FORM 10-Q United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-8610 SBC COMMUNICATIONS INC. Incorporated under the laws of the State of Delaware I.R.S. Employer Identification Number 43-1301883 175 E. Houston, San Antonio, Texas 78205 Telephone Number: (210) 821-4105 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At October 31, 2000, 3,384,971,128 common shares were outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------- SBC COMMUNICATIONS INC. - -------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME Dollars in millions except per share amounts (Unaudited) - -------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------- Operating Revenues Landline local service $ 5,721 $ 4,938 $ 16,333 $ 14,384 Wireless subscriber 1,749 1,639 4,897 4,405 Network access 2,492 2,535 7,832 7,595 Long distance service 807 869 2,391 2,680 Directory advertising 912 926 2,761 2,746 Other 1,773 1,638 5,023 4,815 - -------------------------------------------------------------------------------------------- Total operating revenues 13,454 12,545 39,237 36,625 - -------------------------------------------------------------------------------------------- Operating Expenses Operations and support 8,245 7,640 23,374 21,507 Depreciation and amortization 2,363 2,443 6,943 6,378 - -------------------------------------------------------------------------------------------- Total operating expenses 10,608 10,083 30,317 27,885 - -------------------------------------------------------------------------------------------- Operating Income 2,846 2,462 8,920 8,740 - -------------------------------------------------------------------------------------------- Other Income (Expense) Interest expense (422) (365) (1,194) (1,069) Equity in net income of affiliates 267 220 656 574 Other income (expense) - net 2,013 (29) 2,196 (129) - -------------------------------------------------------------------------------------------- Total other income (expense) 1,858 (174) 1,658 (624) - -------------------------------------------------------------------------------------------- Income Before Income Taxes 4,704 2,288 10,578 8,116 - -------------------------------------------------------------------------------------------- Income Taxes 1,705 1,153 3,906 3,270 - -------------------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change 2,999 1,135 6,672 4,846 - -------------------------------------------------------------------------------------------- Cumulative Effect of Accounting Change, net of tax - - - 207 - -------------------------------------------------------------------------------------------- Net Income $ 2,999 $ 1,135 $ 6,672 $ 5,053 ============================================================================================ Earnings Per Common Share: Income Before Cumulative Effect of Accounting Change $ 0.89 $ 0.33 $ 1.97 $ 1.42 Net Income $ 0.89 $ 0.33 $ 1.97 $ 1.48 - -------------------------------------------------------------------------------------------- Earnings Per Common Share - Assuming Dilution: Income Before Cumulative Effect of Accounting Change $ 0.88 $ 0.33 $ 1.95 $ 1.40 Net Income $ 0.88 $ 0.33 $ 1.95 $ 1.46 - -------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding (in millions) 3,387 3,414 3,393 3,411 Dividends Declared Per Common Share $ 0.25375 $ 0.24375 $ 0.76125 $ 0.73125 ============================================================================================ <FN> See Notes to Consolidated Financial Statements. ============================================================================================ </FN> SBC COMMUNICATIONS INC. - --------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS Dollars in millions except per share amounts - --------------------------------------------------------------------------------------- September 30, December 31, ------------- ------------ 2000 1999 - --------------------------------------------------------------------------------------- Assets (Unaudited) Current Assets Cash and cash equivalents $ 545 $ 495 Accounts receivable - net of allowances for uncollectibles of $1,039 and $1,099 10,142 9,378 Prepaid expenses 950 651 Deferred income taxes 590 767 Other current assets 1,585 639 - --------------------------------------------------------------------------------------- Total current assets 13,812 11,930 - --------------------------------------------------------------------------------------- Property, plant and equipment - at cost 124,044 116,332 Less: accumulated depreciation and amortization 74,347 69,761 - --------------------------------------------------------------------------------------- Property, Plant and Equipment - Net 49,697 46,571 - --------------------------------------------------------------------------------------- Intangible Assets - Net of Accumulated Amortization of $1,472 and $1,115 7,149 4,737 Goodwill - Net of Accumulated Amortization of $362 and $210 4,998 2,059 Investments in Equity Affiliates 9,937 10,648 Other Assets 8,983 7,270 - --------------------------------------------------------------------------------------- Total Assets $ 94,576 $ 83,215 ======================================================================================= Liabilities and Shareowners' Equity Current Liabilities Debt maturing within one year $ 9,413 $ 3,374 Accounts payable and accrued liabilities 12,137 11,717 Accrued taxes 4,248 3,386 Dividends payable 861 836 - --------------------------------------------------------------------------------------- Total current liabilities 26,659 19,313 - --------------------------------------------------------------------------------------- Long-Term Debt 15,890 17,475 - --------------------------------------------------------------------------------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 6,532 4,821 Postemployment benefit obligation 9,875 9,612 Unamortized investment tax credits 336 389 Other noncurrent liabilities 4,094 3,879 - --------------------------------------------------------------------------------------- Total deferred credits and other noncurrent liabilities 20,837 18,701 - --------------------------------------------------------------------------------------- Corporation-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts* 1,000 1,000 - --------------------------------------------------------------------------------------- Shareowners' Equity Common shares issued ($1 par value) 3,433 3,433 Capital in excess of par value 12,356 12,453 Retained earnings 17,905 13,798 Guaranteed obligations of employee stock ownership plans (ESOP) (33) (106) Deferred compensation leveraged ESOP (LESOP) (62) (73) Treasury shares (at cost) (2,163) (1,717) Accumulated other comprehensive loss (1,246) (1,062) - --------------------------------------------------------------------------------------- Total shareowners' equity 30,190 26,726 - --------------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $ 94,576 $ 83,215 ======================================================================================= <FN> * The trusts contain $1,030 in principal amount of the Subordinated Debentures of Pacific Telesis Group. See Notes to Consolidated Financial Statements. </FN> SBC COMMUNICATIONS INC. - -------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in millions, increase (decrease) in cash and cash equivalents (Unaudited) - -------------------------------------------------------------------------------------- Nine months ended September 30, -------------------------- 2000 1999 - -------------------------------------------------------------------------------------- Operating Activities Net income $ 6,672 $ 5,053 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,943 6,378 Undistributed earnings from investments in equity affiliates (344) (343) Provision for uncollectible accounts 604 824 Amortization of investment tax credits (53) (64) Deferred income tax expense 996 662 Cumulative effect of accounting change, net of tax - (207) Gain on sales of investments (2,160) (268) Changes in operating assets and liabilities: Accounts receivable (1,368) 56 Other current assets (713) 30 Accounts payable and accrued liabilities 1,442 (271) Other - net (1,073) (351) - -------------------------------------------------------------------------------------- Total adjustments 4,274 6,446 - -------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 10,946 11,499 - -------------------------------------------------------------------------------------- Investing Activities Construction and capital expenditures (9,202) (7,006) Investments in affiliates (140) (32) Purchase of short-term investments (533) (26) Proceeds from short-term investments - 6 Dispositions 3,534 1,448 Acquisitions (5,306) (4,792) Other - 2 - -------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (11,647) (10,400) - -------------------------------------------------------------------------------------- Financing Activities Net change in short-term borrowings with original maturities of three months or less 4,278 2,214 Issuance of long-term debt 1,039 738 Repayment of long-term debt (921) (2,140) Issuance of common shares - 307 Issuance of preferred shares in subsidiaries - 3 Purchase of treasury shares (1,457) (21) Issuance of treasury shares 307 197 Dividends paid (2,560) (2,464) Other 65 - - -------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 751 (1,166) - -------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 50 (67) - -------------------------------------------------------------------------------------- Cash and cash equivalents beginning of year 495 599 - -------------------------------------------------------------------------------------- Cash and Cash Equivalents End of Period $ 545 $ 532 ====================================================================================== Cash paid during the nine months ended September 30 for: Interest $ 1,298 $ 1,200 Income taxes, net of refunds $ 2,113 $ 1,929 <FN> See Notes to Consolidated Financial Statements. </FN> SBC COMMUNICATIONS INC. - ---------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY Dollars in millions (Unaudited) - ---------------------------------------------------------------------------------------------------------=----------------------- Guaranteed Accumulated Capital in Obligations of Deferred Other Common Excess of Par Retained Employee Stock Compensation Treasury Comprehensive Shares Value Earnings Ownership Plans - LESOP Shares Loss - ----------------------------------------------------------------------------------------------------------=---------------------- Balance, December 31, 1999 $ 3,433 $ 12,453 $ 13,798 $ (106) $ (73) $ (1,717) $ (1,062) Net income - - 6,672 - - - - Other comprehensive loss - - - - - - (184) Dividends to shareowners - - (2,583) - - - - Reduction of debt associated with ESOP - - - 73 - - - Cost of LESOP trust shares allocated to employee accounts - - - - 11 - - Purchase of treasury shares - - - - - (1,457) - Issuance of treasury shares - (222) - - - 1,011 - Other - 125 18 - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 $ 3,433 $ 12,356 $ 17,905 $ (33) $ (62) $ (2,163) $ (1,246) ================================================================================================================================= <FN> See Notes to Consolidated Financial Statements. </FN> SELECTED FINANCIAL AND OPERATING DATA At September 30, or for the nine months then ended: 2000 1999 - --------------------------------------------------------------------------- Debt ratio....................................... 44.79% 47.54% Network access lines in service (000)............ 61,287 60,383 Resold lines (000)............................... 1,616 1,422 Access minutes of use (000,000).................. 210,927 196,393 Wireless customers (000)......................... 13,025 10,693 Number of employee............................... 223,260 203,270 SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Dollars in millions except per share amounts 1. BASIS OF PRESENTATION Throughout this document, SBC Communications Inc. is referred to as "we" or "SBC". The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) that permit reduced disclosure for interim periods. We believe that these financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the interim periods shown. The results for the interim periods are not necessarily indicative of results for the full year. You should read these consolidated financial statements in conjunction with the consolidated financial statements and accompanying notes included in SBC's 1999 Annual Report to Shareowners. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We have reclassified certain amounts in prior period financial statements to conform to the current period's presentation. 2. CONSOLIDATION The consolidated financial statements include the accounts of SBC and our majority-owned subsidiaries. All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships, joint ventures and less than majority-owned subsidiaries are principally accounted for under the equity method. Earnings from certain foreign investments accounted for using the equity method are included for periods ended within three months of the date of SBC's Consolidated Statements of Income. 3. CUMULATIVE EFFECT OF CHANGE IN DIRECTORY ACCOUNTING Prior to January 1, 1999, Ameritech Corporation's (Ameritech) directory publishing subsidiary recognized revenues and expenses related to publishing directories using the "amortization" method, under which revenues and expenses were recognized over the lives of the directories, generally one year. Effective January 1, 1999, we changed the method of accounting to the "issue basis", which recognizes revenues and expenses at the time the related directory is published. We changed the methodology because the issue basis method is generally followed in the publishing industry, including our other directory subsidiaries, and better reflects the operating activity of the business. The cumulative after-tax effect of applying the changes in method to prior years was recognized as of January 1, 1999 as a one-time, non-cash gain of $207, or $0.06 per share, net of deferred taxes of $125. Had we used the current method during prior periods, income before extraordinary items and cumulative effect of accounting change would not have been materially affected. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts 4. COMPREHENSIVE INCOME The components of SBC's comprehensive income for the third quarter and nine months ended September 30, 2000 and 1999 include net income and adjustments to shareowners' equity for foreign currency translation adjustment and net unrealized gain (loss) on securities. Following is SBC's comprehensive income: ------------------------------------------------------------------------------------------ Three months ended Nine months ended September 30, September 30, ----------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------ Net income $ 2,999 $ 1,135 $ 6,672 $ 5,053 Other comprehensive income, net of tax: Foreign currency translation adjustment (259) 122 (470) (368) Reclassification adjustment to net income for cumulative translation adjustment on securities sold 323 - 323 - Net unrealized gain (loss) on securities: Unrealized gain (loss) on available for sale securities (18) 18 7 18 Less: reclassification adjustment for (gain) loss included in net income 2 - (44) (5) ------------------------------------------------------------------------------------------ Net unrealized gain (loss) on securities (16) 18 (37) 13 ------------------------------------------------------------------------------------------ Other comprehensive income (loss) 48 140 (184) (355) ------------------------------------------------------------------------------------------ Total comprehensive income $ 3,047 $ 1,275 $ 6,488 $ 4,698 ========================================================================================== 5. COMPLETION OF MERGERS Upon completion of the mergers with Ameritech, Southern New England Telecommunications Corporation (SNET), and Pacific Telesis Group (PAC), we reviewed operations throughout the merged company. Based on these merger integration reviews, we made strategic decisions to significantly integrate operations and consolidate some administrative and support functions resulting in one-time charges. One-time charges incurred include costs related to various regulatory and legal issues, merger approval costs and other related costs. We did not incur any of these one-time charges in the third quarter or for the first nine months of 2000. In the third quarter and first nine months of 1999, we incurred costs of $884 ($883 net of tax) related to the merger with Ameritech. Remaining accruals for anticipated cash expenditures related to these decisions totaled $343 at September 30, 2000 and $755 at December 31, 1999. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts 6. SUBSIDIARY FINANCIAL INFORMATION We have fully and unconditionally guaranteed certain outstanding debt securities of PAC, Pacific Bell Telephone Company (PacBell), and Southwestern Bell Telephone Company (SWBell), each of which is a wholly owned subsidiary of SBC. In August 2000, the SEC issued new rules for reporting parent company guarantees of subsidiary securities. In accordance with these new rules, we are providing the following condensed consolidating financial information. The Parent column presents investments in all subsidiaries under the equity method of accounting. PAC, PacBell and SWBell are listed separately because each has issued debt that we have guaranteed. PacBell is a wholly owned subsidiary of PAC, and the new rules require that its financial information also be included in the PAC column. All other subsidiaries that do not have securities guaranteed by us are presented in the Other column. The consolidating adjustments column (Adjs.) eliminates the intercompany balances and transactions between our subsidiaries, as well as removing the double presentation of PacBell in order to reconcile to the SBC consolidated financial information. See Note 8 for a discussion of conforming items on the segments and subsidiaries. Condensed Consolidating Statements of Income For the Three Months Ended September 30, 2000 Parent PAC PacBell SWBell Other Adjs. Total ----------------------------------------------------------------------------------------------------- Total operating revenues $ - $3,016 $ 2,619 $ 2,904 $ 7,851 $ (2,936) $ 13,454 Total operating expenses (88) 1,982 1,793 2,109 6,922 (2,110) 10,608 -------------------------------------------------------------------------------------------- -------- Operating income 88 1,034 826 795 929 (826) 2,846 -------------------------------------------------------------------------------------------- -------- Interest expense (158) (106) (94) (91) (377) 404 (422) Equity in net income of affiliates 2,882 21 - - 272 (2,908) 267 Other income (expense) - net 234 (24) (1) 2 2,088 (286) 2,013 -------------------------------------------------------------------------------------------- -------- Income before income taxes 3,046 925 731 706 2,912 (3,616) 4,704 ------------------------------------------------------------------------------------------- -------- Income taxes 47 361 293 260 1,037 (293) 1,705 -------------------------------------------------------------------------------------------- -------- Net Income $ 2,999 $ 564 $ 438 $ 446 $ 1,875 $ (3,323) $ 2,999 ============================================================================================ ======== Condensed Consolidating Statements of Income For the Three Months Ended September 30, 1999 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------------- -------- Total operating revenues $ - $2,920 $ 2,455 $ 2,797 $ 7,056 $ (2,683) $ 12,545 Total operating expenses (27) 2,092 1,792 2,044 6,202 (2,020) 10,083 -------------------------------------------------------------------------------------------- -------- Operating income 27 828 663 753 854 (663) 2,462 -------------------------------------------------------------------------------------------- -------- Interest expense (42) (94) (84) (95) (393) 343 (365) Equity in net income of affiliates 1,185 - - - 237 (1,202) 220 Other income (expense) - net 169 2 4 1 41 (246) (29) -------------------------------------------------------------------------------------------- -------- Income before income taxes 1,339 736 583 659 739 (1,768) 2,288 -------------------------------------------------------------------------------------------- -------- Income taxes 204 287 231 242 420 (231) 1,153 -------------------------------------------------------------------------------------------- -------- Net Income $ 1,135 $ 449 $ 352 $ 417 $ 319 $ (1,537) $ 1,135 ============================================================================================ ======== SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts Condensed Consolidating Statements of Income For the Nine Months Ended September 30, 2000 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------------- ------- Total operating revenues $ - $ 8,880 $ 7,725 $ 8,662 $ 22,561 $ (8,591) $ 39,237 Total operating expenses (135) 6,330 5,659 6,547 18,441 (6,525) 30,317 -------------------------------------------------------------------------------------------- -------- Operating income 135 2,550 2,066 2,115 4,120 (2,066) 8,920 -------------------------------------------------------------------------------------------- -------- Interest expense (359) (338) (297) (283) (1,079) 1,162 (1,194) Equity in net income of affiliates 6,353 55 - - 664 (6,416) 656 Other income (expense) - net 624 (5) - 3 2,379 (805) 2,196 -------------------------------------------------------------------------------------------- -------- Income before income taxes 6,753 2,262 1,769 1,835 6,084 (8,125) 10,578 -------------------------------------------------------------------------------------------- -------- Income taxes 81 883 706 677 2,265 (706) 3,906 -------------------------------------------------------------------------------- Net Income $ 6,672 $ 1,379 $ 1,063 $ 1,158 $ 3,819 $ (7,419) $ 6,672 ============================================================================================ ======== Condensed Consolidating Statements of Income For the Nine Months Ended September 30, 1999 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------------- -------- Total operating revenues $ - $ 8,839 $ 7,245 $ 8,375 $ 20,105 $ (7,939) $ 36,625 Total operating expenses (38) 6,530 5,350 6,069 16,018 (6,044) 27,885 -------------------------------------------------------------------------------------------- -------- Operating income 38 2,309 1,895 2,306 4,087 (1,895) 8,740 -------------------------------------------------------------------------------------------- -------- Interest expense (150) (341) (287) (284) (1,043) 1,036 (1,069) Equity in net income of affiliates 5,102 - - - 591 (5,119) 574 Other income (expense)- net 169 82 35 5 347 (767) (129) -------------------------------------------------------------------------------------------- -------- Income before income taxes 5,159 2,050 1,643 2,027 3,982 (6,745) 8,116 -------------------------------------------------------------------------------------------- -------- Income taxes 99 813 650 745 1,613 (650) 3,270 -------------------------------------------------------------------------------------------- -------- Income before cumulative effect of accounting change 5,060 1,237 993 1,282 2,369 (6,095) 4,846 -------------------------------------------------------------------------------------------- -------- Cumulative effect of accounting change (7) (218) (1,010) (273) 705 1,010 207 -------------------------------------------------------------------------------------------- -------- Net Income $ 5,053 $ 1,019 $ (17) $ 1,009 $ 3,074 $ (5,085) $ 5,053 ============================================================================================ ======== SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts Condensed Consolidating Balance Sheets September 30, 2000 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------------- -------- Cash and cash equivalents $ 334 $ 10 $ 9 $ 42 $ 159 $ (9) $ 545 Accounts receivable - net 9,061 2,839 2,280 2,191 12,155 (18,384) 10,142 Other current assets 687 566 443 619 1,253 (443) 3,125 -------------------------------------------------------------------------------------------- -------- Total current assets 10,082 3,415 2,732 2,852 13,567 (18,836) 13,812 -------------------------------------------------------------------------------------------- -------- Property, plant and equipment - net 144 13,275 12,862 14,387 21,891 (12,862) 49,697 -------------------------------------------------------------------------------------------- -------- Intangible assets - net - 803 - - 11,344 - 12,147 -------------------------------------------------------------------------------------------- -------- Investments in equity affiliates 29,810 181 - - 5,660 (25,714) 9,937 -------------------------------------------------------------------------------------------- -------- Other assets 2,703 1,694 1,525 26 11,408 (8,373) 8,983 -------------------------------------------------------------------------------------------- -------- Total Assets $42,739 $19,368 $ 17,119 $17,265 $ 63,870 $(65,785) $ 94,576 ============================================================================================ ======== Debt maturing within one year $ 8,472 $ 1,568 $ 1,827 $ 2,433 $ 10,316 $(15,203) $ 9,413 Other current liabilities 1,348 3,826 3,406 3,443 11,357 (6,134) 17,246 -------------------------------------------------------------------------------------------- -------- Total current liabilities 9,820 5,394 5,233 5,876 21,673 (21,337) 26,659 -------------------------------------------------------------------------------------------- -------- Long-term debt 568 4,353 4,293 3,976 13,755 (11,055) 15,890 -------------------------------------------------------------------------------------------- -------- Postemployment benefit obligation 87 2,922 2,740 2,967 3,899 (2,740) 9,875 -------------------------------------------------------------------------------------------- -------- Other noncurrent liabilities 2,074 1,575 1,278 1,103 6,296 (1,364) 10,962 -------------------------------------------------------------------------------------------- -------- Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts - 1,000 - - - - 1,000 -------------------------------------------------------------------------------------------- -------- Total shareowners' equity 30,190 4,124 3,575 3,343 18,247 (29,289) 30,190 -------------------------------------------------------------------------------------------- -------- Total Liabilities and Shareowners' Equity $42,739 $19,368 $ 17,119 $17,265 $ 63,870 $(65,785) $ 94,576 ============================================================================================ ======== SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts Condensed Consolidating Balance Sheets December 31, 1999 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------------- -------- Cash and cash equivalents $ 101 $ 13 $ 12 $ 49 $ 332 $ (12) $ 495 Accounts receivable - net 8,012 2,538 1,929 1,913 13,374 (18,388) 9,378 Other current assets 223 471 377 491 872 (377) 2,057 -------------------------------------------------------------------------------------------- -------- Total current assets 8,336 3,022 2,318 2,453 14,578 (18,777) 11,930 -------------------------------------------------------------------------------------------- -------- Property, plant and equipment - net 89 12,628 12,213 13,958 19,896 (12,213) 46,571 -------------------------------------------------------------------------------------------- -------- Intangible assets - net - 824 - - 5,972 - 6,796 -------------------------------------------------------------------------------------------- -------- Investments in equity affiliates 23,461 199 - - 8,347 (21,359) 10,648 -------------------------------------------------------------------------------------------- -------- Other assets 2,203 1,683 1,407 20 10,158 (8,201) 7,270 -------------------------------------------------------------------------------------------- -------- Total Assets $34,089 $18,356 $ 15,938 $16,431 $ 58,951 $(60,550) $ 83,215 ============================================================================================ ======== Debt maturing within one year $ 3,364 $ 1,869 $ 1,674 $ 2,086 $ 10,861 $(16,480) $ 3,374 Other current liabilities 1,347 3,075 2,865 3,041 10,129 (4,518) 15,939 -------------------------------------------------------------------------------------------- -------- Total current liabilities 4,711 4,944 4,539 5,127 20,990 (20,998) 19,313 -------------------------------------------------------------------------------------------- -------- Long-term debt 685 4,551 4,491 4,211 14,796 (11,259) 17,475 -------------------------------------------------------------------------------------------- -------- Postemployment benefit obligation 111 2,888 2,703 3,049 3,564 (2,703) 9,612 -------------------------------------------------------------------------------------------- -------- Other noncurrent liabilities 1,856 1,845 1,486 1,143 4,271 (1,512) 9,089 -------------------------------------------------------------------------------------------- -------- Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts - 1,000 - - - - 1,000 -------------------------------------------------------------------------------------------- -------- Total shareowners' equity 26,726 3,128 2,719 2,901 15,330 (24,078) 26,726 -------------------------------------------------------------------------------------------- -------- Total Liabilities and Shareowners' Equity $ 34,089 $18,356 $ 15,938 $16,431 $ 58,951 $ (60,550)$ 83,215 ============================================================================================ ======== Condensed Consolidating Statements of Cash Flows Nine Months Ended September 30, 2000 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------------- -------- Net cash from operating activities $ 3,149 $ 2,959 $ 2,287 $ 2,444 $ 3,699 $ (3,592) $ 10,946 Net cash from investing activities (4,261) (2,108) (2,035) (2,483) (2,464) 1,704 (11,647) Net cash from financing activities 1,345 (854) (255) 32 (1,408) 1,891 751 -------------------------------------------------------------------------------------------- -------- Net Increase (Decrease) in Cash $ 233 $ (3)$ (3) $ (7) $ (173)$ 3 $ 50 =========================================================================================== ======== SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts Condensed Consolidating Statements of Cash Flows Nine Months Ended September 30, 1999 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------------- -------- Net cash from operating activities $ 1,005 $ 2,084 $ 2,293 $ 2,988 $ 5,687 $ (2,558) $ 11,499 Net cash from investing activities (22) (1,880) (1,665) (2,075) (6,424) 1,666 (10,400) Net cash from financing activities (1,248) (188) (614) (886) 892 878 (1,166) -------------------------------------------------------------------------------------------- -------- Net Increase (Decrease) in Cash $ (265) $ 16 $ 14 $ 27 $ 155 $ (14) $ (67) ============================================================================================ ======== SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts 7. EARNINGS PER SHARE A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for income before cumulative effect of accounting change for the three and nine months ended September 30, 2000 and 1999 are shown in the table below. ------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------- Numerators Numerator for basic earnings per share: Income before cumulative effect of accounting change $ 2,999 $ 1,135 $6,672 $ 4,846 ------------------------------------------------------------------------------- Dilutive potential common shares: Other stock-based compensation 1 1 4 3 ------------------------------------------------------------------------------- Numerator for diluted earnings per share $ 3,000 $ 1,136 $6,676 $ 4,849 =============================================================================== Denominators (000,000) Denominator for basic earnings per share: Weighted average number of common shares outstanding 3,387 3,414 3,393 3,411 ------------------------------------------------------------------------------- Dilutive potential common shares: Stock options 30 42 31 43 Other stock-based compensation 8 7 7 7 ------------------------------------------------------------------------------- Denominator for diluted earnings per share 3,425 3,463 3,431 3,461 =============================================================================== Basic earnings per share: Income before cumulative effect of accounting change $ 0.89 $ 0.33 $ 1.97 $ 1.42 Cumulative effect of accounting change - - - 0.06 ------------------------------------------------------------------------------- Net income $ 0.89 $ 0.33 $ 1.97 $ 1.48 =============================================================================== Diluted earnings per share: Income before cumulative effect of accounting change $ 0.88 $ 0.33 $ 1.95 $ 1.40 Cumulative effect of accounting change - - - 0.06 ------------------------------------------------------------------------------- Net income $ 0.88 $ 0.33 $ 1.95 $ 1.46 =============================================================================== Under the Financial Accounting Standards Board's proposed Exposure Draft issued in September 1999, "Business Combinations and Intangible Assets", SBC would begin reporting on the income statement an earnings per share amount which excludes all goodwill charges (amortization expense and impairment losses). Goodwill charges related to investments in equity affiliates are currently included in equity in net income of affiliates on the income statement. The diluted earnings per share before goodwill charges for net income was $0.90 and $2.05 for the three and nine months ended September 30, 2000 and $0.43 and $1.59 for the three and nine months ended September 30, 1999. 8. SEGMENT INFORMATION SBC's segments are strategic business units that offer different products and services and are managed accordingly. We evaluate performance based on income before income taxes adjusted for normalizing (i.e. one-time) items. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts We have four reportable segments that reflect the current management of our business: (1) wireline; (2) wireless; (3) information and entertainment; and (4) international. The wireline segment provides landline telecommunications services, including local, network access and long distance services, messaging and Internet services and sells customer premise and private business exchange equipment. The wireless segment provides wireless telecommunications services, including local and long distance services, and sells wireless equipment. The information and entertainment segment consists of directory operations including advertising, yellow pages, white pages and electronic publishing and Ameritech's electronic security and cable television operations. All international investment operations are disclosed separately in the international segment. Normalized results for 2000 exclude the following items: o Gains of $1,699 ($1,125 net of tax) in the third quarter and for the first nine months related to the sale of direct and indirect interests in MATAV and Netcom GSM, two international equity investments. o Gains of $238 ($155 net of tax) in the third quarter and for the first nine months on the sale of Telefonos de Mexico, S.A. de C.V. L shares associated with SBC's purchase of a Mandatorily Exchangeable Debt Securities note with characteristics that will essentially offset future mark to market adjustments on the Debt Exchangeable for Common Stock. o Pension settlement gains of $29 ($19 net of tax) in the third quarter associated with pension litigation and $403 ($260 net of tax) for the first nine months primarily related to employees who terminated employment during 1999. These third quarter and first nine month gains were primarily in the wireline segment. o Costs of $400 ($258 net of tax) in the third quarter and $780 ($528 net of tax) for the first nine months primarily in the wireline segment associated with strategic initiatives and other adjustments resulting from the merger integration process with Ameritech. o A charge of $132 in the first nine months (with no tax effect) in the wireline segment related to in-process research and development from the March 2000 acquisition of Sterling Commerce, Inc. (Sterling). Normalized results for 1999 exclude the following items: o Costs of $884 ($883 net of tax) in the third quarter and for the first nine months related to conforming accounting estimation techniques and valuation assumptions, the impairment of a portion of the accounting goodwill associated with Ameritech's security business and costs associated with strategic initiatives resulting from the merger integration process with Ameritech. o Income of $73 ($47 net of tax) in the third quarter and $191 ($114 net of tax) for the first nine months in the wireless segment from the incremental impacts of overlapping wireless properties sold in October 1999. o A reduction of $45 ($27 net of tax), primarily in the wireless segment, in the first nine months for a portion of a first quarter 1998 charge to cover the cost of consolidating security monitoring centers and company-owned wireless retail stores. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts Segment results, including a reconciliation to our consolidated results, for the third quarter of 2000 and 1999 and for the nine months ended September 30, 2000 and 1999 are as follows: -------------------------------------------------------------------------- Revenues For the three months ended from external Intersegment Income before September 30, 2000 customers revenues income taxes -------------------------------------------------------------------------- Wireline $ 10,074 $ 52 $ 1,766 Wireless 2,214 1 370 Information and entertainment 1,042 17 368 International 77 2 209 Corporate, adjustments & eliminations 46 (72) 425 Normalizing adjustments 1 - 1,566 -------------------------------------------------------------------------- Total $ 13,454 $ - $ 4,704 ========================================================================== -------------------------------------------------------------------------- Revenues For the three months ended from external Intersegment Income before September 30, 1999 customers revenues income taxes -------------------------------------------------------------------------- Wireline $ 9,425 $ 80 $ 2,189 Wireless 1,882 - 317 Information and entertainment 1,055 16 352 International 56 3 150 Corporate, adjustments & eliminations 43 (99) 91 Normalizing adjustments 84 - (811) -------------------------------------------------------------------------- Total $ 12,545 $ - $ 2,288 ========================================================================== ------------------------------------------------------------------------------------- Revenues At September 30, 2000 or for from external Intersegment Income before Segment the nine months ended customers revenues income taxes assets ------------------------------------------------------------------------------------- Wireline $ 29,592 $ 166 $ 5,918 $ 61,444 Wireless 6,144 1 960 13,872 Information and entertainment 3,111 72 1,018 3,787 International 245 2 642 12,096 Corporate, adjustments & eliminations 145 (241) 612 3,377 Normalizing adjustments - - 1,428 - ------------------------------------------------------------------------------------- Total $ 39,237 $ - $ 10,578 $ 94,576 ===================================================================================== SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts ------------------------------------------------------------------------------------- Revenues At September 30, 1999 or for from external Intersegment Income before Segment the nine months ended customers revenues income taxes assets ------------------------------------------------------------------------------------- Wireline $ 27,764 $ 239 $ 6,569 $ 52,876 Wireless 4,945 - 720 12,642 Information and entertainment 3,060 72 940 3,638 International 172 11 498 13,542 Corporate, adjustments & eliminations 156 (322) 37 (852) Normalizing adjustments 528 - (648) - ------------------------------------------------------------------------------------- Total $ 36,625 $ - $ 8,116 $ 81,846 ===================================================================================== Corporate, adjustments and eliminations include corporate activities, the elimination of intersegment transactions and other adjustments. Included in other adjustments are differences in accounting between subsidiaries and consolidated financial statements for pension and postretirement benefits and the treatment of conforming accounting adjustments arising out of the pooling of interests transactions with Ameritech, SNET and PAC that were required to be treated as cumulative effect of accounting changes by the subsidiaries. 9. ACQUISITIONS AND DISPOSITIONS In March 2000, SBC acquired Sterling, a provider of electronic business integration solutions, in an all cash tender offer valued at approximately $3,576. We accounted for the transaction under the purchase method of accounting. The valuation of assets acquired includes certain intangible assets such as developed technology, tradename, assembled workforce, customer relationships and goodwill, which will be amortized over their remaining useful lives of between 3 and 20 years. We expensed the acquired in-process research and development of approximately $132 in March 2000. We included the results of operations in the consolidated financial statements from the date of the acquisition. In July 2000, SBC exercised its right to sell its interest in MATAV, a Hungarian telecommunications company, to Deutsche Telekom, SBC's partner in the investment, for approximately $2,199. The transaction closed in August 2000 with a pre-tax gain of approximately $1,153. In August 2000, Tele Danmark and SBC sold their interests in Netcom GSM, a wireless telecommunications provider in Norway, to a third party with a pre-tax gain of approximately $546. 10.WIRELESS TRANSACTIONS In August 2000, SBC acquired wireless properties in Texas and Washington from GTE Corporation for approximately $1,349. The properties acquired cover a population of more than 7.4 million people and included approximately 318,000 customers, and were included in the contribution to the wireless joint venture with BellSouth Corporation (BellSouth). In October 2000, SBC and BellSouth began contributions of their wireless properties and formally began operations of their wireless joint venture, Cingular Wireless (Cingular), formed in April 2000. Cingular serves more than 19 million customers, the second largest wireless operator in the United States, and has approximately 190 million potential customers in 38 states, the District of Columbia, Puerto Rico and the United States Virgin Islands. Ownership in Cingular is held 60% by SBC and 40% by BellSouth, with control shared equally. SBC will account for its interest under the equity SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts method of accounting. Cingular will be managed independently with a four-seat board of directors (two seats from each company). The contributions to Cingular were made after we received the approval of the United States Department of Justice and the Federal Communications Commission. At the contribution date we were required to sell our overlapping properties in Indianapolis, Indiana and selected Radiofone properties in New Orleans and Baton Rouge, Louisiana. We received approximately $930 in proceeds from these sales and will record pre-tax gains of more than $300 in the fourth quarter of 2000. 11.VOLUNTARY ENHANCED PENSION AND RETIREMENT PROGRAM In October 2000, we implemented a voluntary enhanced pension and retirement benefit program to reduce the number of management employees. The program offers eligible management employees who decide to terminate employment with SBC an enhanced pension and increased eligibility for post-retirement medical and dental benefits. Most of the employees who accepted this offer should terminate employment before the end of the year, however, under the program, SBC may retain employees for up to one year. If our cost savings targets are not met through the voluntary program, there may be involuntary personnel reductions in the fourth quarter of 2000. We are still evaluating the results of the program, but we expect to report in the fourth quarter significant costs attributable to the enhanced benefits and significant pension settlement gains. We currently anticipate that the pension settlement gains will exceed the enhanced benefits costs and any collateral severance costs. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS Overview Financial results for SBC Communications Inc. (SBC) for the third quarter and the first nine months of 2000 and 1999 are summarized as follows: - -------------------------------------------------------------------------------------- Third Quarter Nine-Month Period Percent Percent 2000 1999 Change 2000 1999 Change - -------------------------------------------------------------------------------------- Operating revenues $ 13,454 $ 12,545 7.2% $ 39,237 $ 36,625 7.1% Operating expenses 10,608 10,083 5.2% 30,317 27,885 8.7% Operating income 2,846 2,462 15.6% 8,920 8,740 2.1% Income before income taxes and cumulative effect of accounting change 4,704 2,288 - 10,578 8,116 30.3% Income before cumulative effect of accounting change 2,999 1,135 - 6,672 4,846 37.7% Cumulative effect of accounting change - - - - 207 - Net income 2,999 1,135 - 6,672 5,053 32.0% ====================================================================================== SBC reported net income of $2,999, or $0.88 per share assuming dilution, in the third quarter of 2000 and $6,672, or $1.95 per share assuming dilution, for the first nine months of 2000 compared to $1,135, or $0.33 per share assuming dilution, in the third quarter of 1999 and $5,053, or $1.46 per share assuming dilution, for the first nine months of 1999. The first nine months of 1999 included a cumulative effect of accounting change related to accounting for directory revenues and expenses (see Note 3 of Notes to Consolidated Financial Statements). The third quarter and first nine months of 2000 and 1999 also included several items that SBC normalizes for management purposes. Normalized results for 2000 exclude the following items: o Gains of $1,699 ($1,125 net of tax) in the third quarter and for the first nine months related to the sale of direct and indirect interests in MATAV and Netcom GSM, two international equity investments. o Gains of $238 ($155 net of tax) in the third quarter and for the first nine months on the sale of Telefonos de Mexico, S.A. de C.V. (Telmex), L shares associated with SBC's purchase of a Mandatorily Exchangeable Debt Securities note with characteristics that will essentially offset future mark to market adjustments on the Debt Exchangeable for Common Stock (DECS). o Pension settlement gains of $29 ($19 net of tax) in the third quarter associated with pension litigation and $403 ($260 net of tax) for the first nine months primarily related to employees who terminated employment during 1999. These third quarter and first nine month gains were primarily in the wireline segment. o Costs of $400 ($258 net of tax) in the third quarter and $780 ($528 net of tax) for the first nine months primarily in the wireline segment associated with strategic initiatives and other adjustments resulting from the merger integration process with Ameritech Corporation (Ameritech). SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued o A charge of $132 in the first nine months (with no tax effect) in the wireline segment related to in-process research and development from the March 2000 acquisition of Sterling Commerce, Inc. (Sterling). Normalized results for 1999 exclude the following items: o Costs of $884 ($883 net of tax) in the third quarter and for the first nine months related to conforming accounting estimation techniques and valuation assumptions, the impairment of a portion of the accounting goodwill associated with Ameritech's security business and costs associated with strategic initiatives resulting from the merger integration process with Ameritech. o Income of $73 ($47 net of tax) in the third quarter and $191 ($114 net of tax) for the first nine months in the wireless segment from the incremental impacts of overlapping wireless properties sold in October 1999. o A reduction of $45 ($27 net of tax), primarily in the wireless segment, in the first nine months for a portion of a first quarter 1998 charge to cover the cost of consolidating security monitoring centers and company-owned wireless retail stores. Excluding the 2000 and 1999 normalizing items, SBC's income before cumulative effect of accounting change was $1,958, or $0.57 per share assuming dilution, in the third quarter of 2000 and $5,792, or $1.69 per share assuming dilution, for the first nine months of 2000 compared to $1,971, or $0.57 per share assuming dilution, in the third quarter of 1999 and $5,588, or $1.62 per share assuming dilution, for the first nine months of 1999. The primary factors contributing to the increase in consolidated revenues were growth in demand for data communications and wireless services and products. These increases were partially offset by increased operating expenses related to the buildout of our broadband network, and investments in new products and services, including Digital Subscriber Line (DSL), national expansion and long distance service. The national expansion initiative is SBC's plan to enter the top 30 metropolitan markets beyond its traditional regions by October 2001. InterLATA long distance service was launched in Texas on July 10, 2000. Segment Results The following tables show components of normalized results of operations by segment. A discussion of significant segment results is also presented. Intercompany interest affects the segment results of operations but is not discussed as it is eliminated in consolidation. The consolidated results section discusses interest expense, other income (expense) - net and income taxes. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued Wireline Wireline provides landline telecommunications services, including local, network access and long distance services, messaging and Internet services and sells customer premise and private business exchange equipment. - -------------------------------------------------------------------------------- Third Quarter Nine-Month Period Percent Percent 2000 1999 Change 2000 1999 Change - -------------------------------------------------------------------------------- Operating revenues Local service $ 5,721 $ 5,006 14.3% $16,342 $ 14,469 12.9% Network access 2,515 2,571 (2.2) 7,901 7,675 2.9 Long distance service 750 843 (11.0) 2,241 2,627 (14.7) Other 1,140 1,085 5.1 3,274 3,232 1.3 - --------------------------------------------- ------------------ Total Operating Revenues 10,126 9,505 6.5 29,758 28,003 6.3 - --------------------------------------------- ------------------ Operating expenses Operations and support 6,111 5,320 14.9 17,332 15,573 11.3 Depreciation and amortization 1,959 1,725 13.6 5,636 5,051 11.6 - --------------------------------------------- ------------------ Total Operating Expenses 8,070 7,045 14.5 22,968 20,624 11.4 - --------------------------------------------- ------------------ Operating Income 2,056 2,460 (16.4) 6,790 7,379 (8.0) - --------------------------------------------- ------------------ Interest Expense (297) (292) 1.7 (925) (877) 5.5 - --------------------------------------------- ------------------ Other Income (Expense) - Net 7 21 (66.7) 53 67 (20.9) - --------------------------------------------- ------------------ Income Before Income Taxes $ 1,766 $ 2,189 (19.3)% $ 5,918 $ 6,569 (9.9)% ================================================================================ Local service revenues increased $715, or 14.3%, in the third quarter and $1,873, or 12.9%, for the first nine months of 2000. Excluding the operations of Sterling, acquired in March 2000, the increases were approximately 11.7% in the third quarter and 10.9% for the first nine months of 2000. Approximately $179 of the increase in the third quarter and $390 for the first nine months of 2000 was attributable to increased demand from business customers for network integration and Internet services. Wholesale revenues accounted for approximately $122 of the third-quarter increase and $264 of the increase for the first nine months of 2000. Increased demand for vertical services such as Caller ID, Call Waiting, voice mail and other enhanced services increased revenue by approximately $103 in the third quarter and $260 for the first nine months of 2000. Demand for data services in the residential market increased local service revenues by approximately $67 in the third quarter and $103 for the first nine months of 2000. Directory assistance revenues increased approximately $33 in the third quarter and $56 for the first nine months of 2000, primarily due to price increases in California, Illinois and Texas. The introduction of extended area service plans and the September 1999 Texas Universal Service Fund (TUSF) rate rebalancing collectively increased local service revenues by approximately $19 in the third quarter and $131 for the first nine months of 2000. However, these regulatory actions had only a SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued nominal effect on overall revenue because they decreased intrastate network access revenues by approximately $23 in the third quarter and $98 for the first nine months of 2000 and decreased long distance revenues by approximately $2 in the third quarter and $22 for the first nine months of 2000. The Texas Public Utility Commission has stated that the TUSF is intended, among other things, to help support the provision of basic local telephone service to high-cost rural areas. Network access revenues decreased $56, or 2.2%, in the third quarter and increased $226, or 2.9%, for the first nine months of 2000. The third quarter decline was primarily due to the July 2000 implementation of the Coalition for Affordable Local and Long Distance Service (CALLS) proposal, which required reduction of carrier switched access rates. Implementation of CALLS reduced third quarter network access revenues by approximately $167. Additionally, intrastate access rate reductions in Texas resulted in a decrease in network access revenues of approximately $70 in the third quarter and $184 for the first nine months of 2000. These decreases in access rates were largely offset by continued demand for special access and switched data transport services, as well as higher network usage by alternative providers of intraLATA toll services. Long distance service revenues decreased $93, or 11.0%, in the third quarter and $386, or 14.7%, for the first nine months of 2000. Long distance service revenues decreased by approximately $69 in the third quarter and $265 for the first nine months of 2000 due to competitive losses resulting from dialing parity implementation. This decrease was partially offset by an increase of approximately $6 in the third quarter and $24 for the first nine months of 2000 due to price increases in Illinois, Indiana, Michigan and Ohio. The decrease was also offset by approximately $18 in the third quarter and for the first nine months of 2000 from entry into the Texas long distance market. The continued introduction of extended area service plans, as described above in local service, decreased long distance revenues by approximately $2 in the third quarter and $22 for the first nine months of 2000, which increased local service revenues by the same amounts. Other operating revenues increased $55, or 5.1%, in the third quarter and $42, or 1.3%, for the first nine months of 2000. Equipment sales increases, primarily residential, of approximately $50 in the third quarter and $105 for the first nine months of 2000, were partially offset by declines in the payphone business of approximately $28 in the third quarter and $71 for the first nine months of 2000. Sales of other nonregulated products and services increased in the third quarter and were up slightly for the first nine months of 2000. Operations and support expenses increased $791, or 14.9%, in the third quarter and $1,759, or 11.3%, for the first nine months of 2000. Approximately $259 of third quarter and $608 of the first nine months increases were related to costs associated with the continued rollout of DSL. Personnel increases, particularly in the residential and business channels, increased operations and support expenses by approximately $150 in the third quarter and $353 for the first nine months of 2000. Operations and support expenses also increased approximately $247 in the third quarter and $502 for the first nine months of 2000 due to costs associated with network integration and E-Commerce services, including costs of Sterling. In addition, SBC's national expansion initiative increased expenses by approximately $119 in the third quarter and $222 for the first nine months of 2000. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued Depreciation and amortization expenses increased $234, or 13.6%, in the third quarter and $585, or 11.6%, for the first nine months of 2000. Overall higher plant levels increased depreciation expense by approximately $85 in the third quarter and $239 for the first nine months of 2000. The acquisition of Sterling caused an increase of approximately $86 in the third quarter and $178 for the first nine months of 2000. Amortization of capitalized software also increased approximately $56 in the third quarter and $153 for the first nine months of 2000. Wireless Wireless provides wireless telecommunications services, including local and long distance services, and sells wireless equipment. - ------------------------------------------------------------------------------------ Third Quarter Nine-Month Period Percent Percent 2000 1999 Change 2000 1999 Change - ------------------------------------------------------------------------------------ Operating revenues Subscriber revenues $ 1,749 $ 1,457 20.0% $ 4,897 $ 3,872 26.5% Other 466 425 9.6 1,248 1,073 16.3 - ----------------------------------------------- ------------------ Total Operating Revenues 2,215 1,882 17.7 6,145 4,945 24.3 - ----------------------------------------------- ------------------ Operating expenses Operations and support 1,429 1,191 20.0 3,996 3,316 20.5 Depreciation and amortization 248 262 (5.3) 817 632 29.3 - ----------------------------------------------- ------------------ Total Operating Expenses 1,677 1,453 15.4 4,813 3,948 21.9 - ----------------------------------------------- ------------------ Operating Income 538 429 25.4 1,332 997 33.6 - ----------------------------------------------- ------------------ Interest Expense (143) (68) - (267) (152) 75.7 - ----------------------------------------------- ------------------ Equity in Net Income of Affiliates 7 12 (41.7) 7 28 (75.0) - ----------------------------------------------- ------------------ Other Income (Expense) - Net (32) (56) (42.9) (112) (153) (26.8) - ----------------------------------------------- ------------------ Income Before Income Taxes $ 370 $ 317 16.7% $ 960 $ 720 33.3% ==================================================================================== Subscriber revenues increased $292, or 20.0%, in the third quarter and $1,025, or 26.5%, for the first nine months of 2000. Approximately $40 of the increase in the third quarter and $385 for the first nine months of 2000 was due to acquisitions of wireless properties. The remaining increases were primarily due to the net additions of 486,000 customers in the third quarter and 1,361,000 customers for the first nine months of 2000. Average revenue per customer declined by approximately 2.0% in the third quarter but was flat for the first nine months of 2000. At September 30, 2000, domestic wireless customers totaled 13,025,000. Other wireless revenues increased $41, or 9.6%, in the third quarter and $175, or 16.3%, for the first nine months of 2000. The increase was primarily due to increased equipment sales of approximately $49 in the third quarter and $104 for the first nine months of 2000, related to the increase in gross customer additions of 43% in the third quarter and 37% for the first nine months of 2000. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued Additionally, in the third quarter, outcollect roaming revenues (revenues from non-SBC wireless customers roaming on SBC's wireless network) decreased by approximately $7, due to reduced rates and usage, but increased for the first nine months of 2000 by approximately $76, due to acquisitions. Operations and support expenses increased $238, or 20.0%, in the third quarter and $680, or 20.5%, for the first nine months of 2000 due primarily to the net additions of customers discussed in subscriber revenues. Equipment costs also increased as a result of the increase in equipment sales noted above. Depreciation and amortization expenses decreased by $14, or 5.3%, in the third quarter and increased by $185, or 29.3%, for the first nine months of 2000. The third quarter of 2000 includes approximately a $35 decrease resulting from a purchase price allocation true-up adjustment related to the third quarter 1999 acquisition of Comcast Cellular Corporation (Comcast) and Cellular Communications of Puerto Rico (Cellular Communications). The nine month increase was primarily related to these third quarter 1999 acquisitions. Under the terms of our joint venture agreement with BellSouth Corporation (BellSouth) (see Note 10 of Notes to Consolidated Financial Statements), we will begin accounting for our interest in Cingular Wireless (Cingular) using the equity method of accounting in the fourth quarter of 2000. However, we currently anticipate using proportional consolidation in evaluating the results of Cingular internally. Consequently, our prospective wireless segment results will reflect 60% of the results of Cingular. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued Information and Entertainment Information and entertainment consists of directory operations including advertising, yellow pages, white pages and electronic publishing, electronic security and cable television operations. - ----------------------------------------------------------------------------------- Third Quarter Nine-Month Period Percent Percent 2000 1999 Change 2000 1999 Change - ----------------------------------------------------------------------------------- Operating Revenues $ 1,059 $ 1,071 (1.1)%$ 3,183 $ 3,132 1.6% - ---------------------------------------------- ------------------ Operating expenses Operations and support 618 659 (6.2) 1,945 2,022 (3.8) Depreciation and amortization 54 49 10.2 161 141 14.2 - ---------------------------------------------- ------------------ Total Operating Expenses 672 708 (5.1) 2,106 2,163 (2.6) - ---------------------------------------------- ------------------ Operating Income 387 363 6.6 1,077 969 11.1 - ---------------------------------------------- ------------------ Interest Expense (25) (13) 92.3 (75) (37) - - ---------------------------------------------- ------------------ Other Income (Expense) - Net 6 2 - 16 8 - - ---------------------------------------------- ------------------ Income Before Income Taxes $ 368 $ 352 4.5% $ 1,018 $ 940 8.3% =================================================================================== Information and entertainment operating revenues decreased $12, or 1.1%, in the third quarter and increased $51, or 1.6%, for the first nine months of 2000. A change in the timing of the publication of directories to the fourth quarter caused a decrease of approximately $48 in the third quarter, partially offset by an increase of approximately $29 related to increased demand for directory advertising services. Increased demand for directory advertising services contributed approximately $93 to the increase for the first nine months of 2000, offset by a decrease of approximately $66 related to the change in the timing of directory publications. Also contributing to the nine month increase was approximately $29 from growth in subscribers at Ameritech's cable business. Operations and support expenses decreased $41, or 6.2%, in the third quarter and $77, or 3.8%, for the first nine months of 2000. Of these decreases approximately $11 in the third quarter and $13 for the first nine months were due to changes in the timing of directory publications noted above, and the remaining reductions are primarily related to cost savings in the directory operations from the merger integration process with Ameritech. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued International - ----------------------------------------------------------------------------------- Third Quarter Nine-Month Period Percent Percent 2000 1999 Change 2000 1999 Change - ----------------------------------------------------------------------------------- Operating Revenues $ 79 $ 59 33.9% $ 247 $ 183 35.0% - ---------------------------------------------- ------------------ Operating Expenses 144 77 87.0 351 220 59.5 - ---------------------------------------------- ------------------ Operating Income (Loss) (65) (18) - (104) (37) - - ---------------------------------------------- ------------------ Interest Expense (36) (42) (14.3) (173) (173) - - ---------------------------------------------- ------------------ Equity in Net Income of Affiliates 207 208 (0.5) 604 546 10.6 - ---------------------------------------------- ------------------ Other Income (Expense) - Net 103 2 - 315 162 94.4 - ---------------------------------------------- ------------------ Income Before Income Taxes $ 209 $ 150 39.3% $ 642 $ 498 28.9% =================================================================================== Operating revenues increased $20, or 33.9%, in the third quarter and $64, or 35.0%, for the first nine months of 2000. The increase was primarily from increased volume-related long distance revenues. Operating expenses increased $67, or 87.0%, in the third quarter and $131, or 59.5%, for the first nine months of 2000. The increase was partly due to the costs associated with the increased long distance volumes as noted above and partly due to an increase in parent allocated charges. Equity in net income of affiliates decreased $1, or 0.5%, in the third quarter and increased $58, or 10.6%, for the first nine months of 2000. In the third quarter of 2000, SBC sold investments in the Aurec companies in Israel and MATAV, a Hungarian telecommunications company, which resulted in reductions in equity in net income totaling approximately $3 in the third quarter of 2000. Additionally, SBC's investments in ATL-Algar Telecom Leste S.A., a Brazilian communications company (ATL) and Amdocs Limited (Amdocs) had equity losses as compared to the prior year, totaling a decrease of approximately $43 in the third quarter and $87 for the first nine months of 2000. TeleDanmark had lower equity income in the third quarter and for the first nine months of 2000 due primarily to the decline in the value of the Danish Kroner, which resulted in reductions of approximately $8 in the third quarter and $25 for the first nine months. Offsetting these decreases were increases in equity in net income from SBC's investments in Telmex and Bell Canada, for a total increase of approximately $50 in the third quarter and $169 for the first nine months of 2000. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts RESULTS OF OPERATIONS - Continued Consolidated Results Interest expense increased $57, or 15.6%, in the third quarter and $125, or 11.7%, for the first nine months of 2000. This increase was primarily due to higher composite rates and increased debt levels in 2000. Other income (expense) - net increased $2,042 to income of $2,013 in the third quarter of 2000 from expense of $29 in the third quarter of 1999. Other income increased $2,325 to income of $2,196 for the first nine months of 2000 from expense of $129 for the first nine months of 1999. The increases in the third quarter and first nine months of 2000 are primarily due to gains on the sale of our interests in MATAV and Netcom GSM totaling approximately $1,699. Additionally, the increases are due to a decline in the market value of the DECS redeemable in Telmex L shares in 2000 as compared to an increase in 1999, net of gains recognized from the sale of Telmex L shares, resulting in a year over year increase totaling approximately $210 in the third quarter and $498 for the first nine months. Gains of approximately $7 in the third quarter and $72 for the first nine months of 2000 were recognized for market adjustments on shares of Amdocs used for deferred compensation. An offsetting deferred compensation expense was recorded in operations and support expense. The third quarter and first nine months of 1999 included charges of approximately $22 to write down several of Ameritech's cost investments to conform with SBC methodology. The first nine months of 1999 included gains from the sale of a portion of Amdocs shares of approximately $92 in a secondary offering, as well as gains of $52 representing market adjustments on Amdocs shares used for contributions to the SBC Foundation and deferred compensation. Results for the first nine months of 1999 also included a gain of approximately $59 recognized from the sale of SBC's investment in Chile and a gain of approximately $24 recognized from the sale of discontinued plant. Other income (expense) - net in future periods will not reflect changes in the market value of the DECS. See liquidity and capital resources for a discussion of the sale of Telmex L shares. Income Taxes in 2000 and 1999 reflect the tax effect of the normalizing items previously described in the Overview section. These charges increased income taxes by $525 in the third quarter and by $548 for the first nine months of 2000 and by $25 in the third quarter and $94 for the first nine months of 1999. The net effective tax rate on these one-time items differed as a result of nondeductible items included in the charges. Excluding these items, income taxes for the third quarter and first nine months of 2000 would have been $1,180 and $3,358. Income taxes for the third quarter and first nine months of 1999 would have been $1,128 and $3,176 excluding one-time charges. Income taxes were higher due primarily to higher income before income taxes and an increase in the effective tax rate due to higher nondeductible items in 2000. COMPETITIVE AND REGULATORY ENVIRONMENT Kansas and Oklahoma Long Distance In September 2000, the Oklahoma Corporation Commission approved SBC's application to provide interLATA long distance service for calls originating in Oklahoma. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts COMPETITIVE AND REGULATORY ENVIRONMENT - Continued In October 2000, the Kansas Corporation Commission approved SBC's application to provide such service for calls originating in Kansas. On October 26, 2000, both applications were filed with the Federal Communications Commission (FCC) for approval and the FCC has 90 days to rule on the applications. SBC continues to seek long distance approval in its other in-region states and has filed applications with state commissions in Arkansas, California, Missouri and Nevada. Illinois Service Standards SBC expects the Illinois Commerce Commission to impose a $30 fine for failure to satisfy a service repair standard imposed by the merger with Ameritech. The fine is related to calendar year 2000 performance and will be imposed through credits to customer bills. SBC expects to begin issuing the credits in February 2001 and accrued operating expense of $30 in the second and third quarters of 2000 for that purpose. Missouri Interconnection Agreement In September 2000, SBC reached a settlement agreement with MCI WorldCom Inc. (MCI) concerning reciprocal compensation for calls to Internet service providers under interconnection agreements with various MCI companies. The settlement did not exceed amounts previously accrued. Ohio Service Quality Ruling In September 2000, the Public Utilities Commission of Ohio (PUCO) upheld, in most respects, its July order imposing marketing restrictions; SBC's request for relief from dividend restrictions remains pending. In October 2000, the PUCO ordered an outside audit of Ameritech Ohio service quality covering the period August 1999 to December 2001. In addition, SBC will be required to pay certain on-going expenses of the PUCO staff in relation to the Ohio service quality investigation. SBC does not expect the payment of these expenses to have a material effect on SBC's results of operations or financial position. Ameritech Customer Credits In October 2000, SBC announced, as part of both a voluntary credit program as well as negotiations with a state utility commission to resolve ongoing service issues in Ameritech areas, that it will provide credits for lost dial tone or delays in obtaining new service to certain residential customers in the Ameritech region. Such credits will be recorded as operating expense as incurred and are expected to total approximately $25 in 2000. SecurityLink In October 2000, under terms of a consent decree reached with the FCC, we agreed to enter into an agreement to divest SecurityLink by February 2001 or pay a $1 penalty to the United States government. The FCC found that certain 1996 and 1997 acquisitions by SecurityLink violated provisions of the Telecommunications Act of 1996 that prohibit local telephone companies from owning alarm monitoring businesses. Certain aspects of a potential SecurityLink divestiture, such as a general decline in the market value of companies in the security industry and sale under order by the FCC, could negatively impact the sales price such that proceeds could be less than the carrying value. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts OTHER BUSINESS MATTERS Cumulative Effect of Change in Accounting See Note 3 of Notes to Consolidated Financial Statements for a discussion of the change in directory accounting at Ameritech. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which will require all derivatives to be recorded on the balance sheet at fair value, and will require changes in the fair value of the derivatives to be recorded in net income or comprehensive income. We plan to adopt FAS 133 on January 1, 2001 as a one-time, non-cash cumulative effect of accounting change. However, because of our minimal use of derivatives, we do not expect that adoption of this standard will have a significant effect on our financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which must be adopted by the fourth quarter of 2000. SAB 101 addresses, among other items, when revenue relating to nonrefundable, up-front fees should be recognized. We expect to defer the recognition of revenue and direct expenses related to up-front fees with no significant effect on operating or net income. Acquisitions and Dispositions See Note 9 of Notes to Consolidated Financial Statements for a discussion of acquisitions and dispositions made during 2000. Wireless Transactions See Note 10 of Notes to Consolidated Financial Statements for a discussion of the wireless joint venture with BellSouth. Voluntary Enhanced Pension and Retirement Program See Note 11 of Notes to Consolidated Financial Statements for a discussion of the Voluntary Enhanced Pension and Retirement Program. Pending Transactions In August 2000, SBC and SpectraSite Communications, Inc. (SpectraSite) announced an agreement under which we will grant the exclusive rights to sublease space on our 3,900 communications towers to SpectraSite. SpectraSite has also agreed to build or buy an estimated 800 new towers for us over the next five years. We will receive total consideration of $1,308 in a combination of cash and SpectraSite common stock. The transaction will close incrementally beginning in the fourth quarter and continuing for over one year. The payments we receive at closing will represent prepayments on the operating leases with SpectraSite and will be recognized in revenue over the life of the leases. Cingular (see Note 10 of Notes to Consolidated Financial Statements) will sublease space on the towers from SpectraSite and will have expansion rights on a majority of the existing towers. In September 2000, SBC, Bell Canada International Inc. (BCI) and Telmex announced revisions to the June 2000 agreement between Telmex and BCI governing the formation of a new, facilities-based communications company which will serve as the three companies' principal vehicle for expansion in Latin America. We will take an 11.4% stake in the new company by contributing our investment in ATL. When the contribution is made, we will account for our investment in the new company as a cost investment. The agreement is expected to close in the fourth quarter. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts OTHER BUSINESS MATTERS - Continued Marketing Agreements In April 2000, SBC entered into a strategic marketing and sales alliance with Cisco Systems, Inc. (Cisco) to accelerate delivery of broadband services to customers. Through joint marketing and sales efforts, SBC will package Cisco equipment with advanced voice, broadband data and network integration services. The alliance also consists of a series of joint research and product development activities. In September 2000, SBC announced an agreement making Covad Communications (Covad) an in-region and out-of-region DSL provider for SBC. SBC will begin marketing both symmetric business service DSL and asymmetric consumer service DSL provided by Covad throughout the United States. The companies will work together on network, provisioning and product planning activities needed to support the agreement. In November 2000, SBC purchased a minority ownership position (approximately 6%) in Covad, after receiving regulatory approval. LIQUIDITY AND CAPITAL RESOURCES SBC had $545 in cash and cash equivalents available at September 30, 2000. During the first nine months of 2000, as in 1999, SBC's primary source of funds continued to be cash provided by operating activities. SBC has entered into agreements with several banks for committed lines of credit totaling $4,000, all of which may be used to support commercial paper borrowings. SBC had no borrowings outstanding under these lines of credit as of September 30, 2000. Commercial paper borrowings as of September 30, 2000 and December 31, 1999 totaled $5,915 and $2,623. SBC's investing activities during the first nine months of 2000 consisted of $9,202 in construction and capital expenditures, primarily in the wireline and wireless segments. Investing activities during the first nine months of 2000 also included asset dispositions of $3,534, primarily related to the sale of SBC's interests in MATAV and Netcom GSM, and asset acquisitions of $5,306, primarily the approximate $3,600 acquisition of Sterling discussed above. Investing activities during the first nine months of 1999 included asset dispositions of $1,448, primarily related to additional proceeds from the sale of Telecom Corp of New Zealand Limited shares, and asset acquisitions of $4,792 related to Bell Canada, Comcast and Cellular Communications. In September 2000, proceeds of $520 were received on the sale of Telmex L shares. The proceeds were primarily used to purchase a mandatorily exchangeable debt securities note issued by a financial institution with characteristics that will essentially offset future mark to market adjustments on the DECS. SBC recorded a pre-tax gain of $238 on the sale. Short-term borrowings increased $4,278 primarily to fund the acquisition of Sterling. SBC also spent $1,457 on the repurchase of shares of its common stock under the repurchase plan announced in January 2000. As of October 31, 2000, SBC has repurchased a total of approximately 41 million shares of its common stock of the 100 million shares authorized to be repurchased. Financing activities during the first nine months of 1999 included new short-term borrowings and long-term debt proceeds to finance SBC's investment in Bell Canada and the acquisition of Comcast and Cellular Communications. In 1999, subsequent to the completion of the acquisitions of Comcast and Cellular Communications, SBC retired SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts LIQUIDITY AND CAPITAL RESOURCES - Continued virtually all of Comcast's and Cellular Communications' long-term debt in the amount of $1,415. Cash paid for dividends in the first nine months of 2000 was $2,560, or 3.9% higher than in the first nine months of 1999 due to an increase in dividends paid per share to $0.76125 from $0.73125. In the second quarter of 2000, SBC issued approximately $2,015 of one-year variable rate notes with interest payable quarterly. The interest rate is reset quarterly based on the three-month London Interbank Offer Rate (LIBOR) minus five basis points. At the end of the third quarter, the three-month LIBOR rate was 6.81%. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 3. Quantitative and Qualitative Disclosures About Market Risk Dollars in millions except per share amounts There has been no material change in SBC's market risks related to financial instruments since December 31, 1999. CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties. SBC claims the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. The following factors could cause SBC's future results to differ materially from those expressed in the forward-looking statements: o Adverse economic changes in the markets served by SBC, or countries in which SBC has significant investments. o Changes in available technology. o The final outcome of FCC rulemakings and judicial review, if any, of such rulemakings, including issues relating to jurisdiction. o The final outcome of state regulatory proceedings in SBC's 13-state area, and judicial review, if any, of such proceedings, including proceedings relating to interconnection terms, access charges, universal service, unbundled network elements and resale rates, and reciprocal compensation. o Enactment of additional state, Federal and/or foreign regulatory laws and regulations pertaining to SBC's subsidiaries and foreign investments. o The timing of entry and the extent of competition in the local and intraLATA toll markets in SBC's 13-state area and SBC's entry into the in-region long distance market. o The impact of the Ameritech transaction, including performance with respect to regulatory requirements and merger integration efforts. o The timing and cost of deployment of SBC's broadband initiative also known as Project Pronto, its effect on the carrying value of the existing wireline network and the level of consumer demand for offered services. o The impact of the wireless joint venture with BellSouth Corporation, known as Cingular Wireless, including marketing and product development efforts and financial capacity. Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially impact SBC's future earnings. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds Dollars in millions except per share amounts During the third quarter of 2000, non-employee directors acquired from the Company shares of common stock pursuant to the Company's Non-Employee Director Stock and Deferral Plan. Under the plan, a director may make an annual election to receive all or part of his or her annual retainer or fees in the form of SBC shares or deferred stock units (DSUs) that are convertible into SBC shares. Each Director also receives an annual grant of DSUs. During this period, an aggregate of 5,522 SBC shares and DSUs were acquired by non-employee directors at prices ranging from $40.81 to $50.00, in each case the fair market value of the shares on the date of acquisition. The issuances of shares and DSUs were exempt from registration pursuant to Section 4(2) of the Securities Act. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 12 Computation of Ratios of Earnings to Fixed Charges. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K On July 6, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. In the report, SBC disclosed that it had filed a Certificate of Ownership and Merger to merge its capital funding subsidiary, SBC Communications Capital Corporation, with and into SBC. On July 7, 2000, SBC filed a Form 8-K, reporting on Item 2. Acquisition or Disposition of Assets. In the report, SBC disclosed that it had exercised its right to sell its 50% ownership in MagyarCom to Deutsche Telekom. On July 28, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events and Item 7. Financial Statements and Exhibits. In the report, SBC disclosed a press release announcing second quarter 2000 earnings. On August 17, 2000, SBC filed a Form 8-K, reporting on Item 7. Financial Statements and Exhibits. In the report, SBC disclosed pro forma financial statements relating to the wireless joint venture with BellSouth Corporation. On August 28, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. In the report, SBC disclosed that it had commenced a new Medium-Term Notes program for the sale of up to $7,500 Medium-Term Notes. On October 3, 2000, SBC filed a Form 8-K, reporting on Item 5. Other Events. In the report, SBC disclosed that SBC and BellSouth Corporation closed a transaction to combine their domestic wireless operations. SBC COMMUNICATIONS INC. SEPTEMBER 30, 2000 Item 6. Exhibits and Reports on Form 8-K - Continued Dollars in millions except per share amounts On October 12, 2000, SBC filed a Form 8-K, reporting on Item 2. Acquisition or Disposition of Assets and Item 7. Financial Statements and Exhibits. In the report, SBC disclosed that SBC and BellSouth Corporation closed a transaction to contribute to their joint venture called Cingular Wireless substantially all of their respective domestic wireless voice and wireless data businesses. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SBC Communications Inc. November 9, 2000 /s/ Donald E. Kiernan --------------------- Donald E. Kiernan Senior Executive Vice President and Chief Financial Officer