonmanagement employees is based on a flat
dollar amount per year according to job classification. Most employees can
elect to receive their pension benefits in either lump sum or annuity.
SBC's objective in funding the plans, in combination with the standards of
the Employee Retirement Income Security Act of 1974 (as amended), is to
accumulate funds sufficient to meet its benefit obligations to employees
upon their retirement. Contributions to the plans are made to a trust for
the benefit of plan participants. Plan assets consist primarily of stocks,
U.S. government and domestic corporate bonds, index funds and real estate.
Effective with the Ameritech merger, SBC performed a midyear valuation for
all pension plans. The amounts that follow reflect the impacts and
assumptions of the midyear valuation.
The following table presents the change in the pension plan benefit
obligation for the years ended December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Benefit obligation at beginning of the year $ 27,528 $ 26,235
Service cost - benefits earned during the
period 584 548
Interest cost on projected benefit obligation 1,831 1,813
Amendments 460 224
Actuarial (gain)/loss (1,121) 1,170
Special termination benefits 32 53
Benefits paid (3,629) (2,515)
----------------------------------------------------------------------------
Benefit obligation at end of year $ 25,685 $ 27,528
============================================================================
The following table presents the change in pension plan assets for the years
ended December 31 and the pension plans' funded status at December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Fair value of plan assets at beginning of the
year $ 41,794 $ 38,703
Actual return on plan assets 8,065 5,593
Benefits paid (3,901) (2,502)
----------------------------------------------------------------------------
Fair value of plan assets at end of year 1 $ 45,958 $ 41,794
============================================================================
Funded status $ 20,273 $ 14,266
Unrecognized prior service cost 1,898 1,653
Unrecognized net gain (17,926) (12,487)
Unamortized transition asset (1,036) (1,352)
----------------------------------------------------------------------------
Prepaid pension cost $ 3,209 $ 2,080
============================================================================
1 Plan assets include SBC common stock of $34 at December 31, 1999 and $71
at December 31, 1998.
The following table presents amounts recognized in SBC's Consolidated
Balance Sheets at December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Prepaid pension cost $ 3,539 $ 2,512
Accrued pension liability (330) (432)
----------------------------------------------------------------------------
Net amount recognized $ 3,209 $ 2,080
============================================================================
Net pension cost is composed of the following:
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Service cost - benefits earned during the
period $ 584 $ 548 $ 481
Interest cost on projected benefit obligation 1,831 1,813 1,789
Expected return on plan assets (2,951) (2,722) (2,527)
Amortization of prior service cost (35) (57) (69)
Recognized actuarial gain (273) (161) (157)
-----------------------------------------------------------------------------------------
Net pension benefit $ (844) $ (579) $ (483)
=========================================================================================
Significant weighted-average assumptions used in developing pension
information include:
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------
Discount rate for determining projected benefit obligation 7.75% 7.0% 7.2%
Long-term rate of return on plan assets 8.50% 8.5% 8.5%
Composite rate of compensation increase 4.25% 4.2% 4.2%
==============================================================================================
The projected benefit obligation is the actuarial present value of all
benefits attributed by the pension benefit formula to previously rendered
employee service. It is measured based on assumptions concerning future
interest rates and employee compensation levels. Should actual experience
differ from the actuarial assumptions, the benefit obligation will be
affected.
In April 1997, management amended the SBC Pension Benefit Plan to a cash
balance pension plan effective June 1, 1997. Under the new plan,
participants accrue benefits based on a percentage of pay plus interest. In
addition, a transition benefit is phased in over five years. The new plan
also requires computation of a grandfathered benefit using the old formula
for five years. Participants receive the greater of the cash balance benefit
or the grandfathered benefit. The new cash balance plan allows lump sum
benefit payments in addition to annuities. This change did not have a
significant impact on SBC's net income for 1997.
During 1997, a significant amount of lump sum pension payments resulted in a
partial settlement of PAC's pension plans. Therefore, net settlement gains
in the amount of $299 were recognized in 1997. Of this amount, $152 was
recognized in the first quarter of 1997 and related primarily to managers
who terminated employment in 1996. These gains are not included in the net
pension cost shown in the table above.
In addition to the net periodic benefit costs reported in the above tables,
SBC recognized $566 in net settlement gains in the fourth quarter of 1999.
These settlement gains resulted from a significant amount of lump sum
pension payments that caused a partial settlement of Ameritech's pension
plans. SBC is currently evaluating whether additional lump sum payments will
require the recognition of additional settlement gains in 2000.
In December 1999, under the provisions of Section 420 of the Internal
Revenue Code, SBC transferred $280 in pension assets to a health care
benefit account for the reimbursement of retiree health care benefits paid
by SBC.
Supplemental Retirement Plans - SBC also provides senior and middle
management employees with nonqualified, unfunded supplemental retirement and
savings plans. These plans include supplemental defined pension benefits as
well as compensation deferral plans, some of which include a corresponding
match by SBC based on a percentage of the compensation deferral. Expenses
related to these plans were $146, $114 and $97 in 1999, 1998 and 1997.
Liabilities of $1,287 and $1,022 related to these plans have been included
in other noncurrent liabilities in SBC's Consolidated Balance Sheets at
December 31, 1999 and 1998.
Postretirement Benefits - SBC provides certain medical, dental and life
insurance benefits to substantially all retired employees under various
plans and accrues actuarially determined postretirement benefit costs as
active employees earn these benefits. SBC's postretirement benefit cost in
1998 and 1997 for certain plans reflects an estimate of potential future
cost sharing by retirees. SBC maintains Voluntary Employee Beneficiary
Association trusts to fund postretirement benefits. Assets consist
principally of stocks and U.S. government and corporate bonds.
The following table sets forth the change in the benefit obligation for the
years ended December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Benefit obligation at beginning of the year $ 15,489 $ 12,978
Service cost - benefits earned during the period 260 193
Interest cost on projected benefit obligation 1,050 904
Amendments (2) 2,008
Actuarial (gain)/loss (515) 109
Benefits paid (771) (703)
----------------------------------------------------------------------------
Benefit obligation at end of year $ 15,511 $ 15,489
============================================================================
The following table sets forth the change in plan assets for the years ended
December 31 and the plans' funded status at December 31:
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Fair value of plan assets at beginning of the
year $ 6,869 $ 5,583
Actual return on plan assets 1,199 1,114
Employer contribution 93 442
Benefits paid (290) (270)
----------------------------------------------------------------------------
Fair value of plan assets at end of year 1 $ 7,871 $ 6,869
============================================================================
Funded status $ (7,640) $ (8,620)
Unrecognized prior service cost 960 1,119
Unrecognized net gain (2,460) (1,245)
----------------------------------------------------------------------------
Accrued postretirement benefit obligation $ (9,140) $ (8,746)
============================================================================
1 Plan assets include SBC common stock of $10 at December 31, 1999 and 1998.
Postretirement benefit cost is composed of the following:
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 260 $ 193 $ 187
Interest cost on accumulated postretirement
benefit obligation (APBO) 1,050 904 876
Expected return on assets (504) (419) (351)
Amortization of prior service cost 157 (260) (280)
Recognized actuarial gain (13) (12) (27)
------------------------------------------------------------------------------------
Postretirement benefit cost $ 950 $ 406 $ 405
====================================================================================
The fair value of plan assets restricted to the payment of life insurance
benefits was $1,277 and $1,323 at December 31, 1999 and 1998. At December
31, 1999 and 1998, the accrued life insurance benefits included in the APBO
benefit obligation were $540 and $322.
The assumed medical cost trend rate in 2000 is 8.0%, decreasing linearly to
5.0% in 2006, prior to adjustment for cost-sharing provisions of the medical
and dental plans for active and certain recently retired employees. The
assumed dental cost trend rate in 2000 is 5.5%, reducing to 5.0% in 2002. A
one percentage-point change in the assumed health care cost trend rate would
have the following effects:
----------------------------------------------------------------------------
One Percentage- One Percentage-
Point Increase Point Decrease
----------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 186 $ 148
Effect on postretirement
benefit obligation 1,632 1,402
----------------------------------------------------------------------------
Significant assumptions for the discount rate, long-term rate of return on
plan assets and composite rate of compensation increase used in developing
the APBO and related postretirement benefit costs were the same as those
used in developing the pension information. Due to the Ameritech merger, a
midyear valuation also was performed for all postretirement benefit plans.
Note 12. Other Employee Benefits
Employee Stock Ownership Plans - SBC maintains contributory savings plans
that cover substantially all employees. Under the savings plans, SBC matches
a stated percentage of eligible employee contributions, subject to a
specified ceiling.
SBC has six leveraged ESOPs as part of the existing savings plans. Two of
the ESOPs were funded with notes issued by the savings plans to various
lenders, the proceeds of which were used to purchase shares of SBC's common
stock in the open market. These notes are unconditionally guaranteed by SBC
and therefore presented as a reduction to shareowners' equity and an
increase in long-term debt. They will be repaid with SBC contributions to
the savings plans, dividends paid on SBC shares and interest earned on funds
held by the ESOPs.
One ESOP purchased PAC treasury shares in exchange for a promissory note
from the plan to PAC. Since PAC is the lender, this note is not reflected as
a liability and the remaining cost of unallocated trust shares is carried as
a reduction of shareowners' equity. Principal and interest on the note are
paid from employer contributions and dividends received by the trust. All
PAC shares were exchanged for SBC shares effective with the merger April 1,
1997. The provisions of the ESOP were unaffected by this exchange. Another
ESOP acquired SNET shares with the proceeds of notes issued by the savings
plans, which SNET guaranteed, through a third party. The SNET common stock
was acquired through open market purchases in exchange for a promissory note
from the plan to SNET. SNET periodically makes cash payments to the ESOP
that, together with dividends received on shares held by the ESOP, are used
to make interest and principal payments on both loans. All SNET shares were
exchanged for SBC shares effective with the merger October 26, 1998. The
provisions of the ESOP were unaffected by this exchange.
Two ESOPs were funded with notes issued by the savings plans which Ameritech
guaranteed, the proceeds of which were used to purchase, at fair market
value, shares of Ameritech common stock held in treasury. As a result of
Ameritech's unconditional guarantee, the notes are presented as a reduction
to shareowners' equity and an increase in long-term debt. Ameritech
periodically made cash payments that, together with dividends received on
shares held by the ESOPs, were used to make interest and principal payments
on the loan. All Ameritech shares were exchanged for SBC shares effective
with the merger on October 8, 1999. The provisions of the ESOP were
unaffected by this exchange.
SBC's match of employee contributions to the savings plans is fulfilled with
shares of stock allocated from the ESOPs and with purchases of SBC's stock
in the open market. Shares held by the ESOPs are released for allocation to
the accounts of employees as employer-matching contributions are earned.
Benefit cost is based on a combination of the contributions to the savings
plans and the cost of shares allocated to participating employees' accounts.
Both benefit cost and interest expense on the notes are reduced by dividends
on SBC's shares held by the ESOPs and interest earned on the ESOPs' funds.
Information related to the ESOPs and the savings plans is summarized below:
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Benefit expense-net of dividends and interest income $ 90 $ 77 $ 73
Interest expense-net of dividends and interest income 10 25 36
-----------------------------------------------------------------------------------------
Total expense $ 100 $ 102 $ 109
=========================================================================================
Company contributions for ESOPs $ 104 $ 142 $ 141
=========================================================================================
Dividends and interest income for debt service $ 75 $ 100 $ 104
=========================================================================================
SBC shares held by the ESOPs are summarized as follows at December 31:
-----------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------
Unallocated 16,030,695 24,501,561
Allocated to participants 101,257,366 95,069,009
-----------------------------------------------------------------------------------------
Total 117,288,061 119,570,570
=========================================================================================
Note 13. Stock-Based Compensation
Under various SBC plans, senior and other management employees and
non-employee directors have received stock options, stock appreciation
rights (SARs), performance stock units and nonvested stock units. Stock
options issued through December 31, 1999 carry exercise prices equal to the
market price of the stock at the date of grant and have maximum terms
ranging from five to ten years. Beginning in 1994 and ending in 1999,
certain Ameritech employees were awarded grants of nonqualified stock
options with dividend equivalents. Depending upon the grant, vesting of
stock options may occur up to four years from the date of grant. Performance
stock units are granted to key employees based upon the common stock price
at date of grant and are awarded in the form of common stock and cash at the
end of a two- or three-year period, subject to the achievement of certain
performance goals. Nonvested stock units are valued at market price of the
stock at date of grant and vest over a three- to five-year period. Up to 310
million shares may be issued under these plans.
SBC measures compensation cost for these plans using the intrinsic
value-based method of accounting as allowed in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123). Accordingly, no compensation cost for SBC's stock option plans has
been recognized. Had compensation cost for stock option plans been
recognized using the fair value-based method of accounting at the date of
grant for awards in 1999, 1998 and 1997 as defined by FAS 123, SBC's net
income would have been $7,969, $7,537 and $3,962, and basic net income per
share would have been $2.34, $2.21 and $1.17. The compensation cost that has
been charged against income for SBC's other stock-based compensation plans
totaled $36, $83 and $65 for 1999, 1998 and 1997.
For purposes of these pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period.
The fair value for these options was estimated at the date of grant, using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: risk-free interest rate
of 5.31%, 5.69% and 6.47%; dividend yield of 1.65%, 2.38% and 2.98%;
expected volatility factor of 15%, 18% and 19%; and expected option life of
4.5, 5.0 and 4.9 years.
As of December 31, 1998, 29,390 shares of nonperformance-based restricted
stock issued to Ameritech employees were outstanding under the Ameritech
plans. Shareowners' equity reflects deferred compensation for the unvested
stock awarded. This amount was reduced and charged against operations
(together with any change in market price) as the employees vested in the
stock. All restricted stock under Ameritech plans vested as a result of the
Ameritech merger with an SBC subsidiary in 1999.
Information related to options and SARs is summarized below:
------------------------------------------------------------------------------------------------
Weighted-
Average Exercise
Number Price
------------------------------------------------------------------------------------------------
Outstanding at January 1, 1997 126,464,343 $20.03
Granted 56,229,919 25.52
Exercised (27,891,733) 18.49
Forfeited/Expired (10,567,550) 22.85
------------------------------------------------------------------------------
Outstanding at December 31, 1997
(60,656,487 exercisable at weighted-average price of $19.36) 144,234,979 22.27
Granted 34,516,726 39.46
Exercised (25,767,038) 20.61
Forfeited/Expired (6,747,545) 29.64
------------------------------------------------------------------------------
Outstanding at December 31, 1998
(73,187,564 exercisable at weighted-average price of $20.85) 146,237,122 26.26
Granted 26,139,492 48.70
Exercised (19,095,315) 23.13
Forfeited/Expired (4,118,769) 39.06
------------------------------------------------------------------------------
Outstanding at December 31, 1999
(116,276,298 exercisable at weighted-average price of $26.91) 149,162,530 $30.24
================================================================================================
Information related to options and SARs outstanding at December 31, 1999:
------------------------------------------- ------------- -------------- ------------- -------------
Exercise Price Range $10.90-$17.39 $17.40-$29.99 $30.00-$35.49 $35.50-$59.00
------------------------------------------- ------------- -------------- ------------- -------------
Number of options and SARs:
Outstanding 13,145,846 82,990,276 9,845,528 43,180,880
Exercisable 13,145,846 74,948,465 9,845,528 18,336,459
Weighted-average exercise price:
Outstanding $15.07 $23.93 $34.16 $46.10
Exercisable $15.07 $23.53 $34.16 $45.30
Weighted-average remaining contractual life 3.93 years 6.29 years 8.30 years 8.83 years
=========================================== ============= ============== ============= =============
The weighted-average, grant-date fair value of each option granted during
1999, 1998 and 1997 was $9.31, $8.71 and $5.36.
As of December 31, additional shares available under stock options with
dividend equivalents were 1,526,514 in 1999, 1,505,625 in 1998 and 1,325,201
in 1997.
Options and SARs held by the continuing employees of PAC at the time of the
AirTouch Communications, Inc. (AirTouch) spinoff were supplemented with an
equal number of options and SARs for common shares of spunoff operations.
The exercise prices for outstanding options and SARs held by continuing
employees of PAC were adjusted downward to reflect the value of the
supplemental spunoff operations' options and SARs. The balance sheet
reflects a related liability equal to the difference between the current
market price of spunoff operations stock and the exercise prices of the
supplemental options outstanding. The spunoff operations options and SARs
have been adjusted for Vodafone's acquisition of AirTouch and for Vodafone's
five-for-one stock split in 1999. As of December 31, 1999, 404,825
supplemental spunoff operations options and SARs were outstanding with
expiration dates ranging from 2000 to 2003. Outstanding options and SARs
that were held by employees of the wireless operations at the spinoff date
were replaced by options and SARs for common shares of spunoff operations.
The spunoff operations assumed liability for these replacement options and
SARs.
Note 14. Shareowners' Equity
From time to time, SBC repurchases shares of common stock for distribution
or to offset shares distributed through its employee benefit plans or in
certain acquisitions. In 1999, the Board of Directors approved the
repurchase of approximately 23 million shares of SBC's common stock, which
has been completed.
In January 2000, SBC's Board of Directors authorized the repurchase of up to
100 million shares of SBC's common stock.
Note 15. Acquisitions and Dispositions
Acquisitions - In July 1999, SBC completed the acquisition of Comcast, the
wireless subsidiary of Comcast Corporation, in a transaction valued at
approximately $1.8 billion, including assumption of $1.4 billion in debt.
With the acquisition, SBC added approximately 862,000 wireless subscribers
in Pennsylvania, Delaware, New Jersey and Illinois.
In June 1999, SBC acquired 20% of Bell Canada, a subsidiary of BCE Inc.
(BCE), a publicly traded Canadian communications company, for approximately
$3.4 billion. As part of the investment, SBC has the option to sell its
shares to BCE at fair market value plus 25% in 2002 and 2004. BCE has the
option to repurchase the shares on the same terms. SBC also has the right to
sell its shares at a premium to BCE if a change in control of BCE occurs
before June 2004. After June 2004, the sales price would be the higher of
fair market value or the implied value in the transaction that gave rise to
the change in control at BCE. Similarly, BCE may repurchase the shares at
fair market value any time if there is a change in control of SBC. The
investment agreement also provides for rights of first refusal and rights of
first offer.
In January 1998, SBC purchased a 34% interest in Tele Danmark, the national
communications provider in Denmark, from the Kingdom of Denmark for
approximately $3.1 billion. As part of the investment agreement, Tele
Danmark repurchased and retired all remaining shares owned by the Danish
government, effectively increasing SBC's equity ownership to 41.6% of Tele
Danmark.
In May 1997, a consortium made up of SBC and Telekom Malaysia Berhad, 60%
owned by SBC, completed the purchase of 30% of Telkom. SBC invested
approximately $760, approximately $600 of which remained in Telkom.
During 1997, SBC also acquired assets of several companies engaged in
electronic security services for approximately $1 billion in cash and stock.
These above acquisitions were accounted for under the purchase method of
accounting. The purchase prices in excess of the underlying fair value of
identifiable net assets acquired are being amortized over periods not
exceeding 40 years. Results of operations of the acquisitions have been
included in the consolidated financial statements from their respective
dates of acquisition.
The above developments did not have a significant impact on consolidated
results of operations for 1999, 1998 or 1997, nor would they, had they
occurred on January 1 of the respective periods.
Dispositions - In October 1999, SBC completed the required disposition, as a
condition of the Ameritech merger, of 20 Midwestern cellular properties
including the competing cellular licenses in several markets including, but
not limited to, Chicago, Illinois, and St. Louis, Missouri. SBC recorded an
extraordinary gain of $1,379, or $0.40 per share on this sale net of taxes
of $960. Results of operations for 1999 up to the date of disposition, 1998
and 1997 include revenues of $705, $891 and $861, net income of $119, $123
and $88 and diluted earnings per share of $0.03, $0.04 and $0.03 related to
these cellular properties.
During the third quarter of 1998, SBC sold its interest in MTN to the
remaining shareholders of MTN for $337. The sale fulfilled SBC's obligation
to divest MTN as a requirement of the acquisition of Telkom. The effect on
other income (expense) - net and net income from the sale of MTN was $250
and $162.
In April 1998, SBC sold substantially all of its remaining interest in TCNZ
in a global stock offering. Net proceeds received in two installment
payments in April 1998 and March 1999 were approximately $2.1 billion
resulting in an after-tax gain of approximately $1 billion in 1998.
Pending Transaction - In November 1999, SBC and Prodigy Communications
Corporation (Prodigy) announced an agreement to form a partnership that will
join their consumer and small business Internet operations. Under the terms
of the agreement, which is expected to close in the second quarter of 2000,
SBC will make Prodigy its exclusive retail consumer and small business
Internet access service for customers in SBC's service area. Prodigy will
assume management of approximately 650,000 SBC subscribers of dial-up, ISDN
and basic DSL Internet access services, increasing Prodigy's total managed
subscriber base to more than 2 million. Subject to specific exceptions, SBC
will exclusively market Prodigy service through its extensive marketing
channels with a commitment to deliver a minimum of 1.2 million new customers
over the next three years to the Prodigy member base. The agreement provides
SBC with a 43% ownership stake in the partnership and a similar voting
interest in Prodigy. Under certain circumstances, this may translate into a
direct ownership interest in Prodigy. Required approvals for the transaction
have been received from certain Federal regulatory agencies that had
jurisdiction to consider the transaction. The agreement is subject to
approval at a meeting of the shareholders of Prodigy, which is anticipated
in early 2000.
Note 16. Software Costs
The American Institute of Certified Public Accountants issued a Statement of
Position (SOP) that requires capitalization of certain computer software
expenditures beginning in 1999. The SOP, which prescribed prospective
application, requires the capitalization of certain costs incurred in
connection with developing or obtaining internal use software beginning in
1999. Capitalized software costs are being amortized over three years. Prior
to the adoption of the SOP, the costs of computer software purchased or
developed for internal use were generally expensed as incurred. However,
initial operating system software costs were, and continue to be,
capitalized.
With comparable levels of software expenditures, the SOP would tend to
increase net income when compared with SBC's former method of accounting for
software costs. However, the increases would be largest in the year of
adoption with diminishing levels of increases compared with current
accounting throughout the amortization period. Consequently, given otherwise
comparable income levels excluding software, and otherwise comparable
software expenditures, the effect of the SOP would be to increase income in
the first year and decrease income in each subsequent year until the number
of years affected by the SOP equals the amortization period. The effect of
adopting the SOP was to increase net income by approximately $274, or $0.08
per share, assuming dilution, for the year ended December 31, 1999.
Note 17. Additional Financial Information
-----------------------------------------------------------------------------------------------
December 31,
---------------------------
Balance Sheets 1999 1998
-----------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accounts payable $ 4,834 $ 4,726
Accrued taxes 3,386 2,611
Advance billing and customer deposits 1,481 1,255
Compensated future absences 711 677
Accrued interest 427 432
Accrued payroll 800 536
Other 3,464 3,016
-----------------------------------------------------------------------------------------------
Total $ 15,103 $ 13,253
===============================================================================================
-----------------------------------------------------------------------------------------------
Statements of Income 1999 1998 1997
-----------------------------------------------------------------------------------------------
Advertising expense $ 812 $ 814 $ 844
===============================================================================================
Interest expense incurred $ 1,511 $ 1,691 $ 1,700
Capitalized interest (81) (86) (150)
-----------------------------------------------------------------------------------------------
Total interest expense $ 1,430 $ 1,605 $ 1,550
===============================================================================================
-----------------------------------------------------------------------------------------------
Statements of Cash Flows 1999 1998 1997
-----------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 1,516 $ 1,713 $ 1,676
Income taxes, net of refunds 2,638 2,676 1,640
===============================================================================================
No customer accounted for more than 10% of consolidated revenues in 1999,
1998 or 1997.
Approximately two-thirds of SBC employees are represented by collective
bargaining agreements with varying dates of expiration in the years 2001
through 2002.
Note 18. Quarterly Financial Information (Unaudited)
-------------------------------------------------------------------------------------------------
Total Stock Price
----------------------------------
Diluted
Calendar Operating Operating Net Earnings
Quarter Revenues Income Income Per Share High Low Close
-------------------------------------------------------------------------------------------------
1999
First $ 11,802 $ 3,051 $ 1,980 $ 0.57 $ 59.938 $ 46.063 $ 47.188
Second 12,256 3,227 1,938 0.56 58.000 48.000 58.000
Third 12,534 2,462 1,135 0.33 59.875 45.375 51.063
Fourth 12,897 2,858 3,106 0.90 55.500 44.063 48.750
----------------------------------------------------
Annual $ 49,489 $ 11,598 $ 8,159 $ 2.36
=================================================================================================
1998
First $ 11,038 $ 2,685 $ 1,483 $ 0.43 $ 46.563 $ 35.375 $ 43.375
Second 11,398 3,017 2,750 0.80 44.938 37.125 40.000
Third 11,606 2,994 1,926 0.56 44.875 35.000 44.375
Fourth 12,165 2,527 1,531 0.44 54.875 41.125 53.625
----------------------------------------------------
Annual $ 46,207 $ 11,223 $ 7,690 $ 2.23
=================================================================================================
The first quarter of 1999 includes a cumulative effect of accounting change
of $207, or $0.06 per share from a change in accounting for directory
operations at Ameritech. The fourth quarter of 1999 includes an
extraordinary gain of $1,379, or $0.40 per share on the sale of the
overlapping wireless properties. The first quarter of 1998 includes a
cumulative effect of accounting change of $15, or $0.01 per share from a
change in accounting for directory operations at SNET. The fourth quarter of
1998 includes an extraordinary loss on retirement of debt of $60, or $0.02
per share.
There were also normalizing (i.e. one-time) items which are included in the
information above, but are excluded from the information that management
uses to evaluate the performance of each segment of the business (see Note
7). The after-tax impact of the 1999 normalizing items was as follows:
o An expense reduction of $27 in the first quarter related to a first
quarter 1998 charge to cover the cost of consolidating security
monitoring centers and company-owned cellular retail stores.
o Charges of $883 in the third quarter and $574 in the fourth quarter
related to strategic initiatives resulting from the merger integration
process with Ameritech (see Note 2).
o Gains of $368 in the fourth quarter related to lump sum pension
settlement gains for 1999 retirements.
o Gains of $77 in the fourth quarter related to sales by an international
equity affiliate.
o Incremental impacts of overlapping wireless properties required to be
sold in October 1999 of $39 in the first quarter, $28 in the second
quarter, $47 in the third quarter and $5 in the fourth quarter.
The after-tax impact of the 1998 normalizing items was as follows:
o Charges of $64 in the first quarter to cover the cost of consolidating
security monitoring centers and company-owned cellular retail stores.
o Gain of $1,012 in the second quarter on the sale of TCNZ shares.
o Gains of $219 in the third quarter on sales of certain non-core
businesses, principally the required disposition of MTN, due to SBC's
investment in Telkom.
o Charges of $268 in the fourth quarter related to strategic initiatives
resulting from the merger integration process with SNET.
o Gain of $102 in the fourth quarter from the sale of certain telephone
and directory assets.
o Incremental impacts of overlapping wireless properties required to be
sold in October 1999 of $19 in the first quarter, $30 in the second
quarter, $28 in the third quarter and $46 in the fourth quarter.
Report of Independent Auditors
The Board of Directors and Shareowners
SBC Communications Inc.
We have audited the accompanying consolidated balance sheets of SBC
Communications Inc. (the Company) as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareowners' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the 1998 and 1997
financial statements of Ameritech Corporation, a wholly owned subsidiary, which
statements reflect total assets constituting approximately 40% of the Company's
related 1998 consolidated financial statement total and which reflect total
operating revenues constituting approximately 37% of the Company's related
consolidated financial statement totals for the years ended December 31, 1998
and 1997. Those statements were audited by other auditors whose report has been
furnished to us. Our opinion, insofar as it relates to the 1998 and 1997 data
included for Ameritech Corporation, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SBC Communications
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
San Antonio, Texas
February 11, 2000
Report of Management
The consolidated financial statements have been prepared in conformity with
United States' generally accepted accounting principles. The integrity and
objectivity of the data in these financial statements, including estimates and
judgments relating to matters not concluded by year end, are the responsibility
of management, as is all other information included in the Annual Report, unless
otherwise indicated.
The financial statements of SBC Communications Inc. (SBC) have been audited by
Ernst & Young LLP, independent auditors. Management has made available to Ernst
& Young LLP all of SBC's financial records and related data, as well as the
minutes of shareowners' and directors' meetings. Furthermore, management
believes that all representations made to Ernst & Young LLP during its audit
were valid and appropriate.
Management has established and maintains a system of internal accounting
controls that provides reasonable assurance as to the integrity and reliability
of the financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial reporting.
The concept of reasonable assurance recognizes that the costs of an internal
accounting controls system should not exceed, in management's judgment, the
benefits to be derived.
Management also seeks to ensure the objectivity and integrity of its financial
data by the careful selection of its managers, by organizational arrangements
that provide an appropriate division of responsibility and by communication
programs aimed at ensuring that its policies, standards and managerial
authorities are understood throughout the organization. Management continually
monitors the system of internal accounting controls for compliance. SBC
maintains an internal auditing program that independently assesses the
effectiveness of the internal accounting controls and recommends improvements
thereto.
The Audit Committee of the Board of Directors, which consists of 11 directors
who are not employees, meets periodically with management, the internal auditors
and the independent auditors to review the manner in which they are performing
their respective responsibilities and to discuss auditing, internal accounting
controls and financial reporting matters. Both the internal auditors and the
independent auditors periodically meet alone with the Audit Committee and have
access to the Audit Committee at any time.
Edward E. Whitacre Jr.
Chairman of the Board and
Chief Executive Officer
Donald E. Kiernan
Senior Executive Vice President,
Chief Financial Officer and Treasurer
Stock Trading Information
SBC is listed on the New York, Chicago and Pacific stock exchanges and
The Swiss Exchange. SBC is traded on the London Stock Exchange through
the SEAQ International Markets facility.
Ticker symbol (NYSE): SBC
Newspaper stock listing: SBC or SBC Comm