FORM 10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X|
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
or
|_|Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8610
SBC COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
At October 31, 2001, 3,361,560,646 common shares were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Operating Revenues
Landline local service $ 5,679 $ 5,703 $ 17,174 $ 16,289
Wireless subscriber 38 1,749 154 4,897
Network access 2,642 2,489 7,849 7,828
Long distance service 778 792 2,297 2,354
Directory advertising 972 912 2,749 2,761
Other 1,229 1,777 3,782 5,037
- --------------------------------------------------------------------------------
Total operating revenues 11,338 13,422 34,005 39,166
- --------------------------------------------------------------------------------
Operating Expenses
Operations and support 6,316 8,213 18,625 23,303
Depreciation and amortization 2,200 2,363 6,822 6,943
- --------------------------------------------------------------------------------
Total operating expenses 8,516 10,576 25,447 30,246
- --------------------------------------------------------------------------------
Operating Income 2,822 2,846 8,558 8,920
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (377) (422) (1,261) (1,194)
Interest income 144 32 515 66
Equity in net income of affiliates 509 267 1,451 656
Other income (expense) - net 99 1,981 41 2,130
- --------------------------------------------------------------------------------
Total other income (expense) 375 1,858 746 1,658
- --------------------------------------------------------------------------------
Income Before Income Taxes 3,197 4,704 9,304 10,578
- --------------------------------------------------------------------------------
Income taxes 1,125 1,705 3,289 3,906
- --------------------------------------------------------------------------------
Income Before Extraordinary Item 2,072 2,999 6,015 6,672
- --------------------------------------------------------------------------------
Extraordinary item, net of tax - - (18) -
- --------------------------------------------------------------------------------
Net Income $ 2,072 $ 2,999 $ 5,997 $ 6,672
================================================================================
Earnings Per Common Share:
Income Before Extraordinary Item $ 0.62 $ 0.89 $ 1.79 $ 1.97
Net Income $ 0.62 $ 0.89 $ 1.78 $ 1.97
- --------------------------------------------------------------------------------
Earnings Per Common Share - Assuming Dilution:
Income Before Extraordinary Item $ 0.61 $ 0.88 $ 1.77 $ 1.95
Net Income $ 0.61 $ 0.88 $ 1.77 $ 1.95
- --------------------------------------------------------------------------------
Weighted Average Number of Common
Shares Outstanding (in millions) $ 3,362 3,387 3,368 3,393
Dividends Declared Per Common Share $ 0.25625 $0.25375 $0.76875 $0.76125
================================================================================
See Notes to Consolidated Financial Statements.
SBC COMMUNICATIONS INC.
- ----------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
- ----------------------------------------------------------------------------------
September 30, December 31,
2001 2000
- ----------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 562 $ 643
Accounts receivable - net of allowances for
uncollectibles of $1,109 and $1,016 9,319 10,144
Prepaid expenses 1,069 550
Deferred income taxes 549 671
Other current assets 1,125 1,640
- ----------------------------------------------------------------------------------
Total current assets 12,624 13,648
- ----------------------------------------------------------------------------------
Property, plant and equipment - at cost 125,652 119,753
Less: accumulated depreciation and amortization 76,780 72,558
- ----------------------------------------------------------------------------------
Property, Plant and Equipment - Net 48,872 47,195
- ----------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated
Amortization of $657 and $746 4,041 5,475
Investments in Equity Affiliates 12,204 12,378
Notes Receivable from Cingular Wireless 5,926 9,568
Other Assets 12,048 10,387
- ----------------------------------------------------------------------------------
Total Assets $ 95,715 $ 98,651
==================================================================================
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 7,318 $ 10,470
Accounts payable and accrued liabilities 10,582 15,432
Accrued taxes 4,356 3,592
Dividends payable 862 863
- ----------------------------------------------------------------------------------
Total current liabilities 23,118 30,357
- ----------------------------------------------------------------------------------
Long-Term Debt 18,041 15,492
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Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 7,339 6,806
Postemployment benefit obligation 9,992 9,767
Unamortized investment tax credits 272 318
Other noncurrent liabilities 4,441 4,448
- ----------------------------------------------------------------------------------
Total deferred credits and other noncurrent
liabilities 22,044 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 12,003 12,125
Retained earnings 21,751 18,341
Guaranteed obligations of employee stock
ownership plans (ESOP) - (21)
Deferred compensation - leveraged ESOP (LESOP) - (37)
Treasury shares (at cost) (3,180) (2,071)
Accumulated other comprehensive loss (1,495) (1,307)
- ----------------------------------------------------------------------------------
Total shareowners' equity 32,512 30,463
- ----------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 95,715 $ 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)
- -------------------------------------------------------------------------------
Nine months ended
September 30,
2001 2000
- -------------------------------------------------------------------------------
Operating Activities
Net income $ 5,997 $ 6,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,822 6,943
Undistributed earnings from investments in
equity affiliates (677) (344)
Provision for uncollectible accounts 886 604
Amortization of investment tax credits (46) (53)
Deferred income tax expense 855 996
Gain on sales of investments (301) (2,170)
Extraordinary item, net of tax 18 -
Changes in operating assets and liabilities:
Accounts receivable (137) (1,368)
Other current assets (466) (713)
Accounts payable and accrued liabilities (1,205) 1,442
Other - net (1,020) (1,279)
- -------------------------------------------------------------------------------
Total adjustments 4,729 4,058
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,726 10,730
- -------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (8,096) (9,202)
Investments in affiliates 1,482 (103)
Purchase of short-term investments - (533)
Proceeds from short-term investments 510 -
Dispositions 864 3,534
Acquisitions - (5,127)
- -------------------------------------------------------------------------------
Net Cash Used in Investing Activities (5,240) (11,431)
- -------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (3,091) 4,278
Issuance of long-term debt 5,723 1,039
Repayment of long-term debt (3,104) (921)
Early redemption of corporation-obligated
mandatorily redeemable
preferred securities of subsidiary trusts (1,000) -
Purchase of treasury shares (1,661) (1,457)
Issuance of treasury shares 277 307
Redemption of preferred shares of subsidiaries (145) -
Dividends paid (2,591) (2,560)
Other 25 65
- -------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (5,567) 751
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (81) 50
- -------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 643 495
- -------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 562 $ 545
===============================================================================
Cash paid during the nine months ended September 30
for:
Interest $ 1,274 $ 1,298
Income taxes, net of refunds $ 1,449 $ 2,113
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 - - 5,997 - - - -
Other comprehensive loss - - - - - - (188)
Dividends to shareowners - - (2,589) - - - -
Reduction of debt associated with ESOP - - - 21 - - -
Cost of LESOP trust shares allocated
to employee accounts - - - - 37 - -
Purchase of treasury shares - - - - - (1,661) -
Issuance of treasury shares - (241) - - - 552 -
Other - 119 2 - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $ 3,433 $ 12,003 $ 21,751 $ - $ - $ (3,180) $ (1,495)
============================================================================================================================
See Notes to Consolidated Financial Statements.
SELECTED FINANCIAL AND OPERATING DATA
At September 30, or for the nine months then ended: 2001 2000
- --------------------------------------------------- -----------------------
Debt ratio.............................................. 43.8% 44.8%
Network access lines in service (000)................... 60,230 61,287
Resold and rebundled line (000)......................... 3,467 2,351
Access minutes of use (000,000)......................... 213,521 210,927
Cingular Wireless customers* (000)...................... 21,279 18,867
Number of employees..................................... 216,740 223,260
*Amounts represent the 100% pro forma customers of Cingular Wireless.
SBC COMMUNICATIONS INC.
SEPTEMBER 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 we netted approximately $2,500 of payables to Cingular Wireless (Cingular) with our notes receivable from Cingular. In addition, based on our revised expectations of when Cingular will repay the amount owed, we 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 ITEMThe first nine months of 2001 includes an extraordinary loss of $18, net of taxes of $10, related to the early redemption of $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 nine months ended September 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 Canada and South Africa in 2001 and Denmark in 2000. |
| | The reclassification adjustment for loss included in deferred revenue reflects the other than temporary decline of approximately $162 ($97 net of tax) in the value of shares we received as payment of future rents. We have determined that the other than temporary decline in the value of these marketable securities should reduce the overstatement of deferred revenue for these payments that were recorded when the marketable securities were originally received. Future rent revenues will also be reduced. |
| | Following is our comprehensive income: |
-------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
-------------------------------------------------------------------------------------
Net income $ 2,072 $ 2,999 $ 5,997 $ 6,672
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (6) (259) (188) (470)
Reclassification adjustment to net income for
cumulative translation adjustment on
securities sold - 323 - 323
Net unrealized gain (loss) on securities:
Unrealized gain (loss) on available for
sale securities (50) (18) (102) 7
Reclassification adjustment for (gain)
loss included in net income 1 2 5 (44)
Reclassification adjustment for
loss included in deferred revenue 97 - 97 -
-------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities 48 (16) - (37)
-------------------------------------------------------------------------------------
Other comprehensive income (loss) 42 48 (188) (184)
-------------------------------------------------------------------------------------
Total comprehensive income $ 2,114 $ 3,047 $ 5,809 $ 6,488
=====================================================================================
| 5. | COMPLETION OF MERGERUpon 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 $56 and $158 at September 30, 2001 and December 31, 2000. |
| 6. | EARNINGS PER SHAREA reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for income before extraordinary item and net income for the three and nine months ended September 30, 2001 and 2000 are shown in the table below. |
--------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
--------------------------------------------------------------------------------
Numerators
Numerator for basic earnings per share:
Income before extraordinary item $ 2,072 $ 2,999 $ 6,015 $ 6,672
--------------------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 2 1 4 4
--------------------------------------------------------------------------------
Numerator for diluted earnings per share $ 2,074 $ 3,000 $ 6,019 $ 6,676
================================================================================
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding 3,362 3,387 3,368 3,393
--------------------------------------------------------------------------------
Dilutive potential common shares:
Stock options 20 30 23 31
Other stock-based compensation 8 8 8 7
--------------------------------------------------------------------------------
Denominator for diluted earnings per share 3,390 3,425 3,399 3,431
================================================================================
Basic earnings per share:
Income before extraordinary item $ 0.62 $ 0.89 $ 1.79 $ 1.97
Extraordinary item - - (0.01) -
--------------------------------------------------------------------------------
Net income $ 0.62 $ 0.89 $ 1.78 $ 1.97
================================================================================
Diluted earnings per share:
Income before extraordinary item $ 0.61 $ 0.88 $ 1.77 $ 1.95
Extraordinary item - - - -
--------------------------------------------------------------------------------
Net income $ 0.61 $ 0.88 $ 1.77 $ 1.95
================================================================================
| 7. | PREPAID PENSION COSTPrepaid 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 September 30, 2001 and December 31, 2000, amounts included in other assets for prepaid pension costs were approximately $7,445 and $5,122. Fluctuations in these assets are caused by pension benefits and pension settlement gains and losses. |
| 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 Statement of Income
For the Three Months Ended September 30, 2001
Parent PacBell SWBell Other Adjs. Total
------------------------------------------------------------------------- --------
Total operating revenues $ - $ 2,628 $ 2,876 $ 6,206 $ (372) $ 11,338
Total operating expenses (30) 1,693 2,048 5,177 (372) 8,516
------------------------------------------------------------------------- --------
Operating Income 30 935 828 1,029 - 2,822
------------------------------------------------------------------------- --------
Interest expense 123 92 86 208 (132) 377
Equity in net income of
affiliates 1,858 - - 509 (1,858) 509
Royalty income (expense) 115 (102) (115) 102 - -
Other income (expense) - net 157 1 (1) 218 (132) 243
------------------------------------------------------------------------- --------
Income Before Income Taxes 2,037 742 626 1,650 (1,858) 3,197
------------------------------------------------------------------------- --------
Income taxes (35) 297 230 633 - 1,125
------------------------------------------------------------------------- --------
Net Income $ 2,072 $ 445 $ 396 $ 1,017 $(1,858) $ 2,072
========================================================================= ========
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2000
Parent PacBell SWBell Other Adjs. Total
------------------------------------------------------------------------ --------
Total operating revenues $ - $ 2,619 $ 2,904 $ 8,241 $ (342) $ 13,422
Total operating expenses (88) 1,793 2,109 7,104 (342) 10,576
------------------------------------------------------------------------ --------
Operating Income 88 826 795 1,137 - 2,846
------------------------------------------------------------------------ --------
Interest expense 158 94 91 384 (305) 422
Equity in net income of
affiliates 2,807 - - 293 (2,833) 267
Royalty income (expense) 115 (102) (115) 102 - -
Other income (expense) - net 234 (1) 2 2,060 (282) 2,013
------------------------------------------------------------------------ --------
Income Before Income Taxes 3,086 629 591 3,208 (2,810) 4,704
------------------------------------------------------------------------ --------
Income taxes 87 257 220 1,141 - 1,705
------------------------------------------------------------------------ --------
Net Income $ 2,999 $ 372 $ 371 $ 2,067 $ (2,810) $ 2,999
======================================================================== ========
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2001
Parent PacBell SWBell Other Adjs. Total
------------------------------------------------------------------------- -------
Total operating revenues $ - $ 7,823 $ 8,633 $ 18,617 $(1,068) $34,005
Total operating expenses (12) 5,020 6,249 15,258 (1,068) 25,447
------------------------------------------------------------------------- -------
Operating Income 12 2,803 2,384 3,359 - 8,558
------------------------------------------------------------------------- -------
Interest expense 406 284 287 748 (464) 1,261
Equity in net income of
affiliates 5,804 - - 1,453 (5,806) 1,451
Royalty income (expense) 345 (305) (345) 305 - -
Other income (expense) - net 200 1 1 816 (462) 556
------------------------------------------------------------------------- -------
Income Before Income Taxes 5,955 2,215 1,753 5,185 (5,804) 9,304
------------------------------------------------------------------------- -------
Income taxes (42) 891 647 1,793 - 3,289
------------------------------------------------------------------------- -------
Income Before
Extraordinary Item 5,997 1,324 1,106 3,392 (5,804) 6,015
------------------------------------------------------------------------- -------
Extraordinary item, net of tax - - - (18) - (18)
------------------------------------------------------------------------- -------
Net Income $ 5,997 $ 1,324 $ 1,106 $ 3,374 $(5,804) $ 5,997
========================================================================= =======
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2000
Parent PacBell SWBell Other Adjs. Total
------------------------------------------------------------------------ -------
Total operating revenues $ - $ 7,725 $ 8,662 $23,725 $ (946) $39,166
Total operating expenses (135) 5,659 6,547 19,121 (946) 30,246
------------------------------------------------------------------------ -------
Operating Income 135 2,066 2,115 4,604 - 8,920
------------------------------------------------------------------------ -------
Interest expense 359 297 283 1,054 (799) 1,194
Equity in net income of
affiliates 6,129 - - 719 (6,192) 656
Royalty income (expense) 345 (305) (345) 305 - -
Other income (expense) - net 624 - 3 2,308 (739) 2,196
------------------------------------------------------------------------ -------
Income Before Income Taxes 6,874 1,464 1,490 6,882 (6,132) 10,578
------------------------------------------------------------------------ -------
Income taxes 202 599 556 2,549 - 3,906
------------------------------------------------------------------------ -------
Net Income $ 6,672 $ 865 $ 934 $ 4,333 $ (6,132) $ 6,672
======================================================================== =======
Condensed Consolidating Balance Sheet
September 30, 2001
Parent PacBell SWBell Other Adjs. Total
--------------------------------------------------------------------- --------
Cash and cash equivalents $ 354 $ 13 $ 38 $ 157 $ - $ 562
Accounts receivable - net 2,513 2,218 2,029 13,252 (10,693) 9,319
Other current assets 232 447 774 1,290 - 2,743
--------------------------------------------------------------------- --------
Total current assets 3,099 2,678 2,841 14,699 (10,693) 12,624
--------------------------------------------------------------------- --------
Property, plant and
equipment - net 113 13,407 15,431 19,921 - 48,872
--------------------------------------------------------------------- --------
Intangible assets - net - - - 4,041 - 4,041
--------------------------------------------------------------------- --------
Investments in equity
affiliates 35,541 - - 15,366 (38,703) 12,204
--------------------------------------------------------------------- --------
Other assets 7,990 2,414 555 10,735 (3,720) 17,974
--------------------------------------------------------------------- --------
Total Assets $46,743 $18,499 $18,827 $64,762 $(53,116) $95,715
===================================================================== ========
Debt maturing within one
year $ 6,429 2,355 $ 3,027 $ 1,965 $ (6,458) $ 7,318
Other current liabilities 1,180 3,547 3,752 11,556 (4,235) 15,800
--------------------------------------------------------------------- --------
Total current liabilities 7,609 5,902 6,779 13,521 (10,693) 23,118
--------------------------------------------------------------------- --------
Long-term debt 4,136 3,673 3,626 10,276 (3,670) 18,041
--------------------------------------------------------------------- --------
Postemployment benefit
obligation 74 2,908 3,025 3,985 - 9,992
--------------------------------------------------------------------- --------
Other noncurrent liabilities 2,412 1,867 1,218 6,605 (50) 12,052
--------------------------------------------------------------------- --------
Total shareowners' equity 32,512 4,149 4,179 30,375 (38,703) 32,512
--------------------------------------------------------------------- --------
Total Liabilities
and Shareowners' Equity $46,743 $18,499 $18,827 $64,762 $(53,116) $95,715
===================================================================== ========
Condensed Consolidating Balance Sheet
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 Statement of Cash Flows
Nine Months Ended September 30, 2001
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------- --------
Net cash from operating
activities $ 1,399 $ 2,599 $ 2,182 $10,124 $ (5,578) $10,726
Net cash from investing
activities 1,445 (1,799) (2,223) (3,492) 829 (5,240)
Net cash from financing
activities (2,926) (796) 27 (6,621) 4,749 (5,567)
----------------------------------------------------------------------- --------
Net Increase (Decrease) in
Cash $ (82) $ 4 $ (14) $ 11 $ - $ (81)
======================================================================= ========
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2000
Parent PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------- --------
Net cash from operating
activities $ 2,934 $ 2,287 $ 2,762 $ 4,124 $ (1,377) $10,730
Net cash from investing
activities (4,046) (2,035) (2,483) (2,521) (346) (11,431)
Net cash from financing
activities 1,345 (255) (286) (1,776) 1,723 751
----------------------------------------------------------------------- --------
Net Increase (Decrease) in
Cash $ 233 $ (3) $ (7) $ (173)$ - $ 50
======================================================================= ========
| 9. | SEGMENT INFORMATIONOur 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 in net income of affiliates 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 November 2001, we expect to sell Ameritech New Media, Ameritech’s cable television operations. |
Normalized results for 2001 exclude the following items:
- Pension settlement gains of $122 ($73 net of tax) in the third quarter and $961 ($592 net of tax) for the first nine 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.
- Combined charges of $401 ($261 net of tax) for the first nine months (recorded in other income (expense) - net) primarily related to valuation adjustments of Williams Communications Group Inc. as well as certain other cost investments accounted for under Financial Accounting Standards Board Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The charge in second quarter 2001 resulted from an evaluation that the decline was other than temporary.
- Reduction of a valuation allowance of $120 ($78 net of tax) for the first nine 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.
- Combined charges of $316 ($205 net of tax) for the first nine months (recorded in operating expenses) related to impairment of our cable operations.
Normalized results for 2000 exclude the following items:
- Gains of $1,699 ($1,125 net of tax) in the third quarter and for the first nine months (recorded primarily in other income (expense)-net) related to the sale of direct and indirect interests in MATÁV and Netcom GSM, two international equity investments.
- Gains of $238 ($155 net of tax) in the third quarter and for the first nine months (recorded in other income (expense)-net) on the sale of Teléfonos de México, S.A. de C.V. L shares associated with SBC’s purchase of a Mandatorily Exchangeable Debt Securities note with characteristics that essentially offset future mark to market adjustments on the Debt Exchangeable for Common Stock.
- Pension settlement gains of $29 ($19 net of tax) in the third quarter associated with pension litigation and $403 ($260 net of tax) for the first nine months (recorded in operating expenses) primarily related to employees who terminated employment during 1999.
- Costs of $400 ($258 net of tax) in the third quarter and $780 ($528 net of tax) for the first nine months (recorded in operating expenses) associated with strategic initiatives and other adjustments resulting from the merger integration process with Ameritech.
- A charge of $132 (with no tax effect) in the first nine months (recorded in operating expenses) 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 nine months ended September 30, 2001 and 2000 are as follows: |
-------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
September 30, 2001 customers revenues income taxes
-------------------------------------------------------------------------
Wireline $ 10,193 $ 7 $ 1,863
Wireless 2,243 - 304
Directory 935 12 530
International 36 12 214
Other 130 12 164
Cingular de-consolidation (2,199) - -
Eliminations - (43) -
Normalizing adjustments - - 122
-------------------------------------------------------------------------
Total $ 11,338 $ - $ 3,197
=========================================================================
-------------------------------------------------------------------------
Revenues
For the three months ended from external Intersegment Income before
September 30, 2000 customers revenues income taxes
-------------------------------------------------------------------------
Wireline $ 10,046 $ 50 $ 1,735
Wireless 2,183 - 359
Directory 873 15 473
International 77 2 209
Other 242 21 362
Eliminations - (88) -
Normalizing adjustments 1 - 1,566
-------------------------------------------------------------------------
Total $ 13,422 $ - $ 4,704
=========================================================================
-------------------------------------------------------------------------------
Revenues
At September 30, 2001 or for from external Intersegment Income before Segment
the nine months ended customers revenues income taxes assets
-------------------------------------------------------------------------------
Wireline $ 30,622 $ 23 $ 5,560 $ 70,048
Wireless 6,466 - 782 12,967
Directory 2,643 65 1,447 2,340
International 140 33 811 10,061
Other 419 42 340 56,395
Cingular de-consolidation (6,285) - - (12,773)
Eliminations - (163) - (43,323)
Normalizing adjustments - - 364 -
-------------------------------------------------------------------------------
Total $ 34,005 $ - $ 9,304 $ 95,715
===============================================================================
-------------------------------------------------------------------------------
Revenues
At September 30, 2001 or for from external Intersegment Income before Segment
the nine months ended customers revenues income taxes assets
-------------------------------------------------------------------------------
Wireline $ 29,532 $ 165 $ 5,873 $ 62,431
Wireless 6,046 - 930 13,830
Directory 2,611 65 1,328 2,289
International 245 2 642 12,096
Other 732 66 377 50,274
Eliminations - (298) - (46,344)
Normalizing adjustments - - 1,428 -
-------------------------------------------------------------------------------
Total $ 39,166 $ - $ 10,578 $ 94,576
===============================================================================
| 10. | DISPOSITIONS In July 2001, we sold our interest in Transasia Telecommunications, a regional wireless telecommunications provider in southern Taiwan, for approximately $133, with a pre-tax gain of $77. |
SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts
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 third quarter and the first nine months of 2001 and 2000 are summarized as follows:
- ----------------------------------------------------------------------------------
Third Quarter Nine-Month Period
- ----------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ----------------------------------------------------------------------------------
Operating revenues $11,338 $13,422 (15.5)% $34,005 $39,166 (13.2)%
Operating expenses 8,516 10,576 (19.5) 25,447 30,246 (15.9)
Operating income 2,822 2,846 (0.8) 8,558 8,920 (4.1)
Income before income taxes
and extraordinary item 3,197 4,704 (32.0) 9,304 10,578 (12.0)
Income before extraordinary
item 2,072 2,999 (30.9) 6,015 6,672 (9.8)
Extraordinary item, net of tax - - - (18) - -
Net income 2,072 2,999 (30.9) 5,997 6,672 (10.1)
==================================================================================
We reported net income of $2,072, or $0.61 per share assuming dilution, in the third quarter of 2001 and $5,997 or $1.77 per share assuming dilution, for the first nine months of 2001 compared to $2,999, or $0.88 per share assuming dilution, in the third quarter of 2000 and $6,672, or $1.95 per share assuming dilution, for the first nine months of 2000. The first nine months of 2001 includes an extraordinary loss of $18, net of taxes of $10, related to the early redemption of $1,000 of our corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts.
Normalized results for 2001 exclude the following items:
- Pension settlement gains of $122 ($73 net of tax) in the third quarter and $961 ($592 net of tax) for the first nine 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.
- Combined charges of $401 ($261 net of tax) for the first nine months (recorded in other income (expense) - net) primarily related to valuation adjustments of Williams Communications Group Inc. as well as certain other cost investments accounted for under Financial Accounting Standards Board Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The charge in second quarter 2001 resulted from an evaluation that the decline was other than temporary.
- Reduction of a valuation allowance of $120 ($78 net of tax) for the first nine 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.
- Combined charges of $316 ($205 net of tax) for the first nine months (recorded in operating expenses) related to impairment of our cable operations.
Normalized results for 2000 exclude the following items:
- Gains of $1,699 ($1,125 net of tax) in the third quarter and for the first nine months (recorded primarily in other income (expense) - net) related to the sale of direct and indirect interests in MATÁV and Netcom GSM, two international equity investments.
- Gains of $238 ($155 net of tax) in the third quarter and for the first nine months (recorded in other income (expense) - net) on the sale of Teléfonos de México, S.A. de C.V. (Telmex) L shares associated with SBC’s purchase of a Mandatorily Exchangeable Debt Securities note with characteristics that essentially offset future mark to market adjustments on the Debt Exchangeable for Common Stock (DECS).
- Pension settlement gains of $29 ($19 net of tax) in the third quarter associated with pension litigation and $403 ($260 net of tax) for the first nine months (recorded in operating expenses) primarily related to employees who terminated employment during 1999.
- Costs of $400 ($258 net of tax) in the third quarter and $780 ($528 net of tax) for the first nine months (recorded in operating expenses) associated with strategic initiatives and other adjustments resulting from the merger integration process with Ameritech.
- A charge of $132 (with no tax effect) in the first nine months (recorded in operating expenses) 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 $73 in the third quarter and $204 for the first nine months of 2001, and to decrease net income by $1,041 in the third quarter and $880 for the first nine 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 proportional consolidation of Cingular changes our normalized revenues, expenses, operating income and non-operating items, but does not change our net income. The following table summarizes our normalized results for the third quarter and first nine months of 2001 and 2000.
Normalized Results
- ----------------------------------------------------------------------------------
Third Quarter Nine-Month Period
- ----------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ----------------------------------------------------------------------------------
Operating revenues $ 13,524 $13,421 0.8% $ 40,254 $ 39,166 2.8%
Operating expenses 10,387 10,220 1.6 31,145 29,751 4.7
Operating income 3,137 3,201 (2.0) 9,109 9,415 (3.3)
Income before income taxes
and extraordinary item 3,075 3,138 (2.0) 8,940 9,150 (2.3)
Income before
extraordinary item 1,999 1,958 2.1 5,811 5,792 0.3
==================================================================================
Consolidated normalized revenues increased in the third quarter primarily due to growth in demand for data communications, wireless, interLATA long distance and directory services and products. The quarterly growth rate of 0.8% was lower than the growth rate for the first half of the year, reflecting the ongoing impact of a weak United States’ (U.S.) economy, challenging federal and state regulatory environments, increased competition and sales of non-strategic assets. We expect that the economic downturn will persist through 2002, further dampening business and consumer demand. Such an economy, combined with a challenging regulatory and competitive environment, would put significant pressure on our ability to generate meaningful growth in 2002. Consolidated normalized operating expenses for the third quarter were flat compared to the second quarter of 2001 and increased 1.6% from the third quarter of 2000. The increase over 2000 results is due primarily to the higher level of investments made for new products and services, including Digital Subscriber Line (DSL) and interLATA long distance, and addressing service issues in the Ameritech region. Partially offsetting the expense increases were cost savings from reductions in force and other operational efficiencies. However, the revenue slowdown has led to a decline in operating income and income before income taxes in the third quarter and for the first nine months of 2001.
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
- ---------------------------------------------------------------------------------
Third Quarter Nine-Month Period
- ---------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------
Operating revenues
Local service $ 5,674 $ 5,704 (0.5)% $17,161 $16,299 5.3%
Network access 2,642 2,514 5.1 7,849 7,898 (0.6)
Long distance service 755 735 2.7 2,202 2,204 (0.1)
Other 1,129 1,143 (1.2) 3,433 3,296 4.2
- ----------------------------------------------- --------------------
Total Operating Revenues 10,200 10,096 1.0 30,645 29,697 3.2
- ----------------------------------------------- --------------------
Operating expenses
Operations and support 5,919 6,032 (1.9) 17,899 17,148 4.4
Depreciation and
amortization 2,126 2,020 5.2 6,259 5,767 8.5
- ----------------------------------------------- -------------------
Total Operating Expenses 8,045 8,052 (0.1) 24,158 22,915 5.4
- ---------------------------- ------------------ -------------------
Operating Income 2,155 2,044 5.4 6,487 6,782 (4.3)
- ---------------------------- ------------------ -------------------
Interest Expense 297 316 (6.0) 953 962 (0.9)
- ---------------------------- ------------------ -------------------
Other Income (Expense) - Net 5 7 (28.6) 26 53 (50.9)
- ----------------------------------------------- -------------------
Income Before Income Taxes $ 1,863 $ 1,735 7.4% $ 5,560 $ 5,873 (5.3)%
=================================================================================
| | Local service revenues decreased $30, or 0.5%, in the third quarter and increased $862, or 5.3%, for the first nine months of 2001. Access line revenue continued to decline as a result of a slowing U.S. economy, increased competition, and technology substitution from wireless and high-speed access service. The decrease was approximately $173 in the third quarter and $408 for the first nine months. Partially offsetting the access line revenue decreases, the continued rollout of DSL increased local service revenues by approximately $87 in the third quarter and $231 for the first nine months as our DSL customers increased to approximately 1,187,000. However, certain other data related revenues including data equipment sales and network integration services decreased approximately $29 in the third quarter, but increased $626 for the first nine months. The third quarter decrease was primarily due to our decision to de-emphasize low-margin equipment as a component in data solutions. Wholesale revenues, which include unbundled network elements and resale services, increased approximately $79 in the third quarter and $271 for the first nine months. Revenues from vertical services such as Caller ID, voice mail and other enhanced services and vertical service packages increased by approximately $16 in the third quarter and $125 for the first nine months; however, the sequential quarterly growth rate has declined significantly since the first quarter. |
| | June 2001 Illinois legislation caused a one-time increase in revenues of approximately $128 for the first nine months of 2001. Additionally, as discussed below, this legislation increased operations and support expenses and decreased interest expense resulting in a net increase of $31 in pre-tax income for the first nine months. |
| | Network access revenues increased $128, or 5.1%, in the third quarter and decreased $49, or 0.6%, for the first nine months of 2001. The increase in the third quarter was largely due to continued demand for our high capacity data transport services, for which revenues increased by approximately $174. Additionally, revenue increased by approximately $89, including a partial reversal of a previous accrual for refunds of the end user common line charge and price cap provision in Michigan. These increases were partially offset by decreases in switched access revenue, due to both a decrease in demand and the continuing impact of the July 2000 implementation of the Coalition for Affordable Local and Long Distance Service (CALLS) proposal. |
| | For the first nine months, the decrease was primarily due to the continuing impact of CALLS, as well as from state regulatory access rate reductions in Texas. These rate reductions were partially offset by continued demand for our high capacity data transport services. |
| | Long distance service revenues increased $20, or 2.7%, in the third quarter and decreased $2, or 0.1%, for the first nine months of 2001. In the third quarter, long distance service revenues increased by continued revenue growth of approximately $96 due to our entry in the Texas, Kansas and Oklahoma interLATA long distance markets and an increase of $13 caused by increased demand for intraLATA toll services. These third quarter increases were partially offset by approximately $58 due to competitive losses resulting from intraLATA dialing parity and $39 attributable to competitive pricing actions in the Ameritech region. |
| | For the first nine months, long distance revenues decreased approximately $161 due to competitive losses resulting from intraLATA dialing parity and $113 related to competitive pricing actions in the Ameritech region. These decreases were largely offset by revenues of approximately $249 due to our entry into the Texas, Kansas and Oklahoma interLATA long distance markets and $37 caused by increased demand for intraLATA toll services. |
| | Other operating revenues decreased $14, or 1.2%, in the third quarter and increased $137, or 4.2%, for the first nine months of 2001. Price increases added revenue of approximately $22 in the third quarter and $90 for the first nine months of 2001. Continued declines in the payphone business decreased other operating revenues by approximately $25 in the third quarter and $63 for the first nine months of 2001. Sales of nonregulated products and services decreased slightly in the third quarter due to a decline in demand related to the weakness of the U.S. economy, but increased for the first nine months of 2001. |
| | Operations and support expenses decreased $113, or 1.9%, in the third quarter and increased $751, or 4.4%, for the first nine months of 2001. Costs to address service issues in the Ameritech region continued to be higher than 2000, and increased approximately $86 in the third quarter and $244 for the first nine months. Illinois legislation discussed above in local service caused a one-time increase in expenses of approximately $110 for the first nine months of 2001. Our provision for uncollectible accounts increased approximately $90 in the third quarter and $330 for the first nine months related to reserves for companies that went out of business and customers with a higher credit risk due to the adverse U.S. economic environment. Costs associated with our continued rollout of DSL, as mentioned in local service, increased approximately $16 in the third quarter and $228 for the first nine months. Costs associated with data equipment sales, network integration and e-commerce services decreased approximately $102 in the third quarter, primarily due to our decision to de-emphasize low-margin equipment as a component in data solutions, but increased $312 for the first nine months. Approximately $46 of the third quarter decrease was due to the slowing of our national expansion initiative to more closely mirror our entrance into the interLATA long distance markets and the third quarter 2000 launch of interLATA long distance service in Texas. These long distance and national expansion initiatives increased expenses by approximately $223 for the first nine months of 2001. |
| | Costs associated with reciprocal compensation decreased approximately $40 in the third quarter and $134 for the first nine months due to our signing new contracts with lower rates, partially offset by growth in usage. We also had lower expenses of approximately $181 in the third quarter and $524 for the first nine months related to reduced employee levels from early retirements, lower personnel benefit costs, reduced outsourcing and advertising costs and gains from certain employee postretirement plans. In addition, the first nine months of 2001 included a reduction in taxes of approximately $92, primarily related to settlements and lower property tax appraisals. |
| | We also recently announced that due to the continuing weak U.S. economy, competitive pressures and the adverse and uncertain regulatory environment, we expect to reduce our work force by several thousand jobs and cut capital spending to approximately $9,500 to $10,500 in 2002. We expect the reduction in capital expenditures to slow the deployment of our broadband network. |
| | Depreciation and amortization expenses increased $106, or 5.2%, in the third quarter and $492, or 8.5%, for the first nine months of 2001. The majority of the increase was related to higher plant levels from the buildout of our broadband network and the 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 $5 and $109 to the increase for the third quarter and first nine months of 2001. |
Wireless
Normalized Results
- ---------------------------------------------------------------------------------
Third Quarter Nine-Month Period
- ---------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------
Operating revenues
Subscriber revenue $1,903 $1,748 8.9% $ 5,441 $4,897 11.1%
Other 340 435 (21.8) 1,025 1,149 (10.8)
- ----------------------------------------------- -------------------
Total Operating Revenues 2,243 2,183 2.7 6,466 6,046 6.9
- ----------------------------------------------- -------------------
Operating expenses
Operations and support 1,506 1,410 6.8 4,400 3,931 11.9
Depreciation and
amortization 313 247 26.7 912 813 12.2
- ----------------------------------------------- -------------------
Total Operating Expenses 1,819 1,657 9.8 5,312 4,744 12.0
- ----------------------------------------------- -------------------
Operating Income 424 526 (19.4) 1,154 1,302 (11.4)
- ----------------------------------------------- -------------------
Interest Expense 127 143 (11.2) 411 267 53.9
- ----------------------------------------------- -------------------
Equity in Net Income of
Affiliates 2 7 (71.4) 13 7 85.7
- ----------------------------------------------- -------------------
Other Income (Expense) - Net 5 (31) - 26 (112) -
- ----------------------------------------------- -------------------
Income Before Income Taxes $ 304 $ 359 (15.3)% $ 782 $ 930 (15.9)%
=================================================================================
We account for our 60% economic interest in Cingular, a nationwide wireless joint venture, 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 the residual wireless properties we hold that have not been contributed, while the 2000 amounts reflect our similar historical wireless operations, prior to the October 2000 contribution to Cingular.
| | Subscriber revenues increased $155, or 8.9%, in the third quarter and $544, or 11.1%, for the first nine months of 2001. The increase, as compared to the prior year, was primarily related to growth in customer base, increased minutes of use and the sale of higher access rate plans. At September 30, 2001, Cingular had approximately 21,279,000 customers. For the third quarter of 2001, Cingular had net customer additions of approximately 95,000, excluding approximately 34,000 customers sold to minority partners. |
| | Other revenues decreased $95, or 21.8%, in the third quarter and $124, or 10.8%, for the first nine 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 other carriers. Also contributing to the decrease was a decline in equipment revenues due to fewer new customers. |
| | Operations and support expenses increased $96, or 6.8%, in the third quarter and $469, or 11.9%, for the first nine months of 2001. The increase was primarily due to costs associated with increased minutes of use on the network, increased long distance expenses as more plans include free long distance and costs for the Cingular national branding campaign that began 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 $66, or 26.7%, in the third quarter and $99, or 12.2%, for the first nine months of 2001 primarily related to higher plant levels. |
Directory
Normalized Results
- ---------------------------------------------------------------------------------
Third Quarter Nine-Month Period
- ---------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------
Operating Revenues $ 947 $ 888 6.6% $ 2,708 $ 2,676 1.2%
- ----------------------------------------------- -------------------
Operating expenses
Operations and support 412 413 (0.2) 1,245 1,335 (6.7)
Depreciation and
amortization 9 8 12.5 27 23 17.4
- ----------------------------------------------- -------------------
Total Operating Expenses 421 421 - 1,272 1,358 (6.3)
- ----------------------------------------------- -------------------
Operating Income 526 467 12.6 1,436 1,318 9.0
- ----------------------------------------------- -------------------
Other Income (Expense) - Net 4 6 (33.3) 11 10 10.0
- ----------------------------------------------- -------------------
Income Before Income Taxes $ 530 $ 473 12.1% $ 1,447 $ 1,328 9.0%
=================================================================================
| | Operating revenuesincreased $59, or 6.6%, in the third quarter and $32, or 1.2%, for the first nine months of 2001. The increase in third quarter revenues was due primarily to a change in timing of certain directory publications from the beginning of the year to the third quarter. For the first nine months of 2001, revenues increased due to an increase in demand for directory advertising services. This increase was offset by decreased revenues of approximately $18 due to changes in the timing of certain directory publications from the first three quarters of 2001 to the fourth quarter. |
| | Operations and supportexpenses decreased $1, or 0.2%, in the third quarter and $90, or 6.7%, for the first nine months of 2001. These decreases were primarily due to lower advertising, travel, contracted services and salary and benefit expenses. Offsetting these decreases was an increase in bad debt expense related to reserves for companies that went out of business or are a higher credit risk due to the weak U.S. economy. The changes in the timing of directory publications noted above in directory operating revenues increased expenses in the third quarter approximately $15 and decreased expenses $11 for the first nine months of 2001. |
International
Normalized Results
- ---------------------------------------------------------------------------------
Third Quarter Nine-Month Period
- ---------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------
Operating Revenues $ 48 $ 79 (39.2)% $ 173 $ 247 (30.0)%
- ----------------------------------------------- --------------------
Operating Expenses 80 144 (44.4) 222 351 (36.8)
- ----------------------------------------------- --------------------
Operating Income (Loss) (32) (65) 50.8 (49) (104) 52.9
- ----------------------------------------------- --------------------
Interest Expense 13 36 (63.9) 23 173 (86.7)
- ----------------------------------------------- --------------------
Equity in Net Income of
Affiliates 183 207 (11.6) 580 604 (4.0)
- ----------------------------------------------- --------------------
Other Income (Expense) - Net 76 103 (26.2) 303 315 (3.8)
- ----------------------------------------------- --------------------
Income Before Income Taxes $ 214 $ 209 2.4% $ 811 $ 642 26.3%
=================================================================================
| | Operating revenues decreased $31, or 39.2%, in the third quarter and $74, or 30.0%, for the first nine months of 2001. The decrease was primarily caused by lower volume-related long distance revenues at Ameritech Global Gateway Services (AGGS), our international long-distance subsidiary which we sold for approximately $13 in September 2001, of approximately $26 in the third quarter and $29 for the first nine months of 2001. Directory advertising revenue decreased due to the December 2000 sale of our German directory investment, Wer Liefert Was (WLW), by approximately $1 in the third quarter and $36 for the first nine months of 2001. The remaining decrease is due to lower management fee revenues. |
| | Operating expenses decreased $64, or 44.4%, in the third quarter and $129, or 36.8%, for the first nine months of 2001. The decrease was due primarily to the sale of WLW and lower volume-related long distance revenues at AGGS, as mentioned above. Additionally, depreciation expense declined due to certain property, plant and equipment being fully depreciated during the first quarter of 2001. |
| | Equity in net income of affiliatesdecreased $24, or 11.6%, in the third quarter and $24, or 4.0%, for the first nine months of 2001. Equity in net income decreased approximately $12 in the third quarter and $65 for the first nine months of 2001 due to the sale of MATÁV in the third quarter of 2000. We recognized lower equity in net income of approximately $37 for the quarter and $55 for the first nine months of 2001 due to a smaller ownership percentage in Telmex, lower income from South American wireless companies held by América Móvil S.A. de C.V. and increased expenses at Telmex due to certain one-time accounting adjustments in 2000. Additionally, equity in net income decreased approximately $33 in the third quarter and $152 for the first nine 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 in net income increased approximately $50 for the first nine months of 2001 from Bell Canada largely due to the first quarter gain on their disposition of an Internet service provider subsidiary. Cegetel S.A.‘s (Cegetel) wireless subscriber growth and higher average revenue per customer in its wireless operations increased equity in net income approximately $9 in the third quarter. These factors, as well as Cegetel’s second quarter sale of AOL France, resulted in increased equity in net income of approximately $91 for the first nine months of 2001. Also partially offsetting the decrease is 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 Américas, which eliminated losses on a comparative basis of approximately $35 in the third quarter and $101 for the first nine months of 2001. |
Other
Normalized Results
- ---------------------------------------------------------------------------------
Third Quarter Nine-Month Period
- ---------------------------------------------------------------------------------
Percent Percent
2001 2000 Change 2001 2000 Change
- ---------------------------------------------------------------------------------
Operating Revenues $ 142 $ 263 (46.0)% $ 461 $ 798 (42.2)%
- ---------------------------------------------- ------------------
Operating Expenses 78 34 - 380 681 (44.2)
- ---------------------------------------------- ------------------
Operating Income 64 229 (72.1) 81 117 (30.8)
- ---------------------------------------------- ------------------
Interest Expense 195 231 (15.6) 705 585 20.5
- ---------------------------------------------- ------------------
Other Income (Expense) - Net 295 364 (19.0) 964 845 14.1
- ---------------------------------------------- ------------------
Income Before Income Taxes $ 164 $ 362 (54.7)% $ 340 $ 377 (9.8)%
=================================================================================
| | Operating revenuesdecreased $121, or 46.0%, in the third quarter and $337, or 42.2%, for the first nine months of 2001, primarily due to the sale of SecurityLink in January 2001. In November 2001, we expect to sell Ameritech New Media, Ameritech’s cable television operations, which reported operating revenues of approximately $40 per quarter for the first nine months of 2001. |
| | Operating expensesincreased $44 in the third quarter and decreased $301, or 44.2%, for the first nine months of 2001. The increase in the third quarter resulted from lower third quarter 2000 expenses due to the one time true-up of billing centralized service costs from the first quarter of 2000 to our operational segments. The decline in the first nine months, as well as a partial offset to the third quarter increase, resulted from decreased expenses due to the sale of SecurityLink. Our cable television operations mentioned above reported operating expenses of approximately $60 per quarter for the first nine months of 2001. |
Consolidated Results
Interest expense decreased $45, or 10.7%, in the third quarter and increased $67, or 5.6%, for the first nine months of 2001. The decrease in the third quarter was due to lower composite rates and decreased average debt levels. The increase for the first nine months was primarily 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 are no longer incurring this expense (see Note 1). The increase for the first nine months was largely offset by cost savings from lower composite rates. Also offsetting the increase was the reversal of an accrual of approximately $20 for the first nine months of 2001 related to items resolved by June 2001 Illinois legislation discussed in local service.
Interest income increased $112 in the third quarter and $449 for the first nine 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. In the second quarter of 2001 we completed the net debt settlement agreement with Cingular and are incurring lower interest income on the note receivable from Cingular (see Note 1).
Other income (expense) - netincludes items that we normalized as previously described in the “Overview” section, primarily the gains of $1,699 in the third quarter of 2000 related to the sale of direct and indirect interests in MATÁV and Netcom GSM. In addition to those items, the third quarter and first nine months of 2001 included gains on the sale of investments of approximately $77 and $301, consisting of the sale of our investment in Transasia Telecommunications, Amdocs Limited (Amdocs) shares and other investments. These gains were partially offset by dividends paid on preferred securities issued by Ameritech subsidiaries of approximately $7 in the third quarter and $29 for the first nine months of 2001, as well as minority interest of $16 for the first nine months of 2001. The amount of our minority interest expense this year has significantly declined from 2000 due to the contribution of most of our wireless properties to Cingular in the fourth quarter of 2000. The first nine months of 2001 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 nine 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 DECS redeemable in Telmex L shares resulting in income of approximately $13 in the third quarter and an expense of $35 for the first nine months of 2000. The DECS were repaid in March 2001. The third quarter and first nine months of 2000 also included gains on the sale of Telmex L shares of approximately $18 and $151. The third quarter and first nine months of 2000 included gains of approximately $7 and $72 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 $59 in the third quarter and $142 for the first nine months of 2000. We recognized interest rate swap income of approximately $20 for the first nine months of 2000 and minority interest expense of approximately $51 in the third quarter and $157 for the first nine 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 $49 in the third quarter and $160 for the first nine months of 2001 and increased income taxes by $525 in the third quarter and $548 for the first nine 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 $1,076 and $3,129 for the third quarter and first nine months of 2001. For the third quarter and first nine months of 2000, income taxes would have been $1,180 and $3,358 excluding one-time charges.
Income taxes were lower in the third quarter and for the first nine months of 2001 primarily due to lower income before income taxes. The decrease in the effective tax rate in the third quarter of 2001 was due to an increase in utilization of tax credits and a decrease in non-deductible goodwill for businesses that were disposed of in 2000. The decrease in the effective tax rate for the first nine months of 2001 was 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
OverviewDespite passage of the Telecommunications Act of 1996, the U.S. telecommunications industry, including DSL and other advanced services, continues, in many respects, to operate as a heavily regulated industry. The expected transition from an industry overseen by multiple regulatory bodies to a market-driven industry monitored by state and federal agencies has been slow. Our wireline subsidiaries remain subject to regulation by state regulatory commissions for intrastate services and by the Federal Communications Commission (FCC) for interstate services. This continuing adverse and uncertain regulatory environment combined with the recent downturn in the U.S. economy presents new challenges for our business. A summary of significant third quarter 2001 regulatory developments follows.
Interconnection In August 2001, the FCC issued its order in response to a March 2000 appellate court reversal and remand of the FCC’s March 1999 interconnection rules. In its August 2001 order, the FCC requires that incumbent local exchange companies, such as our wireline subsidiaries, allow competitors to collocate only equipment that is “necessary” for connecting to the local network, i.e., only equipment with the primary purpose of interconnecting or accessing local lines. The order also requires incumbents to allow competitors to cross-connect with other collocated carriers. In August 2001, we, along with BellSouth, filed a petition for review of this order with the United States Court of Appeals for the District of Columbia on the grounds that the order exceeds the FCC’s jurisdiction and authority. The effect of any future decision on our results of operations and financial position cannot be determined at this time; however if the August 2001 FCC order stands as written, we do not expect it to have a material effect on our financial position or results of operations.
Coalition for Affordable Local and Long Distance Service In September 2001, the United States Court of Appeals for the Fifth Circuit (5th Circuit) issued its decision on appeal of the FCC’s May 2000 CALLS order restructuring federal price cap regulation. Although the 5th Circuit upheld the CALLS order in most key respects, it reversed and remanded to the FCC two specific aspects of the order.
- The 5th Circuit held that the FCC failed to sufficiently justify an incremental $650 in universal service funding and remanded to the FCC for further explanation of the amount; and
- held that the FCC failed to show a rational basis for how it derived the 6.5% transitional mechanism and remanded to the FCC for an explanation of how the percentage was derived.
The current universal service fund amount and transitional mechanism will remain in effect pending FCC response. The effect of any future FCC order on our results of operations and financial position cannot be determined at this time.
Long Distance In August 2001, we filed applications with the FCC to provide long distance service in Missouri and Arkansas and the FCC has 90 days from the filing date to rule on the applications. We continue to seek long distance approval in our other in-region states and have filed applications with state commissions in California, Michigan, Nevada and Ohio. We currently provide long distance service in Texas, Connecticut, Kansas and Oklahoma. In October 2001, the FCC completed its re-examination of certain information contained in our previously approved Kansas and Oklahoma long distance applications and found that we did not intentionally provide false information. The FCC proposed fines of approximately $3 for certain errors in our applications. We plan to file a response with the FCC challenging those fines by mid-November 2001 and the FCC is expected to issue a final ruling on the proposed fines shortly thereafter. This FCC ruling allows us to continue to offer long distance service in Kansas and Oklahoma.
Ameritech Merger In association with its approval of the October 1999 Ameritech merger, the FCC set specific performance and reporting requirements and enforcement provisions that could potentially trigger more than $2 billion in payments through June 2004 if certain goals were not met. Associated with these conditions, we incurred approximately $28 in the third quarter and $69 for the first nine months of 2001 in additional expenses, including payments for failing to meet certain performance measurements.
California Marketing Ruling In September 2001, the California Public Utilities Commission (CPUC) ruled that our California wireline subsidiary must pay approximately $26 in penalties for alleged overly aggressive and deceptive marketing practices related to packages of enhanced services such as Caller ID and call forwarding. We believe these allegations are unwarranted and could hinder our ability to inform consumers about the products and services we offer. The CPUC ruling also orders us to reduce the commission we pay our customer service employees and prescribes acceptable marketing practices. We believe this decision is unlawful on a number of grounds and have filed legal challenges to the decision.
Ohio Service Quality Audit As required by a July 2000 Public Utilities Commission of Ohio (PUCO) order, in September 2001, audit consultants selected by the PUCO issued their preliminary audit report on our Ohio wireline subsidiary’s service quality and marketing practices for the period of August 1999 through May 2001. The report includes recommendations for improving service quality compliance, increasing construction expenditures and providing retroactive customer credits. Although we are challenging certain portions of the report, we began providing retroactive customer credits in October 2001. We do not expect these credits to have a material effect on our results of operations or financial position. A final audit report is due to the PUCO in February 2002; however; we have requested that the PUCO issue a final decision before the end of 2001, including elimination of the $122 in potential penalties noted in their original July 2000 ruling.
OTHER BUSINESS MATTERS
New Accounting StandardsOn 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 will cease and the remaining book value will 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 will 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 FAS 141 and FAS 142 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 international equity investments. Our existing and embedded goodwill amortization expense was approximately $81 net of tax in the third quarter and $241 net of tax for the first nine 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.
We are currently in the process of performing a periodic review of the carrying value and lives of our intangible assets, including approximately $3,200 of goodwill, under the current accounting rules for impairment. If the review indicates that an impairment exists, then material charges to operations in the fourth quarter may be required.
Cingular Employee Transfer Under our joint venture agreement with BellSouth, certain SBC employees leased to Cingular at September 30, 2001 became Cingular employees effective October 28, 2001 and all remaining such leased employees will become Cingular employees effective on or before December 31, 2001. We have a services contract with Cingular under which leased employees provide services to Cingular and we bill Cingular for those costs. The transfer of the employees to Cingular is not expected to have a significant effect on our results of operations or financial position.
Cingular Network Upgrade In October 2001, Cingular announced it will begin upgrading its network to EDGE (Enhanced Data Rates for Global Evolution) third generation wireless data technology. Cingular targets completion of the upgrade for early 2004 and approximate capital expenditures of 18 to 19 dollars per potential customer in the affected Cingular coverage area. We expect funding for this upgrade to be provided by Cingular.
Prodigy Acquisition In October 2001, we entered into a definitive agreement to acquire Prodigy Communications Corporation (Prodigy) through a tender offer to purchase all of the outstanding shares of Prodigy’s Class A common stock at $6.60 per share, leading to a subsequent merger. We expect the transaction to be completed in November 2001.
Labor Agreement In August 2001, the International Brotherhood of Electrical Workers, which represents approximately 12,000 employees, 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.
LIQUIDITY AND CAPITAL RESOURCES
We had $562 in cash and cash equivalents available at September 30, 2001. During the first nine months of 2001 our primary source of funds continued to be cash provided by operating activities. In the first nine 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 September 30, 2001. Commercial paper borrowings as of September 30, 2001 and December 31, 2000 totaled $4,370 and $6,437.
In the first nine months of 2001 we received $454 in cash in addition to SpectraSite stock in exchange for leasing 1,772 towers to SpectraSite Communications Inc. 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 nine months of 2001 consisted of $8,096 in construction and capital expenditures, primarily in the wireline segment, including $1,008 in fiber, electronics and other technology equipment for our broadband initiative, known as Project Pronto. Investing activities during the first nine months of 2001 also included a receipt of $1,371 from Cingular for payment of notes receivable and asset dispositions of $864, primarily related to the sale of SecurityLink, Transasia Telecommunications and Amdocs shares. There were no acquisitions during the first nine months of 2001. Investing activities during the first nine months of 2000 included dispositions of $3,534, due primarily to the sale of our interests in MATÁV and Netcom GSM, and acquisitions of $5,127, of which $3,397 was for the acquisition of Sterling.
Short-term borrowings decreased $3,091 due to the repayment of short-term notes. We also spent $1,661 on the repurchase of shares of our common stock under the repurchase plan announced in January 2000. As of October 31, 2001, we have repurchased a total of approximately 88 million shares of our common stock of the 100 million shares authorized to be repurchased by our Board of Directors in January 2000. Financing activities during the first nine months of 2000 included new short-term borrowings to finance our acquisition of Sterling. Cash paid for dividends in the first nine months of 2001 was $2,591, or 1.2% higher than in the first nine months of 2000 due to an increase in dividends declared per share.
On November 5, 2001, our Board of Directors authorized the repurchase of up to an additional 100 million shares of our common stock.
During the first nine months of 2001, we issued the following long-term obligations:
- 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. In June 2001, we issued approximately $500 of 7.00% notes due 2041. We may redeem the notes, in whole or in part, at any time on or after June 13, 2006. The proceeds, from the sale were used primarily to pay down short-term borrowings, with the remainder used for general corporate purposes.
- In June 2001, we privately sold $1,000 of 20-year annual Puttable Reset Securities. 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.
During the first nine months of 2001, we redeemed the following obligations:
- In February 2001, we redeemed prior to maturity approximately $500 of the Trust Originated Preferred Securities (TOPrS) with an interest rate of 7.56%. In June 2001, we redeemed the remaining $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 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 July and August 2001, we redeemed approximately $615 of multiple bonds with maturities up to 40 years and interest rates ranging from 5.8% to 8.5%.
- In October and November 2001, we redeemed approximately $665 of multiple bonds with maturities up to 40 years and interest rates ranging from 4.4% to 6.9%.
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:
- Adverse economic changes in the markets served by SBC, or countries in which we have significant investments.
- Changes in available technology.
- The final outcome of FCC proceedings, including rulemakings, and judicial review, if any, of such proceedings, including issues relating to jurisdiction.
- 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.
- Enactment of additional state, Federal and/or foreign regulatory laws and regulations pertaining to our subsidiaries and foreign investments.
- 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.
- The impact of the Ameritech transaction, including performance with respect to regulatory requirements and merger integration efforts.
- 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.
- 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 third 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 2,760 SBC shares and DSUs were acquired by non-employee directors at prices ranging from $40.25 to $47.12, in each case the fair market value of the shares on the date of acquisition. The issuances of shares and DSUs were exempt from registration pursuant to Section 4(2) of the Securities Act.
Item 6. Exhibits
(a) Exhibits
Exhibit 10-z Mr. Kiernan's Retirement Agreement
Exhibit 10-aa Mr. Foster's Retirement Agreement
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SBC Communications Inc.
November 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
Nine Months Ended
September 30, Year Ended December 31,
------------------- -------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
Income Before Income Taxes, Extraordinary Items
and Cumulative Effect of Accounting Changes* $ 8,627 $10,234 $12,367 $10,382 $11,859 $ 6,356 $ 8,789
Add:Interest Expense 1,261 1,194 1,592 1,430 1,605 1,550 1,418
Dividends on Preferred 53 78 118 118 114 98 68
Securities
1/3 Rental Expense 176 191 252 236 228 202 188
--------- --------- --------- --------- --------- --------- ---------
Adjusted Earnings $10,117 $11,697 $14,329 $12,166 $13,806 $ 8,206 $10,463
========= ========= ========= ========= ========= ========= =========
Total Interest Charges $ 1,350 $ 1,261 $ 1,693 $ 1,511 $ 1,691 $ 1,700 $ 1,589
Dividends on Preferred Securities 53 78 118 118 114 98 68
1/3 Rental Expense 176 191 252 236 228 202 188
--------- --------- --------- --------- --------- --------- ---------
Adjusted Fixed Charges $ 1,579 $ 1,530 $ 2,063 $ 1,865 $ 2,033 $ 2,000 $ 1,845
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges 6.41 7.65 6.95 6.52 6.79 4.10 5.67
* Undistributed earnings on investments accounted for under the equity method
have been excluded.
AGREEMENT AND RELEASE AND WAIVER OF CLAIMS
This Agreement and the Release and Waiver contained herein are made and entered into in San Antonio, Texas, on this the 31st day of July, 2001, by and between SBC Management Services, L.P. (hereinafter “Company”) and Mr. Don Kiernan (hereinafter “Mr. Kiernan”) for and in consideration of the mutual promises set forth below.
1. Mr. Kiernan will retire from the Company effective at the close of business on July 31, 2001.
2. Commencing on August 1, 2001, and continuing through March 31, 2002, Mr. Kiernan shall provide consulting services to or on behalf of SBC and its subsidiaries with respect to matters involving SBC and its subsidiaries’ financial matters (“Services”) as requested by Company. In exchange for such Services, the Company shall pay to Mr. Kiernan a retainer of $333,334 no later than the 10th day of each of August, 2001, November, 2001 and March, 2002, for a total retainer of $1,000,002. In addition, Mr. Kiernan shall be reimbursed for his reasonable expenses incurred in rendering any requested Services subject to SBC’s expense guidelines in effect when such expenses are incurred. Mr. Kiernan shall act as an independent contractor and not as an agent, partner or employee of SBC or any subsidiary thereof. This Agreement does not establish an agency or partnership relationship between Mr. Kiernan and SBC or any of its subsidiaries. Although the Services will have to be completed to the satisfaction of Company, the actual details of the Services shall be under Mr. Kiernan’s control.
3. The Company agrees to pay Mr. Kiernan his deferred compensation benefits that are equivalent to the benefits under the SBC Senior Management Deferred Compensation Program of 1988 (“Equivalent Program Benefits”) in accordance with the schedule of payments he selected. Except as provided herein, Mr. Kiernan’s Equivalent Program Benefits shall be governed by the SBC Senior Management Deferred Compensation Program of 1988.
4. The Company agrees to pay Mr. Kiernan his supplemental retirement benefits that are equivalent to the benefits that would be paid to him under the SBC Supplemental Retirement Income Plan (“Equivalent SRIP Benefits”) in accordance with the schedule of payments he selected; provided, however, Mr. Kiernan’s Equivalent SRIP Benefits shall be calculated based on Mr. Kiernan’s 2001 target Short Term Incentive Award. Except as provided herein, Mr. Kiernan’s Equivalent SRIP Benefits shall be governed by the SBC Supplemental Retirement Income Plan.
5. Mr. Kiernan hereby specifically waives any right to any other termination pay allowance as a consequence of Mr. Kiernan’s retirement and any and all benefits under the Program or the SRIP which Mr. Kiernan would otherwise become eligible for and entitled to on and after the date of Mr. Kiernan’s retirement. Except as agreed herein, this Agreement and the Release and Waiver contained herein do not abrogate any of the usual entitlements which Mr. Kiernan has or will have, first, while a regular employee and subsequently, upon retirement as a retired employee. All of said benefits will be subject to and provided in accordance with the terms and conditions of the respective benefit plans, as they may be amended from time-to-time, as applicable to Mr. Kiernan.
6. Mr. Kiernan declares that his decision to execute this Agreement and the Release and Waiver contained herein has not been influenced by any declarations or representations by Company (or SBC, or any other subsidiary of Company or of SBC) other than the contractual agreements and consideration expressly stated herein. Company has expressly advised Mr. Kiernan to seek personal legal advice prior to executing this Agreement and the Release and Waiver contained herein and Mr. Kiernan, by his signature below, hereby expressly acknowledges that he was given at least twenty one (21) days in which to seek such advice and decide whether or not to enter into this Agreement and the Release and Waiver contained herein. Mr. Kiernan may revoke this Agreement and the Release and Waiver contained herein within seven (7) days of his execution of the Release and Waiver contained herein by giving notice, in writing, by certified mail, return receipt requested to the Company at the address specified below.
SBC Management Services, L.P. Don Kiernan
By: SBC MSI, LLC
Its: General Partner
/s/ Karen Jennings /s/ Don Kiernan
By: Karen Jennings Don Kiernan
Sr. Executive Vice President-
Human Resources
175 E. Houston, 13th Floor
San Antonio, Texas 78205
7/31/01 7/31/01
Date Date
AGREEMENT AND RELEASE AND WAIVER OF CLAIMS
This Agreement and the Release and Waiver contained herein are made and entered into in San Antonio, Texas, on this the 3rd day of October, 2001, by and between SBC Management Services, L.P. (hereinafter “Company”) and Mr. Charles E. Foster (hereinafter “Mr. Foster”) for and in consideration of the mutual promises set forth below.
1. Mr. Foster retired from the Company effective at the close of business on June 29, 2001.
2. The Company agrees to pay Mr. Foster his supplemental retirement benefits that are equivalent to the benefits that would be paid to him under the SBC Supplemental Retirement Income Plan (“Equivalent SRIP Benefits”) in accordance with the schedule of payments he selected; provided, however, Mr. Foster’s Equivalent SRIP Benefits shall be calculated based on Mr. Foster’s 2001 target Short Term Incentive Award. Except as provided herein, Mr. Foster’s Equivalent SRIP Benefits shall be governed by the SBC Supplemental Retirement Income Plan.
3. Mr. Foster hereby specifically waives any right to any other termination pay allowance as a consequence of Mr. Foster’s retirement and any and all benefits under the SRIP, which Mr. Foster would otherwise become eligible for and entitled to on and after the date of Mr. Foster’s retirement. Except as agreed herein, this Agreement and the Release and Waiver contained herein do not abrogate any of the usual entitlements which Mr. Foster had while a regular employee and has upon retirement as a retired employee. All of said benefits will be subject to and provided in accordance with the terms and conditions of the respective benefit plans, as they may be amended from time-to-time, as applicable to Mr. Foster.
4. Mr. Foster declares that his decision to execute this Agreement and the Release and Waiver contained herein has not been influenced by any declarations or representations by Company (or SBC, or any other subsidiary of Company or of SBC) other than the contractual agreements and consideration expressly stated herein. Company has expressly advised Mr. Foster to seek personal legal advice prior to executing this Agreement and the Release and Waiver contained herein and Mr. Foster, by his signature below, hereby expressly acknowledges that he was given at least twenty one (21) days in which to seek such advice and decide whether or not to enter into this Agreement and the Release and Waiver contained herein. Mr. Foster may revoke this Agreement and the Release and Waiver contained herein within seven (7) days of his execution of the Release and Waiver contained herein by giving notice, in writing, by certified mail, return receipt requested to the Company at the address specified below.
SBC Management Services, L.P. Charles E. Foster
By: SBC-MSI, LLC
Its: General Partner
/s/ Karen Jennings /s/ Charles E. Foster
By: Karen Jennings Charles E. Foster
Sr. Executive Vice President-
Human Resources
175 E. Houston, 13th Floor
San Antonio, Texas 78205
October 3, 2001 October 3, 2001
Date Date
