AT&T Inc. is a North American telecommunications company. In addition to telephone, data and video telecommunications, AT&T also provides mobile communications and internet services for companies, private customers and government organizations. AT&T has long had a monopoly in the United States and Canada.
United StatesSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
(Mark One) |X|
Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934For the quarterly period ended September 30, 2001
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from toCommission File Number 1-8610
Incorporated under the laws of the State of DelawareI.R.S. Employer Identification Number 43-1301883175 E. Houston, San Antonio, Texas 78205Telephone 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 INFORMATIONItem 1. Financial StatementsSBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------CONSOLIDATED STATEMENTS OF INCOMEDollars in millions except per share amounts (Unaudited) - -------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30,2001 2000 2001 2000 - --------------------------------------------------------------------------------Operating RevenuesLandline 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 ExpensesOperations 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 $ 1.97Net 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 $ 1.95Net Income $ 0.61 $ 0.88 $ 1.77 $ 1.95 - --------------------------------------------------------------------------------Weighted Average Number of Common Shares Outstanding (in millions) $ 3,362 3,387 3,368 3,393Dividends Declared Per Common Share $ 0.25625 $0.25375 $0.76875 $0.76125 ================================================================================ See Notes to Consolidated Financial Statements.
- ----------------------------------------------------------------------------------CONSOLIDATED BALANCE SHEETSDollars in millions except per share amounts - ----------------------------------------------------------------------------------September 30, December 31,2001 2000 - ----------------------------------------------------------------------------------Assets (Unaudited)Current AssetsCash 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 AccumulatedAmortization of $657 and $746 4,041 5,475Investments in Equity Affiliates 12,204 12,378Notes Receivable from Cingular Wireless 5,926 9,568Other Assets 12,048 10,387 - ----------------------------------------------------------------------------------Total Assets $ 95,715 $ 98,651 ==================================================================================Liabilities and Shareowners' EquityCurrent LiabilitiesDebt 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 - ----------------------------------------------------------------------------------Deferred Credits and Other Noncurrent LiabilitiesDeferred 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 RedeemablePreferred Securities of Subsidiary Trusts - 1,000 - ----------------------------------------------------------------------------------Shareowners' EquityCommon 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.
- -------------------------------------------------------------------------------CONSOLIDATED STATEMENTS OF CASH FLOWSDollars in millions, increase (decrease) in cash and cash equivalents (Unaudited) - ------------------------------------------------------------------------------- Nine months ended September 30,2001 2000 - -------------------------------------------------------------------------------Operating ActivitiesNet 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 ActivitiesConstruction 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 ActivitiesNet 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.
- ----------------------------------------------------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITYDollars 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.
------------------------------------------------------------------------------------- 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 =====================================================================================
-------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30,2001 2000 2001 2000 --------------------------------------------------------------------------------NumeratorsNumerator 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 ================================================================================
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, 2001Parent 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 BeforeExtraordinary 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 IncomeFor the Nine Months Ended September 30, 2000Parent 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 SheetSeptember 30, 2001Parent 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 SheetDecember 31, 2000Parent 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 FlowsNine Months Ended September 30, 2001Parent 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 FlowsNine Months Ended September 30, 2000Parent 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 ======================================================================= ========
Normalized results for 2001 exclude the following items:
Normalized results for 2000 exclude the following items:
------------------------------------------------------------------------- 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 ===============================================================================
SBC COMMUNICATIONS INC.SEPTEMBER 30, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsDollars in millions except per share amounts
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 Percent2001 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.
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 Percent2001 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.
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.
- --------------------------------------------------------------------------------- Third Quarter Nine-Month Period - --------------------------------------------------------------------------------- Percent Percent2001 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)% =================================================================================
- --------------------------------------------------------------------------------- Third Quarter Nine-Month Period - --------------------------------------------------------------------------------- Percent Percent2001 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.
- --------------------------------------------------------------------------------- Third Quarter Nine-Month Period - --------------------------------------------------------------------------------- Percent Percent2001 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% =================================================================================
- --------------------------------------------------------------------------------- Third Quarter Nine-Month Period - --------------------------------------------------------------------------------- Percent Percent2001 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% =================================================================================
- --------------------------------------------------------------------------------- Third Quarter Nine-Month Period - --------------------------------------------------------------------------------- Percent Percent2001 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)% =================================================================================
Interest expensedecreased $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 incomeincreased $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) - net includes 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.
Overview Despite 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 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.
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 AcquisitionIn 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.
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:
During the first nine months of 2001, we redeemed the following obligations:
There has been no material change in the disclosures about our sensitivities to market risks related to financial instruments since December 31, 2000.
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:
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially impact our future earnings.
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) ExhibitsExhibit 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
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 StephensonRandall Stephenson Senior Executive Vice President and Chief Financial Officer
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.
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 KiernanBy: 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
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. FosterBy: 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