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 1934For the quarterly period ended June 30, 2001
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934For the transition period from to
Commission File Number 1-8610
SBC COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
At July 31, 2001, 3,361,916,075 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 Six months ended
June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Operating Revenues
Landline local service $ 5,927 $ 5,462 $ 11,495 $ 10,586
Wireless subscriber 62 1,648 116 3,148
Network access 2,604 2,674 5,207 5,339
Long distance service 736 767 1,519 1,562
Directory advertising 947 967 1,777 1,849
Other 1,201 1,673 2,553 3,260
- --------------------------------------------------------------------------------
Total operating revenues 11,477 13,191 22,667 25,744
- --------------------------------------------------------------------------------
Operating Expenses
Operations and support 6,226 7,876 12,309 15,090
Depreciation and amortization 2,174 2,317 4,622 4,580
- --------------------------------------------------------------------------------
Total operating expenses 8,400 10,193 16,931 19,670
- --------------------------------------------------------------------------------
Operating Income 3,077 2,998 5,736 6,074
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (425) (416) (884) (772)
Interest income 193 10 371 34
Equity in net income of affiliates 541 189 942 389
Other income (expense) - net (164) 132 (58) 149
- --------------------------------------------------------------------------------
Total other income (expense) 145 (85) 371 (200)
- --------------------------------------------------------------------------------
Income Before Income Taxes 3,222 2,913 6,107 5,874
- --------------------------------------------------------------------------------
Income taxes 1,143 1,062 2,164 2,201
- --------------------------------------------------------------------------------
Income Before Extraordinary Item 2,079 1,851 3,943 3,673
- --------------------------------------------------------------------------------
Extraordinary item, net of tax (8) - (18) -
- --------------------------------------------------------------------------------
Net Income $ 2,071 $ 1,851 $ 3,925 $ 3,673
================================================================================
Earnings Per Common Share:
Income Before Extraordinary Item $ 0.62 $ 0.54 $ 1.17 $ 1.08
Net Income $ 0.62 $ 0.54 $ 1.16 $ 1.08
- --------------------------------------------------------------------------------
Earnings Per Common Share - Assuming Dilution:
Income Before Extraordinary Item $ 0.61 $ 0.54 $ 1.16 $ 1.07
Net Income $ 0.61 $ 0.54 $ 1.15 $ 1.07
- --------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding (in millions) 3,367 3,396 3,372 3,396
Dividends Declared Per Common Share $ 0.25625 $ 0.25375 $ 0.51250 $ 0.50750
================================================================================
See Notes to Consolidated Financial Statements.
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
- --------------------------------------------------------------------------------
June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 649 $ 643
Accounts receivable - net of allowances for
uncollectibles of $1,170 and $1,032 9,208 10,144
Prepaid expenses 1,070 550
Deferred income taxes 574 671
Other current assets 1,073 1,640
- --------------------------------------------------------------------------------
Total current assets 12,574 13,648
- --------------------------------------------------------------------------------
Property, plant and equipment - at cost 123,885 119,753
Less: accumulated depreciation and amortization 75,326 72,558
- --------------------------------------------------------------------------------
Property, Plant and Equipment - Net 48,559 47,195
- --------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated
Amortization of $658 and $746 4,957 5,475
Investments in Equity Affiliates 11,757 12,378
Notes Receivable from Cingular Wireless 5,942 9,568
Other Assets 12,145 10,387
- --------------------------------------------------------------------------------
Total Assets $ 95,934 $ 98,651
================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 8,021 $ 10,470
Accounts payable and accrued liabilities 10,808 15,432
Accrued taxes 3,469 3,592
Dividends payable 861 863
- --------------------------------------------------------------------------------
Total current liabilities 23,159 30,357
- --------------------------------------------------------------------------------
Long-Term Debt 19,024 15,492
- --------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 7,410 6,806
Postemployment benefit obligation 9,967 9,767
Unamortized investment tax credits 287 318
Other noncurrent liabilities 4,832 4,448
- --------------------------------------------------------------------------------
Total deferred credits and other noncurrent
liabilities 22,496 21,339
- --------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts - 1,000
- --------------------------------------------------------------------------------
Shareowners' Equity
Common shares issued ($1 par value) 3,433 3,433
Capital in excess of par value 12,092 12,125
Retained earnings 20,544 18,341
Guaranteed obligations of employee stock
ownership plans (ESOP) (21) (21)
Deferred compensation - leveraged ESOP (LESOP) - (37)
Treasury shares (at cost) (3,256) (2,071)
Accumulated other comprehensive loss (1,537) (1,307)
- --------------------------------------------------------------------------------
Total shareowners' equity 31,255 30,463
- --------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 95,934 $ 98,651
================================================================================
See Notes to Consolidated Financial Statements.
SBC COMMUNICATIONS INC.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
- -------------------------------------------------------------------------------
Six months ended
June 30,
2001 2000
- -------------------------------------------------------------------------------
Operating Activities
Net income $ 3,925 $ 3,673
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,622 4,580
Undistributed earnings from investments in
equity affiliates (224) (142)
Provision for uncollectible accounts 575 415
Amortization of investment tax credits (31) (35)
Deferred income tax expense 648 558
Gain on sales of investments (224) (216)
Extraordinary item, net of tax 18 -
Changes in operating assets and liabilities:
Accounts receivable 336 (575)
Other current assets (431) (371)
Accounts payable and accrued liabilities (2,003) (99)
Other - net (634) (1,052)
- -------------------------------------------------------------------------------
Total adjustments 2,652 3,063
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,577 6,736
- -------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (5,744) (5,341)
Investments in affiliates 1,512 (103)
Proceeds from short-term investments 510 -
Dispositions 339 216
Acquisitions - (3,663)
- -------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,383) (8,891)
- -------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (2,402) 4,604
Issuance of long-term debt 5,724 1,031
Repayment of long-term debt (2,415) (794)
Early redemption of corporation-obligated mandatorily
redeemable preferred securities of subsidiary trusts (1,000) -
Purchase of treasury shares (1,465) (892)
Issuance of treasury shares 132 172
Redemption of preferred shares of subsidiaries (60) -
Dividends paid (1,727) (1,698)
Other 25 50
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (3,188) 2,473
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6 318
- -------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 643 495
- -------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 649 $ 813
===============================================================================
Cash paid during the six months ended June 30 for:
Interest $ 861 $ 848
Income taxes, net of refunds $ 1,330 $ 1,560
See Notes to Consolidated Financial Statements.
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, 2000 $ 3,433 $ 12,125 $ 18,341 $ (21) $ (37) $ (2,071) $ (1,307)
Net income - - 3,925 - - - -
Other comprehensive loss - - - - - - (230)
Dividends to shareowners - - (1,723) - - - -
Reduction of debt associated with ESOP - - - - - - -
Cost of LESOP trust shares allocated to
employee accounts - - - - 37 - -
Purchase of treasury shares - - - - - (1,465) -
Issuance of treasury shares - (109) - - - 280 -
Other - 76 1 - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 3,433 $ 12,092 $ 20,544 $ (21) $ - $ (3,256) $ (1,537)
=============================================================================================================================
See Notes to Consolidated Financial Statements.
SELECTED FINANCIAL AND OPERATING DATA
- ------------------------------------------
- ---------------------------------------------
At June 30, or for the six months then ended: 2001 2000
- --------------------------------------------- ---------------------
Debt ratio.......................................... 46.4% 46.7%
Network access lines in service (000)............... 60,579 61,233
Resold and rebundled line (000)..................... 3,200 2,056
Access minutes of use (000,000) ....................142,738 140,134
Cingular Wireless customers*(000)................... 21,218 18,143
Number of employees.................................216,600 219,000
*Amounts represent the 100% pro forma customers of Cingular Wireless.
SBC COMMUNICATIONS INC.
JUNE 30, 2001
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 this document in
conjunction with the Consolidated Financial Statements and accompanying notes
included in our 2000 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.
In the second quarter of 2001, Cingular Wireless (Cingular), SBC and BellSouth
Corporation completed the net debt settlement calculations that were a part of
the Cingular contribution agreement. As a part of this process, we netted
approximately $2,500 of payables to Cingular with our notes receivable from
Cingular during the quarter. In addition, based on our current expectations of
when Cingular will repay the amount owed, we have reclassified the notes
receivable from Cingular from current to noncurrent assets.
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, including Cingular, 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 our Consolidated Statements of Income.
3. EXTRAORDINARY ITEM The second quarter of 2001 includes an extraordinary loss of
$8, net of taxes of $6, related to the early redemption of approximately $500 of
our corporation-obligated mandatorily redeemable preferred securities of
subsidiary trusts. The first six months of 2001 includes an extraordinary loss
of $18, net of taxes of $10, related to the early redemption of approximately
$1,000 of our corporation-obligated mandatorily redeemable preferred securities
of subsidiary trusts.
4. COMPREHENSIVE INCOME The components of our comprehensive income for the three
and six months ended June 30, 2001 and 2000 include net income and adjustments to
shareowners' equity for the foreign currency translation adjustment and net
unrealized gain (loss) on securities. The foreign currency translation
adjustment is due to exchange rate fluctuations in our foreign affiliates' local
currencies, primarily in Denmark and Canada.
Following is our comprehensive income:
--------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
--------------------------------------------------------------------------------------
Net income $ 2,071 $ 1,851 $ 3,925 $ 3,673
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 56 (101) (182) (211)
Net unrealized gain (loss) on securities:
Unrealized gain (loss) on available for
sale securities (29) (24) (52) 25
Less: reclassification adjustment for (gain)
loss included in net income 4 (8) 4 (46)
--------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities (25) (32) (48) (21)
--------------------------------------------------------------------------------------
Other comprehensive income (loss) 31 (133) (230) (232)
--------------------------------------------------------------------------------------
Total comprehensive income $ 2,102 $ 1,718 $ 3,695 $ 3,441
======================================================================================
5. COMPLETION OF MERGER Upon completion of the merger of an SBC subsidiary with
Ameritech Corporation (Ameritech) in October 1999, we reviewed operations
throughout the merged company. Based on this merger integration review, we made
strategic decisions to significantly integrate operations and consolidate some
administrative and support functions which resulted in one-time charges.
One-time charges incurred included costs related to various regulatory and legal
issues, merger approval costs and other related costs, as well as costs related
to strategic decisions reached by the review teams. Remaining accruals for
anticipated cash expenditures related to these decisions were approximately $81
and $158 at June 30, 2001 and December 31, 2000.
6. EARNINGS PER SHARE A reconciliation of the numerators and denominators of basic
earnings per share and diluted earnings per share for income before extraordinary
item for the three and six months ended June 30, 2001 and 2000 are shown in the
table below.
--------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
--------------------------------------------------------------------------------
Numerators
Numerator for basic earnings per share:
Income before extraordinary item $ 2,079 $ 1,851 $ 3,943 $ 3,673
--------------------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 1 2 2 3
--------------------------------------------------------------------------------
Numerator for diluted earnings per share $ 2,080 $ 1,853 $ 3,945 $ 3,676
================================================================================
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding 3,367 3,396 3,372 3,396
--------------------------------------------------------------------------------
Dilutive potential common shares:
Stock options 20 34 24 31
Other stock-based compensation 8 8 8 8
--------------------------------------------------------------------------------
Denominator for diluted earnings per share 3,395 3,438 3,404 3,435
================================================================================
Basic earnings per share:
Income before extraordinary item $ 0.62 $ 0.54 $ 1.17 $ 1.08
Extraordinary item - - (0.01) -
--------------------------------------------------------------------------------
Net income $ 0.62 $ 0.54 $ 1.16 $ 1.08
================================================================================
Diluted earnings per share:
Income before extraordinary item $ 0.61 $ 0.54 $ 1.16 $ 1.07
Extraordinary item - - (0.01) -
--------------------------------------------------------------------------------
Net income $ 0.61 $ 0.54 $ 1.15 $ 1.07
================================================================================
7. PREPAID PENSION COST Prepaid pension costs are based on the cumulative amount of
net pension benefits we recognized under Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions". At June 30, 2001 and
December 31, 2000, amounts included in other assets for prepaid pension costs
were $6,713 and $5,122. The increase in these assets was primarily due to
pension benefits and pension settlement gains during the first six months of the
year.
8. SUBSIDIARY FINANCIAL INFORMATION We have fully and unconditionally guaranteed
certain outstanding capital securities of Pacific Bell Telephone Company
(PacBell) and Southwestern Bell Telephone Company (SWBell), each of which is a
wholly owned subsidiary of SBC. In accordance with SEC rules, we are providing
the following condensed consolidating financial information.
The Parent column presents investments in all subsidiaries under the equity
method of accounting. PacBell and SWBell are listed separately because each has
securities that we have guaranteed that would otherwise require SEC periodic
reporting. All other wholly owned subsidiaries that do not have securities
guaranteed by us that would require separate reporting are presented in the Other
column. The consolidating adjustments column (Adjs.) eliminates the intercompany
balances and transactions between our subsidiaries.
Condensed Consolidating Statements of Income
For the Three Months Ended June 30, 2001
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------- --------
Total operating revenues $ - $ 2,613 $ 2,856 $ 6,379 $ (371) $ 11,477
Total operating expenses 53 1,713 2,063 4,942 (371) 8,400
----------------------------------------------------------------------------- --------
Operating Income (53) 900 793 1,437 - 3,077
----------------------------------------------------------------------------- --------
Interest expense 135 94 101 261 (166) 425
Equity in net income of affiliates 2,134 - - 543 (2,136) 541
Royalty income (expense) 115 (101) (115) 101 - -
Other income (expense) - net (175) (1) 2 367 (164) 29
----------------------------------------------------------------------------- --------
Income Before Income Taxes 1,886 704 579 2,187 (2,134) 3,222
----------------------------------------------------------------------------- --------
Income taxes (185) 284 215 829 - 1,143
----------------------------------------------------------------------------- --------
Income Before Extraordinary Item 2,071 420 364 1,358 (2,134) 2,079
----------------------------------------------------------------------------- --------
Extraordinary item, net of tax - - - (8) - (8)
----------------------------------------------------------------------------- --------
Net Income $ 2,071 $ 420 $ 364 $ 1,350 $ (2,134) $ 2,071
============================================================================= ========
Condensed Consolidating Statements of Income
For the Three Months Ended June 30, 2000
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------- --------
Total operating revenues $ - $ 2,586 $ 2,928 $ 8,022 $ (345) $ 13,191
Total operating expenses 54 1,975 2,201 6,308 (345) 10,193
----------------------------------------------------------------------------- --------
Operating Income (54) 611 727 1,714 - 2,998
----------------------------------------------------------------------------- --------
Interest expense 138 102 95 285 (204) 416
Equity in net income of affiliates 1,637 - - 206 (1,654) 189
Royalty income (expense) 115 (101) (115) 101 - -
Other income (expense) - net 319 - - 10 (187) 142
----------------------------------------------------------------------------- --------
Income Before Income Taxes 1,879 408 517 1,746 (1,637) 2,913
----------------------------------------------------------------------------- --------
Income taxes 28 167 193 674 - 1,062
----------------------------------------------------------------------------- --------
Net Income $ 1,851 $ 241 $ 324 $ 1,072 $ (1,637) $ 1,851
============================================================================= ========
Condensed Consolidating Statements of Income
For the Six Months Ended June 30, 2001
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------- --------
Total operating revenues $ - $ 5,195 $ 5,757 $12,411 $ (696) $ 22,667
Total operating expenses 18 3,327 4,201 10,081 (696) 16,931
----------------------------------------------------------------------------- --------
Operating Income (18) 1,868 1,556 2,330 - 5,736
----------------------------------------------------------------------------- --------
Interest expense 283 192 201 540 (332) 884
Equity in net income of affiliates 3,946 - - 944 (3,948) 942
Royalty income (expense) 230 (203) (230) 203 - -
Other income (expense) - net 43 - 2 598 (330) 313
----------------------------------------------------------------------------- --------
Income Before Income Taxes 3,918 1,473 1,127 3,535 (3,946) 6,107
----------------------------------------------------------------------------- --------
Income taxes (7) 594 417 1,160 - 2,164
----------------------------------------------------------------------------- --------
Income Before Extraordinary Item 3,925 879 710 2,375 (3,946) 3,943
----------------------------------------------------------------------------- --------
Extraordinary item, net of tax - - - (18) - (18)
----------------------------------------------------------------------------- --------
Net Income $ 3,925 $ 879 $ 710 $ 2,357 $(3,946) $ 3,925
============================================================================= ========
Condensed Consolidating Statements of Income
For the Six Months Ended June 30, 2000
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------- --------
Total operating revenues $ - $ 5,106 $ 5,758 $15,484 $ (604) $ 25,744
Total operating expenses (47) 3,866 4,438 12,017 (604) 19,670
----------------------------------------------------------------------------- --------
Operating Income 47 1,240 1,320 3,467 - 6,074
----------------------------------------------------------------------------- --------
Interest expense 201 203 192 670 (494) 772
Equity in net income of affiliates 3,322 - - 426 (3,359) 389
Royalty income (expense) 230 (203) (230) 203 - -
Other income (expense) - net 390 1 1 248 (457) 183
----------------------------------------------------------------------------- --------
Income Before Income Taxes 3,788 835 899 3,674 (3,322) 5,874
----------------------------------------------------------------------------- --------
Income taxes 115 342 336 1,408 - 2,201
----------------------------------------------------------------------------- --------
Net Income $ 3,673 $ 493 $ 563 $ 2,266 $(3,322) $ 3,673
============================================================================= ========
Condensed Consolidating Balance Sheets
June 30, 2001
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------- --------
Cash and cash equivalents $ 347 $ 31 $ 25 $ 246 $ - $ 649
Accounts receivable - net 3,754 2,087 1,943 13,375 (11,951) 9,208
Other current assets 255 470 765 1,227 - 2,717
----------------------------------------------------------------------------- --------
Total current assets 4,356 2,588 2,733 14,848 (11,951) 12,574
----------------------------------------------------------------------------- --------
Property, plant and equipment - net 115 13,354 15,463 19,627 - 48,559
----------------------------------------------------------------------------- --------
Intangible assets - net - - - 4,957 - 4,957
----------------------------------------------------------------------------- --------
Investments in equity affiliates 34,215 - - 15,375 (37,833) 11,757
----------------------------------------------------------------------------- --------
Other assets 8,049 2,346 449 12,145 (4,902) 18,087
----------------------------------------------------------------------------- --------
Total Assets $46,735 $18,288 $18,645 $66,952 $(54,686) $ 95,934
============================================================================= ========
Debt maturing within one year $ 7,075 $ 2,028 $ 3,303 $ 3,714 $ (8,099) $ 8,021
Other current liabilities 1,561 3,363 3,381 10,685 (3,852) 15,138
----------------------------------------------------------------------------- --------
Total current liabilities 8,636 5,391 6,684 14,399 (11,951) 23,159
----------------------------------------------------------------------------- --------
Long-term debt 4,225 4,294 3,919 11,438 (4,852) 19,024
----------------------------------------------------------------------------- --------
Postemployment benefit obligation 79 2,894 3,045 3,949 - 9,967
----------------------------------------------------------------------------- --------
Other noncurrent liabilities 2,540 1,687 1,214 7,138 (50) 12,529
----------------------------------------------------------------------------- --------
Total shareowners' equity 31,255 4,022 3,783 30,028 (37,833) 31,255
----------------------------------------------------------------------------- --------
Total Liabilities
and Shareowners' Equity $46,735 $18,288 $18,645 $66,952 $(54,686) $ 95,934
============================================================================= ========
Condensed Consolidating Balance Sheets
December 31, 2000
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------- --------
Cash and cash equivalents $ 436 $ 9 $ 52 $ 146 $ - $ 643
Accounts receivable - net 9,503 2,219 2,111 10,439 (14,128) 10,144
Other current assets 631 474 697 1,059 - 2,861
----------------------------------------------------------------------------- --------
Total current assets 10,570 2,702 2,860 11,644 (14,128) 13,648
Property, plant and equipment - net 138 13,028 14,984 19,045 - 47,195
----------------------------------------------------------------------------- --------
Intangible assets - net - - - 5,475 - 5,475
----------------------------------------------------------------------------- --------
Investments in equity affiliates 30,072 - - 17,058 (34,752) 12,378
----------------------------------------------------------------------------- --------
Other assets 3,750 2,061 272 18,722 (4,850) 19,955
----------------------------------------------------------------------------- --------
Total Assets $44,530 $17,791 $18,116 $71,944 $(53,730) $ 98,651
============================================================================= =========
Debt maturing within one year $ 8,918 $ 1,776 $ 2,648 $ 4,607 $ (7,479) $ 10,470
Other current liabilities 2,527 3,794 4,112 16,103 (6,649) 19,887
----------------------------------------------------------------------------- --------
Total current liabilities 11,445 5,570 6,760 20,710 (14,128) 30,357
----------------------------------------------------------------------------- --------
Long-term debt 568 4,293 3,976 11,505 (4,850) 15,492
----------------------------------------------------------------------------- --------
Postemployment benefit obligation 83 2,817 2,993 3,874 - 9,767
----------------------------------------------------------------------------- --------
Other noncurrent liabilities 1,971 1,536 1,314 6,751 - 11,572
----------------------------------------------------------------------------- --------
Corporation-obligated mandatorily
redeemable preferred securities of
subsidiary trusts - - - 1,000 - 1,000
----------------------------------------------------------------------------- --------
Total shareowners' equity 30,463 3,575 3,073 28,104 (34,752) 30,463
----------------------------------------------------------------------------- --------
Total Liabilities
and Shareowners' Equity $44,530 $17,791 $18,116 $71,944 $(53,730) $ 98,651
============================================================================= ========
Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2001
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------- --------
Net cash from operating activities $ (261) $ 1,476 $ 1,017 $ 6,986 $(2,641) $ 6,577
Net cash from investing activities 1,445 (1,272) (1,641) (2,389) 474 (3,383)
Net cash from financing activities (1,273) (182) 597 (4,497) 2,167 (3,188)
----------------------------------------------------------------------------- --------
Net Increase (Decrease) in Cash $ (89) $ 22 $ (27) $ 100 $ - $ 6
============================================================================= ========
Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2000
Parent PacBell SWBell Other Adjs. Total
---------------------------------------------------------------------------- --------
Net cash from operating activities $ 656 $ 1,798 $ 2,032 $ 112 $ 2,138 $ 6,736
Net cash from investing activities (3,414) (1,306) (1,405) (2,438) (328) (8,891)
Net cash from financing activities 2,963 (480) (648) 2,448 (1,810) 2,473
---------------------------------------------------------------------------- --------
Net Increase (Decrease) in Cash $ 205 $ 12 $ (21) $ 122 $ - $ 318
============================================================================ ========
9. 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 (e.g.,
one-time) items. We have five reportable segments that reflect the current
management of our business: (1) wireline; (2) wireless; (3) directory;
(4) international; and (5) other.
In the second quarter of 2001, we moved the results of the SBC Services unit from
the other segment to the wireline segment because the SBC Services unit now
primarily supports the wireline segment. We have restated all prior period
information for this change, which had no effect on our consolidated results.
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.
Prior to the fourth quarter of 2000, the wireless segment included our
consolidated businesses that provided wireless telecommunications services and
sold wireless equipment. In October 2000, we contributed substantially all of
our wireless businesses to Cingular and began reporting results from Cingular's
operations as equity income in the Consolidated Financial Statements. However,
for internal management purposes, we analyze Cingular's results using
proportional consolidation and therefore will discuss Cingular's results on that
basis for segment reporting.
The directory segment includes all directory operations, including yellow and
white pages advertising and electronic publishing. All investments with
primarily international operations are included in the international segment.
The other segment includes all corporate operations and Ameritech's paging, cable
television and SecurityLink operations. SecurityLink was sold in January 2001
and in May 2001, we entered into an agreement to sell our cable television
operations.
Normalized results for 2001 exclude the following items:
o Pension settlement gains of $314 ($189 net of tax) in the second quarter and
$839 ($519 net of tax) for the first six months (recorded in operating
expenses) related to management employees, primarily resulting from a fourth
quarter 2000 voluntary retirement program net of costs associated with that
program.
o Combined charges of $401 ($261 net of tax) in the second quarter and for the
first six months (recorded in other income (expense) - net) related to
valuation adjustments of Williams Communications Group Inc. (Williams) and
certain other cost investments accounted for under Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (FAS 115) (see Note 10).
o Reduction of a valuation allowance of $120 ($78 net of tax) in the second
quarter and for the first six months (recorded in other income (expense) -
net) on a note receivable related to the sale of Ameritech's SecurityLink
business. The note was collected in July 2001.
o Combined charges of $316 ($205 net of tax) for the first six months (recorded
in operating expenses) related to impairment of our cable operations.
Normalized results for 2000 exclude the following items from operating expenses:
o Pension settlement gains of $124 ($80 net of tax) in the second quarter and
$374 ($241 net of tax) for the first six months primarily related to employees
who terminated employment during 1999. We were required to record these second
quarter gains as a result of revising our estimates of total lump-sum payments
to be made during 2000 from a non-management pension plan.
o Costs of $239 ($153 net of tax) in the second quarter and $380 ($270 net of
tax) for the first six months associated with strategic initiatives and other
adjustments resulting from the merger integration process with Ameritech.
o A charge of $132 for the first six months (with no tax effect) related to
in-process research and development from the March 2000 acquisition of
Sterling Commerce, Inc.
Segment results, including a reconciliation to our consolidated results, for the
three and six months ended June 30, 2001 and 2000 are as follows:
------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
June 30, 2001 customers revenues income taxes
------------------------------------------------------------------------
Wireline $ 10,326 $ 7 $ 1,963
Wireless 2,192 - 289
Directory 915 22 537
International 43 12 319
Other 122 14 81
Cingular de-consolidation (2,121) - -
Eliminations - (55) -
Normalizing adjustments - - 33
------------------------------------------------------------------------
Total $ 11,477 $ - $ 3,222
========================================================================
------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
June 30, 2000 customers revenues income taxes
------------------------------------------------------------------------
Wireline $ 9,912 $ 60 $ 2,061
Wireless 2,037 - 270
Directory 895 22 472
International 107 - 194
Other 241 23 31
Eliminations - (105) -
Normalizing adjustments (1) - (115)
------------------------------------------------------------------------
Total $ 13,191 $ - $ 2,913
========================================================================
----------------------------------------------------------------------------------
Revenues
At June 30, 2001 or for the six from external Intersegment Income before Segment
months ended customers revenues income taxes assets
----------------------------------------------------------------------------------
Wireline $ 20,430 $ 15 $ 3,697 $ 69,053
Wireless 4,223 - 478 13,764
Directory 1,708 53 917 2,329
International 104 21 597 11,277
Other 288 31 176 57,001
Cingular de-consolidation (4,086) - - (12,025)
Eliminations - (120) - (45,465)
Normalizing adjustments - - 242 -
----------------------------------------------------------------------------------
Total $ 22,667 $ - $ 6,107 $ 95,934
==================================================================================
----------------------------------------------------------------------------------
Revenues
At June 30, 2000 or for the six from external Intersegment Income before Segment
months ended customers revenues income taxes assets
----------------------------------------------------------------------------------
Wireline $ 19,487 $ 114 $ 4,138 $ 60,695
Wireless 3,863 - 571 12,283
Directory 1,738 50 855 2,175
International 168 - 433 13,081
Other 490 45 15 48,597
Eliminations (1) (209) - (45,640)
Normalizing adjustments (1) - (138) -
----------------------------------------------------------------------------------
Total $ 25,744 $ - $ 5,874 $ 91,191
==================================================================================
10.VALUATION ADJUSTMENTS We have cost investments in Williams and in certain
alternative providers of digital subscriber line services accounted for under FAS
115. We periodically review the value of these investments and determine whether
an investment's decline in value is other than temporary. If so, FAS 115
requires that the cost basis of the investment be written down to fair value,
which is the new cost basis. We concluded that the continued depressed market
values of those companies, as well as difficulties experienced by many similar
companies indicated the decline in value of our investments was other than
temporary. As a result of these reviews, we recognized a combined charge of $401
($261 net of tax) in the second quarter of 2001 in other income (expense) - net.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
- ----------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Throughout this document, SBC Communications Inc. is referred to as "we" or "SBC".
A reference to a Note in this section refers to the accompanying Notes to
Consolidated Financial Statements.
Overview
Our financial results for the second quarter and the first six months of
2001 and 2000 are summarized as follows:
- ------------------------------------------------------------------------------------
Second Quarter Six-Month Period
- ------------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ------------------------------------------------------------------------------------
Operating revenues $11,477 $13,191 (13.0)% $22,667 $25,744 (12.0)%
Operating expenses 8,400 10,193 (17.6) 16,931 19,670 (13.9)
Operating income 3,077 2,998 2.6 5,736 6,074 (5.6)
Income before income taxes
and extraordinary item 3,222 2,913 10.6 6,107 5,874 4.0
Income before extraordinary item 2,079 1,851 12.3 3,943 3,673 7.4
Extraordinary item, net of tax (8) - - (18) - -
Net income 2,071 1,851 11.9 3,925 3,673 6.9
====================================================================================
We reported net income of $2,071, or $0.61 per share assuming dilution, in the
second quarter of 2001 and $3,925, or $1.15 per share assuming dilution, for the
first six months of 2001 compared to $1,851, or $0.54 per share assuming dilution,
in the second quarter of 2000 and $3,673, or $1.07 per share assuming dilution, for
the first six months of 2000. The second quarter of 2001 includes an extraordinary
loss of $8, net of taxes of $6, related to the early redemption of approximately
$500 of our corporation-obligated mandatorily redeemable preferred securities of
subsidiary trusts. The first six months of 2001 includes an extraordinary loss of
$18, net of taxes of $10, related to the early redemption of approximately $1,000 of
our corporation-obligated mandatorily redeemable preferred securities of subsidiary
trusts.
Normalized results for 2001 exclude the following items:
o Pension settlement gains of $314 ($189 net of tax) in the second quarter and
$839 ($519 net of tax) for the first six months (recorded in operating
expenses) related to management employees, primarily resulting from a fourth
quarter 2000 voluntary retirement program net of costs associated with that
program.
o Combined charges of $401 ($261 net of tax) in the second quarter and for the
first six months (recorded in other income (expense) - net) related to
valuation adjustments of Williams Communications Group Inc. and certain other
cost investments accounted for under Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (see Note 10).
o Reduction of a valuation allowance of $120 ($78 net of tax) in the second
quarter and for the first six months (recorded in other income (expense) -
net) on a note receivable related to the sale of Ameritech Corporation's
(Ameritech) SecurityLink business. The note was collected in July 2001.
o Combined charges of $316 ($205 net of tax) for the first six months (recorded
in operating expenses) related to impairment of our cable operations.
Normalized results for 2000 exclude the following items from operating expenses:
o Pension settlement gains of $124 ($80 net of tax) in the second quarter and
$374 ($241 net of tax) for the first six months primarily related to employees
who terminated employment during 1999. We were required to record these
second quarter gains as a result of revising our estimates of total lump-sum
payments to be made during 2000 from a non-management pension plan.
o Costs of $239 ($153 net of tax) in the second quarter and $380 ($270 net of
tax) for the first six months associated with strategic initiatives and other
adjustments resulting from the merger integration process with Ameritech.
o A charge of $132 for the first six months (with no tax effect) related to
in-process research and development from the March 2000 acquisition of
Sterling Commerce, Inc. (Sterling).
The net effect of excluding these normalizing items was to decrease net income by $6
in the second quarter and $131 for the first six months of 2001, and to increase net
income by $73 in the second quarter and $161 for the first six months of 2000. In
addition to these normalizing items, for internal management purposes, we include
the 60% proportional consolidation of Cingular Wireless (Cingular) in our 2001
normalized results. The following table summarizes our normalized results for the
second quarter and first six months of 2001 and 2000.
Normalized Results
- -----------------------------------------------------------------------------------------
Second Quarter Six-Month Period
- -----------------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- -----------------------------------------------------------------------------------------
Operating revenues $ 13,586 $ 13,192 3.0% $ 26,730 $ 25,745 3.8%
Operating expenses 10,370 10,077 2.9 20,758 19,531 6.3
Operating income 3,216 3,115 3.2 5,972 6,214 (3.9)
Income before income taxes
and extraordinary item 3,189 3,028 5.3 5,865 6,012 (2.4)
Income before extraordinary item 2,073 1,924 7.7 3,812 3,834 (0.6)
=========================================================================================
Consolidated normalized revenues increased in the second quarter primarily due to
growth in demand for data communications and wireless services and products.
However, the growth rate was slower than the first quarter reflecting the ongoing
impact of a weak United States' (U.S.) economy, increased competition and sales of
non-strategic assets. Consolidated normalized operating expenses for the second
quarter declined sequentially from the first quarter of 2001 but increased
moderately from the second quarter of 2000 due to investments in new products and
services, including Digital Subscriber Line (DSL) and long distance service, and
addressing service issues in the Ameritech region. These demand-related increases
in expenses were partially offset by cost savings from reductions in employee levels
and other operational efficiencies. While the first six months of 2001 show a
decline in operating income and income before extraordinary item compared to the
first six months of 2000, these expense factors contributed to an increase in
operating income and income before extraordinary item both sequentially over the
first quarter of 2001 and compared to the second quarter of 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, interest income, other income (expense) - net and income taxes.
Wireline
Normalized Results
- --------------------------------------------------------------------------------------
Second Quarter Six-Month Period
- --------------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- --------------------------------------------------------------------------------------
Operating revenues
Local service $ 5,923 $ 5,467 8.3% $ 11,487 $ 10,595 8.4%
Network access 2,604 2,696 (3.4) 5,207 5,384 (3.3)
Long distance service 709 715 (0.8) 1,447 1,469 (1.5)
Other 1,097 1,094 0.3 2,304 2,153 7.0
- ------------------------------------------------- --------------------
Total Operating Revenues 10,333 9,972 3.6 20,445 19,601 4.3
- ------------------------------------------------- --------------------
Operating expenses
Operations and support 5,972 5,682 5.1 11,980 11,116 7.8
Depreciation and amortization 2,094 1,931 8.4 4,133 3,747 10.3
- ------------------------------------------------- -------------------
Total Operating Expenses 8,066 7,613 6.0 16,113 14,863 8.4
- ------------------------------------------------- -------------------
Operating Income 2,267 2,359 (3.9) 4,332 4,738 (8.6)
- ------------------------------------------------- -------------------
Interest Expense 311 322 (3.4) 656 646 1.5
- ------------------------------------------------- -------------------
Other Income (Expense) - Net 7 24 (70.8) 21 46 (54.3)
- ------------------------------------------------- -------------------
Income Before Income Taxes $ 1,963 $ 2,061 (4.8)% $ 3,697 $ 4,138 (10.7)%
=======================================================================================
Local service revenues increased $456, or 8.3%, in the second quarter and $892,
or 8.4%, for the first six months of 2001. Approximately $145 of the increase in
the second quarter and $337 for the first six months was attributable to
continued demand from business customers for network integration services.
Increases in wholesale revenues, which include unbundled network elements and
resale services, accounted for approximately $93 of the second-quarter increase
and $192 for the first six months. Revenues from vertical services such as
Caller ID, voice mail and other enhanced services and vertical service packages
increased by approximately $33 in the second quarter and $109 for the first six
months due to both increased demand and pricing. The continued rollout of DSL
increased local service revenues by approximately $58 in the second quarter and
$144 for the first six months and we increased our number of DSL customers to
approximately 1,037,000 at the end of the second quarter of 2001. Revenue
increases were partially offset by a decrease in access line revenue of
approximately $148 in the second quarter and $235 for the first six months, due
to both a slowing U.S. economy and competitive losses.
Passage of the Illinois legislation discussed in Competitive and Regulatory
Environment resulted in a one-time increase in revenues of approximately $174 in
the second quarter and $128 for the first six months of 2001. The first quarter
of 2001 included a reserve against revenues of approximately $46 relating to
certain issues then pending before the Illinois Commerce Commission (ICC). This
reserve was reversed in the second quarter since the legislation resolved these
issues. Additionally, as discussed below, the legislation increased operations
and support expenses and decreased interest expense.
Network access revenues decreased $92, or 3.4%, in the second quarter and $177,
or 3.3%, for the first six months of 2001. The declines were primarily due to
the continuing impact of 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
network access revenues by approximately $186 in the second quarter and $359 for
the first six months. Additional decreases resulted from state regulatory access
rate reductions. Access rate reductions were partially offset by continued
demand for our core data transport services including SONET, DS3s and ATM.
Long distance service revenues decreased $6, or 0.8%, in the second quarter and
$22, or 1.5%, for the first six months of 2001. Long distance service revenues
decreased by approximately $46 in the second quarter and $103 for the first six
months due to competitive losses resulting from intraLATA dialing parity.
Competitive pricing actions in the Ameritech region also decreased revenues
approximately $40 in the second quarter and $74 for the first six months. These
decreases were largely offset by new revenues of approximately $84 in the second
quarter and $153 for the first six months due to our entry into the Texas, Kansas
and Oklahoma interLATA long distance markets.
Other operating revenues increased $3, or 0.3%, in the second quarter and $151,
or 7.0%, for the first six months of 2001. Sales of nonregulated products and
services increased modestly in the second quarter but were less than the first
quarter of 2001 due to the current weakness in the U.S. economy. Price increases
in 2000 added approximately $35 to the increase in the second quarter and $68 for
the first six months of 2001. These increases were mostly offset by continued
declines in the payphone business of approximately $24 in the second quarter and
$38 for the first six months of 2001.
Operations and support expenses increased $290, or 5.1%, in the second quarter
and $864, or 7.8%, for the first six months of 2001. Costs to address service
issues in the Ameritech region continued to be higher than 2000, and increased
approximately $74 in the second quarter and $158 for the first six months.
Passage of the Illinois legislation discussed in Competitive and Regulatory
Environment increased expenses approximately $110 in the second quarter and for
the first six months of 2001. Our provision for uncollectible accounts increased
approximately $140 in the second quarter and $240 for the first six months
related to reserves for companies that went out of business or are a higher
credit risk due to the current weakness in the U.S. economy. Approximately $80
of the increase in the second quarter and $228 for the first six months was
related to costs associated with our continued rollout of DSL, as mentioned in
local service. Costs associated with data equipment sales, network integration
and e-commerce services increased approximately $125 in the second quarter and
$414 for the first six months due to increased demand, although second quarter
demand was weaker than the first quarter of 2001. In addition, our long distance
and national expansion initiatives increased expenses approximately $113 in the
second quarter and $269 for the first six months.
Costs associated with reciprocal compensation were relatively unchanged in the
second quarter and approximately $85 lower for the first six months due to
reduced negotiated rates partially offset by growth in usage. We also had lower
expenses of approximately $256 in the second quarter and $343 for the first six
months related to reduced employee levels from early retirements, lower personnel
benefit costs, reduced outsourcing costs and gains from certain employee
postretirement plans. In addition, the second quarter and first six months of
2001 included a reduction in taxes of approximately $92, primarily related to
settlements and lower property tax appraisals.
Depreciation and amortization expenses increased $163, or 8.4%, in the second
quarter and $386, or 10.3%, for the first six months of 2001. The majority of
the increase was related to higher plant levels from the buildout of our
broadband network and launch of new products and services, including DSL and
Internet data centers. Our acquisitions of Sterling and a controlling interest
in the parent company of webhosting.com in 2000 also contributed approximately
$20 and $104 to the increase in the second quarter and for the first six months
of 2001.
Wireless
Normalized Results
- ------------------------------------------------------------------------------------
Second Quarter Six-Month Period
- ------------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ------------------------------------------------------------------------------------
Operating revenues
Subscriber revenue $ 1,850 $ 1,648 12.3% $ 3,538 $ 3,148 12.4%
Other 342 389 (12.1) 685 715 (4.2)
- ------------------------------------------------ ----------------
Total Operating Revenues 2,192 2,037 7.6 4,223 3,863 9.3
- ------------------------------------------------ ----------------
Operating expenses
Operations and support 1,439 1,348 6.8 2,894 2,521 14.8
Depreciation and amortization 312 287 8.7 599 566 5.8
- ------------------------------------------------ ----------------
Total Operating Expenses 1,751 1,635 7.1 3,493 3,087 13.2
- ------------------------------------------------ ----------------
Operating Income 441 402 9.7 730 776 (5.9)
- ------------------------------------------------ ----------------
Interest Expense 142 85 67.1 284 124 -
- ------------------------------------------------ ----------------
Equity in Net Income of Affiliates 4 (1) - 11 - -
- ------------------------------------------------ ----------------
Other Income (Expense) - Net (14) (46) 69.6 21 (81) -
- ------------------------------------------------ ----------------
Income Before Income Taxes $ 289 $ 270 7.0% $ 478 $ 571 (16.3)%
====================================================================================
As a result of our joint venture with BellSouth Corporation, we account for our 60%
economic interest in Cingular under the equity method of accounting. However, we
use proportional consolidation in order to evaluate the results of Cingular for
internal management purposes. In the table above, Cingular's proportional results
are included in 2001 along with our wireless properties pending contribution, while
the 2000 amounts reflect our similar historical wireless operations.
Subscriber revenues increased $202, or 12.3%, in the second quarter and $390, or
12.4%, for the first six months of 2001. The majority of the increase was
related to an increase in customers, increased minutes of use and the sale of
higher access rate plans. At June 30, 2001, Cingular had 21,218,000 customers.
Other revenues decreased $47, or 12.1%, in the second quarter and $30, or 4.2%,
for the first six months of 2001. This decrease was due to a decline in roaming
revenues from other carriers, reflecting the continued buildout of competitors'
networks, which resulted in fewer minutes on Cingular's network and lower
negotiated rates with the other carriers. This decrease was partially offset by
increased equipment sales due to customer additions, fewer incentives on handsets
for new customers, as well as an increase in existing customers upgrading their
handsets.
Operations and support expenses increased $91, or 6.8%, in the second quarter and
$373, or 14.8%, for the first six months of 2001. The increase was primarily due
to higher equipment costs caused by an increase in customers and in demand for
higher quality handsets, an increase in long distance expenses as more plans
include free long distance and the Cingular national branding campaign in the
first quarter of 2001. These increases were partially offset by administrative
cost savings gained through the formation of Cingular.
Depreciation and amortization expenses increased by $25, or 8.7%, in the second
quarter and $33, or 5.8%, for the first six months of 2001 primarily related to
higher plant levels.
Directory
Normalized Results
- ----------------------------------------------------------------------------------
Second Quarter Six-Month Period
- ----------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ----------------------------------------------------------------------------------
Operating Revenues $ 937 $ 917 2.2% $ 1,761 $ 1,788 (1.5)%
- ----------------------------------------------- ------------------
Operating expenses
Operations and support 393 440 (10.7) 833 922 (9.7)
Depreciation and amortization 9 7 28.6 18 15 20.0
- ----------------------------------------------- ------------------
Total Operating Expenses 402 447 (10.1) 851 937 (9.2)
- ----------------------------------------------- ------------------
Operating Income 535 470 13.8 910 851 6.9
- ----------------------------------------------- ------------------
Interest Expense 2 2 - 2 5 (60.0)
- ----------------------------------------------- ------------------
Other Income (Expense) - Net 4 4 - 9 9 -
- ----------------------------------------------- ------------------
Income Before Income Taxes $ 537 $ 472 13.8% $ 917 $ 855 7.3%
==================================================================================
Operating revenues increased $20, or 2.2%, in the second quarter and decreased
$27, or 1.5%, for the first six months of 2001. Increased demand for directory
advertising services in the second quarter was partially offset by decreased
revenues due to a change in timing of directory publications from the second
quarter to later in the year. For the first six months of 2001, revenues
decreased approximately $74 due to changes in the timing of directory
publications from the first and second quarters of 2001 to later in the year.
This decline was partially offset by an increase in demand for directory
advertising services.
Operations and support expenses decreased $47, or 10.7%, in the second quarter
and $89, or 9.7%, for the first six months of 2001. These decreases were
primarily due to lower advertising, salary and benefit expenses and license and
sales and use tax expenses. The changes in the timing of directory publications
noted above in directory operating revenues had a minimal impact on operations
and support expenses in the second quarter and decreased expenses approximately
$26 for the first six months of 2001.
International
Normalized Results
- ------------------------------------------------------------------------------------
Second Quarter Six-Month Period
- ------------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ------------------------------------------------------------------------------------
Operating Revenues $ 55 $ 107 (48.6)% $ 125 $ 168 (25.6)%
- ------------------------------------------------ ----------------
Operating expenses 67 118 (43.2) 142 207 (31.4)
- ------------------------------------------------ ----------------
Operating Income (Loss) (12) (11) (9.1) (17) (39) 56.4
- ------------------------------------------------ ----------------
Interest Expense 9 67 (86.6) 10 137 (92.7)
- ------------------------------------------------ ----------------
Equity in Net Income of Affiliates 220 198 11.1 397 397 -
- ------------------------------------------------ ----------------
Other Income (Expense) - Net 120 74 62.2 227 212 7.1
- ------------------------------------------------ ----------------
Income Before Income Taxes $ 319 $ 194 64.4% $ 597 $ 433 37.9%
====================================================================================
Operating revenues decreased $52, or 48.6%, in the second quarter and $43, or
25.6%, for the first six months of 2001. The decrease was primarily caused by a
decrease in directory advertising revenue due to the December 2000 sale of our
German directory investment, Wer Liefert Was (WLW). Also contributing to the
declines were lower volume-related long distance revenues.
Operating expenses decreased $51, or 43.2%, in the second quarter and $65, or
31.4%, for the first six months of 2001. The decrease was due primarily to the
sale of WLW and lower volume-related long distance revenues, as mentioned above.
Equity in net income of affiliates increased $22, or 11.1%, in the second quarter
and was flat for the first six months of 2001. Cegetel S.A.'s sale of AOL
France, wireless subscriber growth and higher average revenue per customer in its
wireless operations increased equity income approximately $66 in the second
quarter and $82 for the first six months of 2001. The sale of MATAV in the third
quarter of 2000 decreased equity income on a comparative basis approximately $32
in the second quarter and $53 for the first six months of 2001. Additionally,
the sale of diAx A.G. (diAx) in the first quarter of 2001 and the exchange of our
equity investment in ATL - Algar Telecom Leste S.A. for a cost investment in
Telecom Americas eliminated losses on a comparative basis of approximately $41 in
the second quarter and $66 for the first six months of 2001. Equity income
decreased approximately $18 for the first six months of 2001 due to a smaller
ownership percentage in our investment in Telefonos de Mexico, S.A. de C.V.
(Telmex) and higher costs of operations at America Movil S.A. de C.V. due to
recent investments in South American wireless companies. Additionally, equity
income decreased approximately $44 in the second quarter and $119 for the first
six months of 2001 from Belgacom S.A. and TDC A/S (TDC) (formerly known as Tele
Danmark A/S) primarily related to decreased earnings from their foreign
affiliates and increased competition. Equity income increased approximately $54
for the first six months of 2001 from Bell Canada, largely due to the gain on
their disposition of an Internet service provider subsidiary.
Other
Normalized Results
- ---------------------------------------------------------------------------------
Second Quarter Six-Month Period
- ---------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------
Operating Revenues $ 136 $ 264 (48.5)% $ 319 $ 535 (40.4)%
- ----------------------------------------------- --------------------
Operating expenses 151 369 (59.1) 302 647 (53.3)
- ----------------------------------------------- --------------------
Operating Income (Loss) (15) (105) 85.7 17 (112) -
- ----------------------------------------------- --------------------
Interest Expense 250 144 73.6 510 354 44.1
- ----------------------------------------------- --------------------
Other Income (Expense) - Net 346 280 23.6 669 481 39.1
- ----------------------------------------------- --------------------
Income Before Income Taxes $ 81 $ 31 - % $ 176 $ 15 -%
=================================================================================
Operating revenues decreased $128, or 48.5%, in the second quarter and $216, or
40.4%, for the first six months of 2001, primarily due to the sale of
SecurityLink in January 2001. In May 2001, we entered into an agreement to sell
our cable television operations, pending regulatory approvals. Once the sale is
final, we expect operating revenues to be reduced by approximately $40 per
quarter.
Operating expenses decreased $218, or 59.1%, in the second quarter and $345, or
53.3%, for the first six months of 2001, primarily due to the sale of
SecurityLink. We expect cash operating expenses to decrease approximately $50
per quarter once the sale of our cable television operations is approved.
Consolidated Results
Interest expense increased $9, or 2.2%, in the second quarter and $112, or 14.5%,
for the first six months of 2001. The increase is due to interest accrued on
payables to Cingular that, prior to the formation of Cingular, was eliminated in
consolidation. However, since the formation of Cingular, this expense is mostly
offset against our equity earnings from Cingular, which includes the interest income
on these notes; therefore having an immaterial impact on consolidated net income.
In the second quarter of 2001 we completed the net debt settlement agreement with
Cingular and, effective in the third quarter of 2001, we will no longer incur this
interest expense (see Note 1). This increase was largely offset by cost savings
from lower composite rates. Also offsetting the increase was the reversal of an
accrual of approximately $18 in the second quarter and $13 for the first six months
of 2001 related to items resolved by the Illinois legislation discussed in
Competitive and Regulatory Environment. In addition to these factors, higher debt
levels contributed to the increased interest expense for the first six months of
2001.
Interest income increased $183 in the second quarter and $337 for the first six
months of 2001. The increase was primarily due to the income accrued from Cingular
for the amount owed to us on notes receivable that, prior to the formation of
Cingular, was eliminated in consolidation. However, since the formation of
Cingular, this income is mostly offset against our equity earnings from Cingular,
which includes the interest expense on these notes; therefore having an immaterial
impact on consolidated net income.
Other income (expense) - net includes items that we normalized as previously
described in the "Overview" section. In addition to those items, the second quarter
and first six months of 2001 included gains on the sale of investments of
approximately $95 and $224, consisting of the sale of Amdocs Limited (Amdocs) shares
and other investments. These gains were partially offset by minority interest and
dividends paid on preferred securities issued by Ameritech subsidiaries of
approximately $26 in the second quarter and $47 for the first six months of 2001.
The second quarter also included gains of approximately $46 recognized for market
adjustments on shares of Amdocs, which were used for deferred compensation. An
offsetting deferred compensation expense was recorded in operations and support
expense. Additionally, in the first six months of 2001, we recognized an expense of
approximately $581 related to an endowment of Amdocs shares to the SBC Foundation
and income of approximately $575 from the related mark to market adjustment on the
Amdocs shares, for a net expense of $6.
The 2000 results included a mark to market adjustment on the Debt Exchangeable for
Common Stock (DECS) redeemable in Telmex L shares resulting in income of
approximately $90 in the second quarter and an expense of $48 for the first six
months of 2000. The first six months of 2000 also included a gain on the sale of
Telmex L shares of approximately $133. The second quarter and first six months of
2000 included gains of approximately $65 recognized for market adjustments on shares
of Amdocs, which were used for deferred compensation. An offsetting deferred
compensation expense was recorded in operations and support expense. Gains on sales
of investments were approximately $25 in the second quarter and $83 for the first
six months of 2000. We recognized interest rate swap income of approximately $20
for the first six months of 2000 and minority interest expense of approximately $51
in the second quarter and $106 for the first six months of 2000.
Income Taxes in 2001 and 2000 reflect the tax effect of the normalizing items
previously described in the Overview section. These charges increased income taxes
$27 in the second quarter and $111 for the first six months of 2001 and decreased
income taxes by $42 in the second quarter and increased income taxes by $23 for the
first six months of 2000. 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 would have been $1,116 and $2,053 for the second quarter
and first six months of 2001. For the second quarter and first six months of 2000,
income taxes would have been $1,104 and $2,178 excluding one-time charges. Income
taxes were higher in the second quarter of 2001 primarily due to higher income
before income taxes and lower for the first six months of 2001 due to lower income
before income taxes. The decrease in the effective tax rate for the first six
months of 2001 is primarily due to contributions to the SBC Foundation in the first
quarter of 2001 and a decrease in non-deductible goodwill for businesses that were
disposed of in 2000.
COMPETITIVE AND REGULATORY ENVIRONMENT
- --------------------------------------
ILLINOIS LEGISLATION In May 2001, the Illinois legislature passed a four-year law,
effective June 30, 2001, mandating certain new requirements for Illinois
telecommunications companies, including our Illinois wireline subsidiary. The law
(1) requires all local telephone companies to provide wireless phones or cash
payments to customers who wait more than five days to get local service repaired or
installed, (2) increases the dollar amount the ICC is authorized to levy in fines
against companies that violate ICC orders, (3) requires our subsidiary to offer
fixed-rate service plans that will result in savings for the average residential
customer and (4) requires our subsidiary to provide advanced broadband
telecommunications services to 80% of its Illinois customers by 2005. Additionally,
the law contains numerous provisions affecting competitive access to our wireline
network, most notably a requirement that we offer for resale new combinations of
unbundled network elements. This issue regarding new combinations is also pending
before the United States Supreme Court (Supreme Court) and the Supreme Court's
decision will likely affect implementation of these unbundling provisions.
Most of the provisions of this legislation will require the ICC to issue specific
regulations, prior to implementation, in order to integrate the new legislation with
existing alternative regulation laws. This legislation may require us to incur
additional expenses to restructure our telecommunications network, which may or may
not improve the efficiency of the network, and to improve installation and repair
service quality. We are likely to experience a decrease in revenues due to the
potentially lower total revenue from average customers generated under fixed-rate
service plans as well as due to new rules regarding competitors' access to our
network, including the impact of any required new combinations of unbundled network
elements offered for resale. The extent of any decrease will depend, among other
factors, on the monthly rates that the ICC ultimately authorizes for our service
plans and the resulting number of access lines lost to competitors as well as on
future ICC and Supreme Court rulings regarding competitive access. As we cannot
predict how the ICC will implement the provisions of this legislation, or the effect
of the pending Supreme Court case, the legislation's direct and indirect effect on
our future results of operations and financial position is not determinable at this
time; however, it likely will be unfavorable and the amounts could be significant.
We are prepared to challenge various provisions of this law depending on ICC
interpretation of those provisions.
This legislation increased pre-tax income approximately $82 in the second quarter
and $31 for the first six months of 2001, consisting of a one-time revenue increase
due to the legislation resolving issues pending before the ICC offset by one-time
refunds and implementation expenses.
MICHIGAN LEGISLATION In July 2000, the Michigan legislature eliminated the monthly
intrastate end-user common line (EUCL) charge and implemented price caps for certain
telecommunications services. In July 2000, we eliminated the EUCL charge and filed
suit in federal court challenging the constitutionality of the legislation. In
September 2000, temporary stays of the price cap provision and the EUCL charge
elimination were issued. In July 2001, the United States Court of Appeals for the
Sixth Circuit (6th Circuit) ruled that we had demonstrated a substantial likelihood
of ultimately showing that the price cap and the EUCL charge elimination were
unconstitutional and stayed both provisions pending completion of the litigation.
We re-instated the EUCL charge in October 2000, and increased prices for our basic
local services in April 2001. Both the EUCL charge and the incremental local
services' price increase will be refunded if the legislation is upheld, and at June
30, 2001, we had approximately $119 accrued for potential refunds. In July 2001,
both the State of Michigan and MCI WorldCom, Inc. filed petitions for re-hearing of
the 6th Circuit decision.
AMERITECH MERGER On October 8, 1999, we completed the merger of one of our
subsidiaries with Ameritech. The Federal Communications Commission (FCC) issued an
order approving the transaction, subject to certain conditions, including fostering
out-of-region competition, promoting advanced services, opening local markets to
competition and improving residential services. These FCC conditions require
specific performance and reporting and contain enforcement provisions that could
potentially trigger more than $2 billion in payments through June 2004 if certain
goals are not met. Associated with these conditions, we incurred approximately $18
in the second quarter and $41 for the first six months of 2001 in additional
expenses, including payments for failing to meet certain performance measurements.
LONG DISTANCE APPLICATIONS We continue to seek long distance approval in our other
in-region states and have filed applications with state commissions in California
and Nevada and have received state commission approval on our Missouri and Arkansas
applications. In June 2001, we withdrew our Missouri long distance application
filed with the FCC in April 2001 in order to revise certain information, and plan to
re-file the Missouri application and file the Arkansas application with the FCC
before the end of 2001. The FCC is currently re-examining certain information
contained in our previously approved Texas, Kansas and Oklahoma long distance
applications. We cannot currently predict the effect that this inquiry will have on
our results of operations and financial position.
WIRELESS AUCTION Cingular invested in a participant in a December 2000/January 2001
FCC auction of wireless spectrum licenses. In June 2001, the United States Court of
Appeals for the District of Columbia ruled that the FCC had no right to re-auction
certain licenses from a bankrupt New York wireless company. In August 2001, the
FCC announced that it plans to appeal this decision to the Supreme Court. It is
unclear how the resolution of this issue will affect Cingular.
OTHER BUSINESS MATTERS
- ----------------------
NEW ACCOUNTING STANDARDS On January 1, 2001, we adopted Financial Accounting
Standards Board Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which requires all derivatives to be recorded on the balance
sheet at fair value. Our adoption did not have a significant effect on our
financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (FAS 141), and Statement No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. FAS 141 also provides new criteria to
determine whether an acquired intangible asset should be recognized separately from
goodwill.
Upon adoption of FAS 142, amortization of existing goodwill would cease and the
remaining book value would be tested for impairment at least annually at the
reporting unit level using a new two-step impairment test. Amortization of goodwill
recorded on equity investments would also cease, but this embedded goodwill will
continue to be tested for impairment under current accounting rules for equity
investments. In addition, we will have adjustments to the equity in net income of
affiliates line item to reflect the impact of adopting these new statements on the
operations of our equity investments.
We will adopt both statements on January 1, 2002 and are currently evaluating the
impact of these statements. We have not yet quantified the impact of these
statements on the operations of our equity investments; included Cingular and our
international segment. Our existing and embedded goodwill amortization expense was
approximately $74 net of tax in the second quarter and $151 net of tax for the first
six months of 2001. During 2002, we will perform the first of the required
impairment tests of goodwill as of January 1, 2002, and we have not yet determined
what the effect of these tests will be on our earnings and financial position. Any
impairment resulting from our initial application of the statements will be recorded
as a cumulative effect of accounting change as of January 1, 2002.
LABOR AGREEMENT In August 2001, the International Brotherhood of Electrical
Workers ratified a labor agreement for wage and other economic matters and
extended the expiration to June 26, 2004. The agreement included a
wage increase of approximately 12.25% over the next three years, in addition
to other economic provisions.
VALUATION ADJUSTMENT See Note 10 for a discussion of the impairment of certain cost
investments.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We had $649 in cash and cash equivalents available at June 30, 2001. During the
first six months of 2001 our primary source of funds continued to be cash provided
by operating activities. In the first six months of 2000 our primary sources of
funds included cash provided by operating activities and short-term borrowings
issued to finance our acquisition of Sterling. We have entered into agreements with
several banks for committed lines of credit totaling $3,700, all of which may be
used to support commercial paper borrowings. We had no borrowings outstanding under
these lines of credit as of June 30, 2001. Commercial paper borrowings as of June
30, 2001 and December 31, 2000 totaled $5,024 and $6,437, out of $8,000 authorized.
During the first six months of 2001 we closed on 1,400 towers under our agreement
with SpectraSite Communications, Inc. The terms of the agreement call for us to
receive a combination of cash and stock. In the first six months of 2001 we
received $359 in cash.
In the first quarter of 2001, we received approximately $783 related to the sale of
our investment in diAx to TDC. Approximately $565 was recorded as a dividend, due
to the nature of our investment in TDC, and was included in undistributed earnings
from investments in equity affiliates.
Our investing activities during the first six months of 2001 consisted of $5,744 in
construction and capital expenditures, primarily in the wireline segment, including
$763 in fiber, electronics and other technology equipment for our broadband
initiative, known as Project Pronto. Investing activities during the first six
months of 2001 also included a receipt of $1,371 from Cingular for payment of notes
receivable and asset dispositions of $339, primarily related to the sale of
SecurityLink and the sale of Amdocs shares. There were no asset acquisitions during
the first six months of 2001. Investing activities during the first six months of
2000 included asset dispositions of $216, due to the sale of Telmex L shares, and
asset acquisitions of $3,663 related to the acquisition of Sterling.
Short-term borrowings decreased $2,402 due to the repayment of short-term notes. We
also spent $1,465 on the repurchase of shares of our common stock under the
repurchase plan announced in January 2000. As of July 31, 2001, we have repurchased
a total of approximately 83 million shares of our common stock of the 100 million
shares authorized to be repurchased. Financing activities during the first six
months of 2000 included new short-term borrowings to finance our acquisition of
Sterling. Cash paid for dividends in the first six months of 2001 was $1,727, or
1.7% higher than in the first six months of 2000 due to an increase in dividends
declared per share.
In February 2001, we redeemed prior to maturity approximately $500 of the Trust
Originated Preferred Securities (TOPrS) with an interest rate of 7.56%. The TOPrS
had an original maturity of 30 years and were included on the balance sheet as
corporation-obligated mandatorily redeemable preferred securities of subsidiary
trusts.
In March 2001, we paid the principal amount of each of the DECS, as adjusted by the
exchange rate specified in the DECS, in the form of cash, which we received from
settlement of our note receivable with characteristics similar to the DECS.
In March 2001, we issued approximately $1,250 of ten-year, 6.25%, global notes.
Additionally, we issued two, one-year notes for approximately $500 each, which carry
variable interest rates. Each note's interest is calculated based on the London
Interbank Offer Rate (LIBOR), one recalculating monthly at the LIBOR less 1 basis
point and the other recalculating quarterly at the LIBOR less 2.5 basis points. In
April 2001, we issued approximately $2,000 of five-year, 5.75%, global notes. The
March and April 2001 notes are redeemable at any time, in whole or in part, and
under certain circumstances, at a premium. The proceeds from these issuances were
used to repay a portion of short-term borrowing and for general corporate purposes.
In June 2001, we redeemed prior to maturity approximately $500 of the TOPrS with an
interest rate of 8.50%. The TOPrS had an original maturity of 30 years and were
included on the balance sheet as corporation-obligated mandatorily redeemable
preferred securities of subsidiary trusts.
In June 2001, we issued approximately $500 of 7.00% Public Income Notes (PINES) due
2041. Interest on the PINES will be paid quarterly; the first payment will be
September 1, 2001. We may redeem the PINES, in whole or in part, at any time on or
after June 13, 2006. The proceeds were used to pay down short-term borrowings.
In June 2001, we privately sold $1,000 of 20-year annual Puttable Reset Securities
(PURS). The notes will bear interest at 4.25% until June 2002, at which time an
investment bank has an annual option to require us to remarket or redeem the notes.
If the option is exercised, the investment bank will reset the interest rate and
remarket the notes for another twelve-month term. If the bank does not exercise its
option on that reset date, we will be required to redeem the notes at par. The
notes are classified as short-term debt and we used the proceeds to pay down other
short-term borrowings.
In July 2001, we redeemed approximately $560 of multiple bonds. The average
interest rate of these bonds was 6.32% with an average remaining maturity of 2 years.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There has been no material change in the disclosures about our sensitivities to
market risks related to financial instruments since December 31, 2000.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
Information set forth in this report contains forward-looking statements that are
subject to risks and uncertainties. We claim 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 our 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 we
have significant investments.
o Changes in available technology.
o The final outcome of FCC proceedings, including rulemakings, and judicial
review, if any, of such proceedings, including issues relating to jurisdiction.
o The final outcome of state regulatory proceedings in our 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, Project Pronto, service standards and reciprocal
compensation.
o Enactment of additional state, Federal and/or foreign regulatory laws and
regulations pertaining to our subsidiaries and foreign investments.
o The timing of entry and the extent of competition in the local and intraLATA
toll markets in our 13-state area and our 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, extent and cost of deployment of our 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, access to
additional spectrum, technological advancements and financial capacity.
Readers are cautioned that other factors discussed in this report, although not
enumerated here, also could materially impact our future earnings.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
During the second quarter of 2001, 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 49,887
SBC shares and DSUs were acquired by non-employee directors at prices ranging from
$40.06 to $42.99, in each case the fair market value of the shares on the date of
acquisition. The issuances of shares and DSUs were exempt from registration
pursuant to Section 4(2) of the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Annual Meeting of Shareowners
(a) The annual meeting of the shareowners of SBC Communications Inc. (SBC) was
held on April 27, 2001, in San Antonio, Texas. Shareowners representing
2,786,591,777 shares of common stock as of the February 28, 2001 record date
were present in person or were represented at the meeting by proxy.
(b) At the meeting, holders of common shares voted as indicated below to elect the
following persons to the Board of Directors for a three-year term:
DIRECTOR SHARES FOR SHARES WITHHELD*
------------------ ------------- ----------------
Herman E. Gallegos 2,663,818,014 122,773,763
Jess T. Hay 2,721,476,476 65,115,301
James A. Henderson 2,726,276,470 60,315,307
Bobby R. Inman 2,720,152,767 66,439,010
John B. McCoy 2,726,568,191 60,023,586
S. Donley Ritchey 2,725,699,028 60,892,749
Joyce M. Roche 2,725,699,028 60,892,749
*Includes shares represented at the meeting by proxy where the shareowner
withheld authority to vote for the indicated director or directors, as well as
shares present at the meeting which were not voted for such director or
directors.
(c) Shareowners ratified the appointment of Ernst & Young LLP as independent
auditors of SBC for the year ended December 31, 2001. The vote was 2,737,079,501
FOR and 27,534,240 AGAINST, with 21,978,036 shares ABSTAINING.
Shareowners voted to adopt a 2001 Incentive Plan for the purpose of replacing the
1996 Stock and Incentive Plan. The vote was 2,300,791,558 FOR and 440,386,688
AGAINST, with 45,413,531 ABSTAINING.
Shareowners voted not to adopt a shareowner proposal to require the board of
directors to nominate at least two candidates for each open board position. The
vote was 188,645,849 FOR and 2,047,348,741 AGAINST, with 97,549,789 ABSTAINING.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
--------
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
(b) Reports on Form 8-K
--------------------
On April 24, 2001, we filed a Form 8-K, reporting on Item 5. Other Events and
Item 7. Financial Statements and Exhibits. In the report, we disclosed a press
release announcing first quarter earnings for 2001.
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.
August 8, 2001 /S/ Randall Stephenson
------------------------
Randall Stephenson
Senior Executive Vice President
and Chief Financial Officer
EXHIBIT 12
SBC COMMUNICATIONS INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Six Months Ended
June 30, Year Ended December 31,
--------------------- ------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before Income Taxes,
Extraordinary Items
and Cumulative Effect of Accounting
Changes* $ 5,883 $ 5,732 $ 12,367 $ 10,382 $ 11,859 $ 6,356 $ 8,789
Add: Interest Expense 884 772 1,592 1,430 1,605 1,550 1,418
Dividends on Preferred
Securities 46 52 118 118 114 98 68
1/3 Rental Expense 114 129 252 236 228 202 188
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjusted Earnings $ 6,927 $ 6,685 $ 14,329 $ 12,166 $ 13,806 $ 8,206 $ 10,463
========== ========== ========== ========== ========== ========== ==========
Total Interest Charges $ 938 $ 814 $ 1,693 $ 1,511 $ 1,691 $ 1,700 $ 1,589
Dividends on Preferred Securities 46 52 118 118 114 98 68
1/3 Rental Expense 114 129 252 236 228 202 188
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjusted Fixed Charges $ 1,098 $ 995 $ 2,063 $ 1,865 $ 2,033 $ 2,000 $ 1,845
========== ========== ========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges 6.31 6.72 6.95 6.52 6.79 4.10 5.67
*Undistributed earnings on investments accounted for under the equity method have
been excluded.
