Annual Report 2000
Selected Financial and Operating Data
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Dollars in millions except per share amounts
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At December 31 or for the year ended: 2000 1999 1998 1997 1996
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Financial Data 1
Operating revenues $ 51,476 $ 49,531 $ 46,241 $ 43,126 $ 40,515
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Operating expenses $ 40,733 $ 37,933 $ 35,018 $ 35,524 $ 30,466
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Operating income $ 10,743 $ 11,598 $ 11,223 $ 7,602 $ 10,049
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Interest expense $ 1,592 $ 1,430 $ 1,605 $ 1,550 $ 1,418
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Equity in net income of affiliates $ 897 $ 912 $ 613 $ 437 $ 470
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Other income (expense) - net $ 2,561 $ (354) $ 1,702 $ (93) $ (215)
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Income taxes $ 4,921 $ 4,280 $ 4,380 $ 2,451 $ 3,368
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Income before extraordinary items and
cumulative effect of accounting change $ 7,967 $ 6,573 $ 7,735 $ 4,087 $ 5,705
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Net Income 2 $ 7,967 $ 8,159 $ 7,690 $ 4,087 $ 5,795
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Earnings per common share:
Income before extraordinary items and
cumulative effect of accounting change $ 2.35 $ 1.93 $ 2.27 $ 1.21 $ 1.67
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Net Income 2 $ 2.35 $ 2.39 $ 2.26 $ 1.21 $ 1.70
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Earnings per common share - assuming
dilution:
Income before extraordinary items and
cumulative effect of accounting change $ 2.32 $ 1.90 $ 2.24 $ 1.20 $ 1.66
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Net Income 2 $ 2.32 $ 2.36 $ 2.23 $ 1.20 $ 1.69
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Total assets $ 98,651 $ 83,215 $ 74,966 $ 69,917 $ 65,765
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Long-term debt $ 15,492 $ 17,475 $ 17,170 $ 17,787 $ 16,536
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Construction and capital expenditures $ 13,124 $ 10,304 $ 8,882 $ 8,856 $ 8,304
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Free cash flow 3 $ 1,175 $ 6,274 $ 4,099 $ 2,723 $ 2,964
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Dividends declared per common share 4 $ 1.015 $ 0.975 $ 0.935 $ 0.895 $ 0.860
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Book value per common share $ 9.00 $ 7.87 $ 6.69 $ 5.26 $ 4.94
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Ratio of earnings to fixed charges 6.95 6.52 6.79 4.10 5.67
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Debt ratio 45.2% 42.9% 47.3% 54.9% 55.6%
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Weighted average common shares
outstanding (000,000) 3,392 3,409 3,406 3,391 3,409
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Weighted average common shares
outstanding with dilution (000,000) 3,433 3,458 3,450 3,420 3,429
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End of period common shares
outstanding (000,000) 3,386 3,395 3,406 3,398 3,389
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Operating Data
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Network access lines in service (000) 61,250 60,697 58,980 56,707 53,891
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Access minutes of use (000,000) 281,581 264,010 247,597 228,300 208,230
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Wireless customers (000) - Cingular/SBC 5 19,681 11,151 8,686 7,556 6,018
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Number of employees 220,090 204,530 200,380 202,440 185,400
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- Certain one-time items are included in the results for each year presented. See
Results of Operations for a summary of the 2000, 1999 and 1998 one-time items.
In 1997, results include the incremental operating impacts attributable to the
operations of the overlapping Ameritech Corporation (Ameritech) wireless
properties sold in 1999, charges resulting from the merger integration process
with Pacific Telesis Group (PAC), and charges related to a work force
restructuring at Belgacom S.A. Additionally, we recognized gains from the sale
of our interests in Bell Communications Research, Inc. and from settlement gains
at PAC associated with lump sum pension payments for 1996 retirements. Excluding
these items, SBC Communications Inc. (SBC) reported an adjusted net income of
$5,836, or $1.71 diluted earnings per share in 1997. In 1996, results include
the incremental operating impacts attributable to the operations of the
overlapping Ameritech wireless properties sold in 1999. Excluding these items,
SBC reported an adjusted income before cumulative effect of accounting change of
$5,216, or $1.52 diluted earnings per share, and an adjusted net loss of $1,493,
or $0.43 diluted earnings per share in 1996.
- Amounts include the following extraordinary items and cumulative effect of
accounting change: 1999, gain on sale of overlapping cellular properties and
change in directory accounting at Ameritech; 1998, early retirement of debt and
change in directory accounting at Southern New England Telecommunications Corp.
(SNET); 1996, change in directory accounting at PAC.
- Free cash flow is net cash provided by operating activities less construction
and capital expenditures.
- Dividends declared by SBC’s Board of Directors; these amounts do not
include dividends declared and paid by Ameritech, SNET and PAC prior to their
respective mergers.
- All periods exclude customers from the overlapping Ameritech wireless properties
sold in 1999. Beginning in 2000, the number presented is the total customers
served by Cingular Wireless, in which we own a 60% equity interest.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts
Throughout this document,
SBC Communications Inc. is referred to as “we” or “SBC”. We
are a holding company whose subsidiaries and affiliates operate in the
communications services industry. Our subsidiaries and affiliates provide
wireline and wireless telecommunications services and equipment, directory
advertising and cable television services both domestically and worldwide.
This discussion should be
read in conjunction with the consolidated financial statements and the
accompanying notes. A reference to a Note in this section refers to the
accompanying Notes to the Consolidated Financial Statements.
Results of Operations
Overview
Reported financial results are summarized as follows:
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Percent Change
-------------------
2000 vs. 1999 vs.
2000 1999 1998 1999 1998
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Operating revenues $ 51,476 $ 49,531 $ 46,241 3.9% 7.1%
Operating expenses 40,733 37,933 35,018 7.4 8.3
Operating income 10,743 11,598 11,223 (7.4) 3.3
Other income (expense) - net 2,561 (354) 1,702 - -
Income before extraordinary items and
cumulative effect of accounting change 7,967 6,573 7,735 21.2 (15.0)
Extraordinary items - 1,379 (60) - -
Cumulative effect of accounting change - 207 15 - -
Net income 7,967 8,159 7,690 (2.4) 6.1
=================================================================================================
In 1999 and 1998, net
income reflected a cumulative effect of accounting change related to accounting
for directory revenues and expenses (see Note 1). In 1999, we recognized an
extraordinary gain from the sale of overlapping cellular properties relating to
the Ameritech Corporation (Ameritech) merger (see Note 15). In 1998, we incurred
an extraordinary loss related to the early retirement of debt.
The reported results shown
in the table above also include one-time items that we normalize for management
purposes. Excluding these items, 2000 income before extraordinary items and
cumulative effect of accounting change would have been $7,746, or 4.1% higher
than 1999 earnings of $7,439. The corresponding diluted earnings per share
amounts would be $2.26 in 2000, or 5.1% higher than $2.15 in 1999. In 1999,
income before extraordinary items and cumulative effect of accounting change
would have been 12.5% higher than 1998 earnings of $6,611. The corresponding
diluted earnings per share amounts would have been 12.0% higher than $1.92 in
1998. The following table summarizes these items and their combined annual
effect on the relevant income or expense lines. Each individual item is
described following the table. The impact of proportionately consolidating our
60% interest in Cingular Wireless (Cingular) is not included in the table below.
For a discussion of this item, please refer to the wireless segment results
later in this document.
Normalizing Items Summary
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2000 1999 1998
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Operating revenues $ (23) 6 $ 529 8,9 $ 884 14,16
Operating expenses 1,405 3,4,5,6 1,454 8,9,10,12 1,148 14,16,17
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Operating income (1,428) (925) (264)
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Interest expense - 12 9 21 14,16
Interest income - - -
Equity in net income of affiliates (36) 1,3,6 131 11 -
Other income (expense) - net 2,149 1,2,4,6,7 (22) 8,9 2,040 13,15,16,17
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Income before income taxes 685 (828) 1,755
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Income taxes * 464 38 631
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Income before extraordinary items and
cumulative effect of accounting change $ 221 $ (886) $1,124
===================================================================================================
* All normalizing items except 5 below have tax impacts.
Normalized results for 2000 exclude the following items:
- Gains of $1,886 ($1,248 net of tax) related to the sale of direct and indirect investments in MATAV and
Netcom GSM, two international equity affiliates, and from the contribution of our investment in ATL -
Algar Telecom Leste S.A. (ATL), a Brazilian telecommunications company, to Telecom Americas Ltd. (Telecom
Americas).
- Gains of $238 ($155 net of tax) on the sale of Teléfonos de México,
S.A. de C.V. (Telmex) L shares associated with our private purchase of a note
receivable with characteristics that will essentially offset future mark to
market adjustments on the Debt Exchangeable for Common Stock (DECS).
-
Pension settlement gains of $512 ($328 net of tax) associated with pension
litigation, first quarter payments primarily related to employees who terminated
employment during 1999 and gains resulting from a voluntary retirement program
net of enhanced pension and postretirement benefits associated with that program
(see Note 12).
-
Costs of $1,205 ($800 net of tax) associated with strategic initiatives and
other adjustments resulting from the merger integration process with Ameritech.
-
A charge of $132 (with no tax effect) related to in-process research and
development from the March 2000 acquisition of Sterling Commerce, Inc.
(Sterling) (see Note 15).
-
Combined charges of $971 ($677 net of tax) related to valuation adjustments of
SecurityLink, Ameritech’s electronic security operations, and certain cost
investments accounted for under Financial Accounting Standards Board Statement
No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”, and the restructure of agreements with Prodigy Communications
Corporation, including the extension of a credit facility and recognition of
previously unrecognized equity losses from our investment (see Note 16).
-
Gains of $359 ($99 net of tax) primarily related to our required disposition of
overlapping wireless properties in connection with our contribution of
operations to Cingular.
Normalized results for 1999 exclude the following items:
-
Charges totaling $1,766 ($1,457 net of tax) including recognition of impairment
of long-lived assets, adjustments to the estimate of allowance for doubtful
accounts, estimation of deferred taxes on international investments, wireless
conversion costs and other items (see Note 2).
- Elimination of income of $197 ($119 net of tax) from the incremental impacts of
overlapping wireless properties sold in October 1999 relating to the Ameritech
merger.
- Pension settlement gains of $566 ($368 net of tax) associated with lump sum
pension payments that exceeded the projected service and interest costs.
- Gains of $131 ($77 net of tax) recognized from the sale of property by an international equity
affiliate.
- A reduction of $45 ($27 net of tax) related to a portion of a first quarter 1998
charge to cover the cost of consolidating security monitoring centers and
company-owned wireless retail stores.
Normalized results for 1998 exclude the following items:
- Gain of $1,543 ($1,012 net of tax) from the sale of Telecom Corporation of New Zealand Limited (TCNZ)
shares.
- Charges of $433 ($268 net of tax) related to strategic initiatives resulting from the merger
integration process with Southern New England Telecommunications Corp. (SNET).
- Gains of $358 ($219 net of tax) from the sale of certain non-core businesses,
principally the required disposition of our investment in MTN, a cellular
company in South Africa.
- Elimination of income of $221 ($123 net of tax) from the incremental impacts of
overlapping wireless properties sold in October 1999 relating to the Ameritech
merger.
- Gains of $170 ($102 net of tax) from the sale of certain telephone and directory assets.
- Charges of $104 ($64 net of tax) to cover the cost of consolidating security monitoring centers and
company-owned wireless retail stores.
The primary factors
contributing to the 2000 and 1999 increases in consolidated normalized revenues
were growth in demand for data communications and wireless services and
products. These increases were offset in 2000 and partially offset in 1999 by
increased operating expenses related to the buildout of our broadband network
and investments in new products and services, including Digital Subscriber Line
(DSL), national expansion and long distance service. The national expansion
initiative is our plan to enter the top 30 metropolitan markets beyond our
traditional regions by April 2002. InterLATA long distance service was launched
in Texas on July 10, 2000.
The contribution of our
wireless operations to Cingular in October 2000, which we account for under the
equity method of accounting, means that our reported revenues and expenses lines
in 2001 will no longer include our wireless operations. Instead, our 60% share
of Cingular’s operations will be reported in the equity in net income of
affiliates line item (see Note 6).
Segment Results
Our 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. Transactions among segments are
reported at fair value and the accounting policies of the segments are the same
as those described in Note 1.
As a result of the
reorganization of management in the fourth quarter of 2000, we have adjusted our
segment reporting structure. We now have five reportable segments that reflect
the current management of our business: wireline, wireless, directory,
international and other. Directory, which was formerly included in the
information and entertainment segment, is now a stand-alone segment.
SecurityLink and Ameritech’s cable television operations, which were
formerly included in the information and entertainment segment, as well as
Ameritech’s paging operations, which were formerly included in the wireless
segment, and all corporate operations, which were formerly included in
corporate, adjustments and eliminations have been moved to the other segment.
The wireline segment provides landline telecommunications services, including local, network access and long
distance services, messaging and Internet services and sells customer premise and private business exchange
equipment.
Prior to the fourth quarter
of 2000, the wireless segment included our consolidated businesses that provided
wireless telecommunications services and sold wireless equipment. In October
2000, we contributed substantially all of our wireless businesses to Cingular
and began reporting results from Cingular’s operations as equity income in
the consolidated financial statements (see Note 6). However, for internal
management purposes, we analyze Cingular’s results using proportional
consolidation and therefore will discuss Cingular’s results on that basis
in the wireless segment.
The directory segment
consists of all SBC directory operations, including yellow and white pages
advertising and electronic publishing. All investments with primarily
international operations are included in the international segment.
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 income,
interest expense, other income (expense) - net and income taxes.
Wireline
Normalized Results
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Percent Change
------------------------
2000 vs. 1999 vs.
2000 1999 1998 1999 1998
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Operating revenues
Local service $ 22,126 $ 19,544 $ 17,546 13.2% 11.4%
Network access 10,496 10,189 9,677 3.0 5.3
Long distance service 2,975 3,395 3,695 (12.4) (8.1)
Other 4,379 4,302 4,446 1.8 (3.2)
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Total Operating Revenues 39,976 37,430 35,364 6.8 5.8
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Operating expenses
Operations and support 23,958 21,486 20,342 11.5 5.6
Depreciation and amortization 7,656 6,825 6,437 12.2 6.0
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Total Operating Expenses 31,614 28,311 26,779 11.7 5.7
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Operating Income 8,362 9,119 8,585 (8.3) 6.2
----------------------------------------------------------------
Interest Expense 1,240 1,188 1,250 4.4 (5.0)
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Other Income (Expense) - Net 70 115 (20) (39.1) -
----------------------------------------------------------------
Income Before Income Taxes $ 7,192 $ 8,046 $ 7,315 (10.6)% 10.0%
========================================================================================
| |
Local
service revenues increased $2,582, or 13.2%, in 2000 and $1,998, or 11.4%,
in 1999. Excluding the operations of Sterling, acquired in March 2000, the
increase was approximately 10.9% in 2000. Approximately $619 of the increase in
2000 was attributable to increased demand from business customers for network
integration and Internet services. In 1999, revenues from a network integration
company acquired in the second quarter of 1999 contributed approximately $578 to
the increase. Demand for DSL and dial-up Internet services in the residential
market increased local service revenues by approximately $164 in 2000 and $24 in
1999. Increased demand for wholesale services, including the resale and sale of
unbundled network elements, accounted for approximately $389 of the increase in
2000 and $193 in 1999. Additionally, directory assistance revenues increased
approximately $75 in 2000, primarily due to price increases in California,
Illinois and Texas, and by $16 in 1999, due to the introduction of national
directory assistance. |
| |
Total
access lines in service at the end of 2000 increased by approximately 1%, while
access lines in service at the end of 1999 increased more than 3%. The lower
growth rate in access lines is due largely to competitive losses, as discussed
in the “Competition” section of “Operating Environment and Trends
of the Business”, as well as DSL penetration, particularly in California,
which has reduced demand for additional lines. Vertical services revenues, which
include custom calling services, such as Caller ID, Call Waiting, voice mail and
other enhanced services, increased by approximately 10% to more than $3.7
billion in 2000 and increased by 14% to more than $3.3 billion in 1999. |
| |
Local
service revenues also increased as a result of regulatory actions that decreased
one or more other types of operating revenues. In 2000, the introduction of
extended area service plans and the September 1999 Texas Universal Service Fund
(TUSF) rate rebalancing collectively increased local service revenues by
approximately $140. In 1999, the introduction of extended area service plans,
the introduction of the California High Cost Fund (CHCF) and the TUSF rate
rebalancing collectively increased local service revenues by approximately $185.
However, these regulatory actions had only a nominal effect on overall revenue
because they decreased intrastate network access revenues by approximately $95
in 2000 and $87 in 1999 and decreased long distance revenues by approximately
$22 in 2000 and $112 in 1999. The Texas Public Utility Commission has stated
that the TUSF is intended, among other things, to help support the provision of
basic local telephone service to high-cost rural areas. |
| |
Network
access revenues increased $307, or 3.0%, in 2000 and $512, or 5.3%, in 1999
due primarily to demand for special access and switched data transport services,
as well as higher network usage by alternative providers of intraLATA toll
services. Additionally, in 1999, customer number portability cost recovery, net
of a Federal Communications Commission (FCC) retroactive rate decrease,
contributed approximately $183 to the increase. The increase in 2000 was
partially offset by the effects of the July 2000 implementation of the Coalition
for Affordable Local and Long Distance Service (CALLS) proposal, as discussed
under “Regulatory Environment”, of approximately $293. Also offsetting
the 2000 increase were the effects of the TUSF described in local service above
of $95 as well as other state regulatory rate reductions of $183. Partially
offsetting the 1999 increase were the effects of rate reductions of
approximately $296 related to the FCC’s productivity factor adjustment and
access reform, state regulatory rate reductions, including reduction of cellular
interconnection rates and the intrastate rate reduction by the Texas legislature
of approximately $144, and the effects of the TUSF and CHCF described in local
service above of $87. |
| |
Long
distance service revenues decreased $420, or 12.4%, in 2000 and $300, or
8.1%, in 1999. Competitive losses, primarily resulting from dialing parity
implementation, decreased long distance revenues by approximately $329 in 2000
and $202 in 1999. Decreases also resulted from the effects of regulatory actions
of approximately $22 in 2000 and $112 in 1999, as discussed in local service,
related to the continued introduction of extended area service plans. |
| |
The
decreases in 2000 were partially offset by approximately $64 from the entry into
the Texas long distance market for interLATA and interstate services and $31 due
to price increases in Illinois, Indiana, Michigan and Ohio. In 1999, the
decreases were partially offset by approximately $128 due to increased demand at
Ameritech’s long distance unit, certified to provide long distance service
outside SBC’s region, and increased demand and toll messages for SNET All
Distance. |
| |
Other
operating revenues increased $77, or 1.8%, in 2000 and decreased $144, or 3.2%,
in 1999. Equipment sales, primarily residential, increased approximately $177 in
2000 and were flat in 1999, while the payphone business declined $124 in 2000
and $176 in 1999. Sales of other nonregulated products and services increased in
both 2000 and 1999. |
| |
Operations
and support expenses increased $2,472, or 11.5%, in 2000 and $1,144, or
5.6%, in 1999. Approximately $931 of the 2000 and $301 of the 1999 increases
were related to costs associated with the continued rollout of DSL. Costs
associated with network integration and E-Commerce services, including
acquisitions in 2000 and 1999, increased approximately $853 in 2000 and $575 in
1999. Personnel increases related to continued demand for new products and
services increased operations and support expenses by approximately $520 in 2000
and $133 in 1999. In addition, our national expansion initiative increased
expenses by approximately $307 in 2000 and $69 in 1999. Costs associated with
reciprocal compensation declined in 2000 by approximately $176 primarily due to
rate reductions and settlements we reached with other carriers during the year.
By contrast, reciprocal compensation costs increased by approximately $288 in
1999. The 1999 increases were partially offset by a change in accounting for
software costs which required approximately $345 to be capitalized rather than
expensed in 1999. |
| |
Depreciation
and amortization expenses increased $831, or 12.2%, in 2000 and $388, or
6.0%, for 1999. Overall higher plant levels increased depreciation expense by
approximately $308 in 2000 and $326 in 1999. Our acquisition of Sterling in
March 2000 caused an increase of approximately $263 in 2000. Amortization of
capitalized software also increased approximately $198 in 2000 over the 1999
amount of $37 due to the 1999 adoption of a new accounting standard requiring
the capitalization of certain internal use software. |
Wireless
Normalized Results
---------------------------------------------------------------------------------------
Percent Change
-----------------------
2000 vs. 1999 vs.
2000 1999 1998 1999 1998
---------------------------------------------------------------------------------------
Operating revenues
Subscriber revenue $ 6,479 $ 5,307 $ 4,540 22.1% 16.9%
Other 1,463 1,318 936 11.0 40.8
----------------------------------------------------------------
Total Operating Revenues 7,942 6,625 5,476 19.9 21.0
----------------------------------------------------------------
Operating expenses
Operations and support 5,349 4,464 3,885 19.8 14.9
Depreciation and amortization 1,086 918 680 18.3 35.0
----------------------------------------------------------------
Total Operating Expenses 6,435 5,382 4,565 19.6 17.9
----------------------------------------------------------------
Operating Income 1,507 1,243 911 21.2 36.4
----------------------------------------------------------------
Interest Expense 424 226 189 87.6 19.6
----------------------------------------------------------------
Other Income (Expense) - Net (108) (134) (177) (19.4) (24.3)
----------------------------------------------------------------
Income Before Income Taxes $ 975 $ 883 $ 545 10.4% 62.0%
=======================================================================================
| |
As
a result of our joint venture agreement with BellSouth Corporation (BellSouth)
(see Note 6), we account for our interest in Cingular under the equity method of
accounting. However, for evaluating results of Cingular internally, we use
proportional consolidation. In the table above, amounts for 2000 include nine
months of our historical wireless operations and three months of 60% of the
results of Cingular plus our wireless properties not yet contributed. Results
for 1999 and 1998 reflect our historical wireless operations that have been
contributed or are pending contribution to Cingular. As certain wireless
operations of BellSouth and SBC will be contributed to Cingular in future
periods, the fourth quarter 2000 results are not completely indicative of
prospective proportionate results. |
| |
Wireless
subscriber revenues increased $1,172, or 22.1%, in 2000 and $767, or 16.9%,
in 1999. Acquisitions of wireless properties accounted for approximately
one-third of the increase in 2000, with the remaining increase due to net
customer additions. For the fourth quarter of 2000, Cingular had approximately
814,000 net customer additions and wireless customers totaling 19,680,000 at
December 31, 2000, compared to 16,599,000 at December 31, 1999 on a pro
forma basis. The 1999 increase in revenues is primarily due to 2,465,000 in net
customer additions, which includes approximately 1,237,000 customers
attributable to the third quarter 1999 acquisitions of Comcast Cellular
Corporation (Comcast) and Cellular Communications of Puerto Rico, Inc. (Cellular
Communications). The 2000 and 1999 increases were partially offset by declines
in average revenue per customer due to the continued migration of customers to
flat rate plans. |
| |
Other
revenues increased $145, or 11.0%, in 2000 and $382, or 40.8%, in 1999. The 2000
increase was predominately due to increased equipment sales, related to the
increase in customer additions, as noted above. The 1999 increase was primarily
attributable to a $291 increase in outcollect roaming revenues (revenues from
other carriers’ customers roaming on our networks) and increased equipment
sales related to the increase in customer additions. |
| |
Operations
and support expenses increased $885, or 19.8%, in 2000 and $579, or 14.9%,
in 1999 due primarily to growth in the number of customers, which included
customers attributable to the third quarter 1999 acquisitions, discussed in
subscriber revenues above. The 1999 results also were impacted by increased
incollect roaming expenses and software costs capitalized rather than expensed
in 1999. |
| |
Depreciation
and amortization expenses increased $168, or 18.3%, in 2000 and $238, or
35.0%, in 1999. The increases were primarily related to third quarter 1999
acquisitions; however, 2000 included approximately a $35 decrease resulting from
a purchase price allocation true-up adjustment related to the acquisitions. |
Directory
Normalized Results
--------------------------------------------------------------------------------------
Percent Change
----------------------
2000 1999 vs.
vs.
2000 1999 1998 1999 1998
--------------------------------------------------------------------------------------
Operating Revenues $ 4,340 $ 4,126 $ 3,753 5.2% 9.9%
----------------------------------------------------------------
Operating expenses
Operations and support 2,008 2,081 1,919 (3.5) 8.4
Depreciation and amortization 32 33 36 (3.0) (8.3)
----------------------------------------------------------------
Total Operating Expenses 2,040 2,114 1,955 (3.5) 8.1
----------------------------------------------------------------
Operating Income 2,300 2,012 1,798 14.3 11.9
----------------------------------------------------------------
Interest Expense 4 9 9 (55.6) -
----------------------------------------------------------------
Other Income (Expense) - Net 65 8 8 - -
----------------------------------------------------------------
Income Before Income Taxes $ 2,361 $ 2,011 $ 1,797 17.4% 11.9%
======================================================================================
| |
Directory
operating revenues increased $214, or 5.2%, in 2000 and $373, or 9.9%, in 1999.
Increased demand for directory advertising services contributed approximately
$173 to the increase in 2000, combined with an increase of $33 related to a
change in the timing of directory publications. The 1999 increase includes
approximately $107 related to the previously discussed change in directory
accounting at Ameritech, $57 for changes in the directory publishing schedule
and $30 due to the restructuring of certain agreements that shifted directory
revenues from the wireline segment. |
| |
Operations
and support expenses decreased $73, or 3.5%, in 2000 and increased $162, or
8.4%, in 1999. The decreased expenses in 2000 were primarily related to cost
savings from the merger integration process with Ameritech. The 1999 results
reflect approximately a $103 increase in expenses as a result of a change in
directory accounting at Ameritech. |
International
Normalized Results
---------------------------------------------------------------------------------------
Percent Change
----------------------
2000 vs. 1999 vs.
2000 1999 1998 1999 1998
---------------------------------------------------------------------------------------
Operating Revenues $ 328 $ 255 $ 149 28.6% 71.1%
-----------------------------------------------------------------
Operating Expenses 475 266 227 78.6 17.2
-----------------------------------------------------------------
Operating Income (Loss) (147) (11) (78) - (85.9)
-----------------------------------------------------------------
Interest Expense 174 235 213 (26.0) 10.3
-----------------------------------------------------------------
Equity in Net Income of Affiliates 862 739 588 16.6 25.7
-----------------------------------------------------------------
Other Income (Expense) - Net 389 209 156 86.1 34.0
-----------------------------------------------------------------
Income Before Income Taxes $ 930 $ 702 $ 453 32.5% 55.0%
=======================================================================================
| |
Operating
revenues increased $73, or 28.6%, in 2000 and $106, or 71.1%, in 1999. The
increases were primarily from increased volume-related long distance revenues.
Revenues for 2001 will not include those of our German directory investment, Wer
Liefert Was (WLW), which was sold in December 2000. Revenues related to WLW in
2000 and 1999 were approximately $40 and $46. |
| |
Operating
expenses increased $209, or 78.6%, in 2000 and $39, or 17.2%, in 1999. The
increases were largely due to the costs associated with the increased long
distance volumes as noted above, and partly due to an increase in corporate
support charges in 2000. In 2001, expenses will be lower by the amount that was
associated with the operations of WLW, approximately $36 in 2000 and $35 in
1999. |
| |
Equity
in net income of affiliates increased $123, or 16.6%, in 2000 and $151, or
25.7%, in 1999. The 2000 increase includes increased equity in net income,
including our share of certain disposition gains, of approximately $219 from
investments in Telmex, Tele Danmark, and Belgacom S.A. (Belgacom). A full twelve
months of operations from Bell Canada in 2000 resulted in approximately $48
higher equity income than the seven months of operations in 1999. Our investment
in Cegetel S.A. produced positive equity income for the first time in 2000
leading to an increase of approximately $17 over prior year equity losses.
Offsetting these increases are reductions to equity in net income of
approximately $35, as a result of the sale of our investment in the Aurec
companies in Israel and MATÁV, a Hungarian telecommunications company. Our
investment in diAx A.G. (diAx), a Swiss mobile landline operator, contributed
approximately $32 in increased losses in equity income due to increased
operating losses, as well as severance accruals and other one-time adjustments.
Our investment in Telkom SA Limited (Telkom) had approximately $20 in lower
equity income from the prior year due mainly to one-time adjustments.
Additionally, our investment in ATL had equity losses of approximately $80. |
| |
The
1999 increase includes increased equity in net income of approximately $134 from
investments in Telmex, Israel and Tele Danmark. The investment in Bell Canada,
along with increased earnings at MATÁV, contributed approximately $71 to
the increase. These increases were partially offset by approximately $83 of
reduced earnings from the sale of our investment in TCNZ and lower earnings from
Telkom and Belgacom. |
| |
The
equity earnings in 2000 discussed above were lower by approximately $75 due to
exchange rate changes from the prior year in the value of our foreign
affiliates’ local currencies, primarily Tele Danmark and Belgacom. Our
earnings from foreign affiliates will continue to be sensitive to exchange rate
changes in the value of the respective local currencies. Our foreign investments
are recorded under accounting principles generally accepted in the United
States, which include adjustments for the purchase method of accounting and
exclude certain adjustments required for local reporting in specific countries,
such as inflation adjustments. Equity earnings in 2001 will reflect a full year
of operations without our investments in the Aurec companies in Israel and
MATÁV. Additionally, in the fourth quarter of 2000, we exchanged our 25%
equity investment in ATL for an 11.4% cost investment in Telecom Americas.
However, through our investment in América Móvil S.A. de C.V., we have
a 3.3% indirect equity investment in Telecom Americas (see Note 7). In January
2001, Tele Danmark acquired our investment in diAx for approximately 1,200
million Swiss francs (approximately $783) in cash and notes (see Note 7). |
Other
Normalized Results
--------------------------------------------------------------------------------------
Percent Change
----------------------
2000 vs. 1999 vs.
2000 1999 1998 1999 1998
--------------------------------------------------------------------------------------
Operating Revenues $ 1,120 $ 1,080 $ 1,137 3.7% (5.0)%
----------------------------------------------------------------
Operating Expenses 749 920 866 (18.6) 6.2
----------------------------------------------------------------
Operating Income 371 160 271 - (41.0)
----------------------------------------------------------------
Interest Expense 898 702 662 27.9 6.0
----------------------------------------------------------------
Other Income (Expense) - Net 1,270 581 641 - (9.4)
----------------------------------------------------------------
Income Before Income Taxes $ 743 $ 39 $ 250 - (84.4)%
======================================================================================
| |
Operating
revenues increased $40, or 3.7%, in 2000 and decreased $57, or 5.0%, in
1999. SecurityLink accounted for almost one-half of the total operating revenues
in this segment and were essentially flat in both 2000 and 1999. Growth in
subscribers at Ameritech’s cable operations increased revenues by
approximately $36 in 2000 and $51 in 1999. 1999 also included a decrease in
revenues of approximately $96 primarily due to the 1998 sale of video related
operations. The January 2001 sale of SecurityLink (see Note 16) will cause a
significant decline in 2001 revenues. |
| |
Operating
expenses decreased $171, or 18.6%, in 2000 and increased $54, or 6.2%, in
1999. Both 2000 and 1999 include decreases related to sales of video related and
other operations. SecurityLink and cable television personnel costs increased in
1999 primarily related to customer growth. The sale of SecurityLink mentioned
above will also cause a significant decline in 2001 expenses. |
Consolidated
Results
Interest expense
increased $162, or 11.3%, in 2000 and decreased $175, or 10.9%, in 1999. The
2000 increase was primarily due to higher composite rates and increased debt
levels. The 1999 decrease was due primarily to reductions in interest expense
resulting from lower average debt levels due to debt retirements in 1998 and
early 1999.
Interest income
increased $152 in 2000 and decreased $55 in 1999. The 2000 increase was
primarily due to the income accrued from Cingular, after our contribution in
October 2000, on notes receivable previously eliminated in consolidation (see
Note 6). However, this income was mostly offset against our equity earnings from
Cingular, which included the interest expense on these notes. The 1999 decrease
was primarily due to incremental 1998 interest income attributable to a
receivable generated on the 1998 sale of our investment in TCNZ.
Other income (expense) -
net includes items that we normalized as previously described in the
“Overview” section. In addition to those items, results for 2000 also
include gains of approximately $87 that were recognized for market adjustments
on shares of Amdocs Limited (Amdocs), one of our equity investees, used for
deferred compensation. An offsetting deferred compensation expense was recorded
in operations and support expense. Results for 2000 also include the sale of our
interests in WLW, the Aurec companies in Israel and certain cost investments
which resulted in gains totaling approximately $295. Additionally, we sold our
remaining Telmex L shares not related to the DECS for a gain, which was
partially offset by appreciation in the market value of Telmex L shares
underlying the DECS, for a net gain of approximately $117 (see Note 7).
These gains were partially offset by lower income from our wireless minority
interest and dividends paid on preferred securities issued by Ameritech
subsidiaries of approximately $208.
Results for 1999 include a
gain from the sale of a portion of Amdocs, of approximately $92 and gains of $63
representing dividends and market adjustments on Amdocs shares used for
contributions to the SBC Foundation and deferred compensation. Results for 1999
also include a gain of approximately $59 recognized from the sale of our
investment in Chile and a gain of $81 recognized from the sales of certain
discontinued plant and other investments. These gains were offset by increased
expenses related to higher appreciation in the market value of Telmex L shares
underlying the DECS than in the comparable periods of 1998, net of gains
recognized from the sale of certain Telmex L shares, of approximately $296, and
dividends paid on preferred securities issued by Ameritech subsidiaries, losses
on forward exchange contracts and other nonoperating items of $76. In addition,
higher wireless minority interest resulted in approximately $287 of expense.
During 1998, we recognized
expenses of approximately $237 related to an impairment of an international
investment and investments in certain wireless technologies, primarily wireless
video, and $154 related to the combination of dividends paid on preferred
securities owned by Ameritech subsidiaries, losses on forward exchange contracts
and debt redemption costs. In addition, wireless minority interest resulted in
approximately $290 of expense. Partially offsetting these expenses was other
income related to a special dividend of approximately $158 received from Amdocs
and gains of $127 recognized on the sale and the charitable contribution of our
available-for-sale investment in Telewest Communications plc.
The changes in the market
value of the DECS were offset in other income (expense) - net in the fourth
quarter of 2000 because of the note we purchased with offsetting
characteristics. These changes will also not be reflected in the first quarter
of 2001 when the DECS mature.
Income taxes reflect
the tax effect of the normalizing items previously described in the
“Overview” section. Excluding these items, income taxes for 2000, 1999
and 1998 were higher due primarily to higher income before income taxes. The net
effective tax rate on the normalizing items differed as a result of
nondeductible items included in the charges and valuation adjustments to certain
deferred tax assets.
Extraordinary items
in 1999 included an extraordinary gain of $1,379, net of taxes of $960, related
to the sale of overlapping wireless properties in October 1999 relating to the
Ameritech merger (see Note 15). In 1998, we recorded an extraordinary loss of
$60 related to the repurchase of approximately $684 of long-term debt.
Cumulative effect of
accounting change includes a change in the method of recognizing directory
publishing revenues and related expenses at Ameritech, effective
January 1, 1999, and at SNET effective January 1, 1998, as discussed
in Note 1. The cumulative after-tax effect of applying the new method to prior
years was recognized as of January 1, 1999 and 1998 as a one-time, non-cash gain
applicable to continuing operations of $207, or $0.06 per share and $15, or
$0.01 per share, net of deferred taxes of $125 and $11.
Operating
Environment and Trends of the Business
Overview
The United States’
telecommunications industry continues in an extended period of transition from a
tightly regulated industry overseen by multiple regulatory bodies to a
market-driven industry monitored by state and federal agencies. Our wireline
telecommunications subsidiaries remain subject to varying degrees of regulation
by state regulatory commissions for intrastate services and by the FCC for
interstate services.
The telecommunications
industry also is changing internationally, as government-owned telephone
monopolies are being privatized in many countries and competitive entrants are
authorized. United States-controlled companies have acquired or formed
investments, joint ventures or strategic relationships with these newly
privatized companies or their new competitors involving any or all of the range
of telecommunications services. Foreign-controlled companies have also acquired
or formed such relationships with United States companies.
As a result, the
competitive and regulatory environment of the telecommunications industry
continues to change. This presents both new opportunities and new risks for our
business.
Trends
Over the next few years, we
expect an increasing percentage of our growth to come from three major drivers:
data and broadband, long distance and wireless.
Data and
Broadband In October 1999, as the first post-Ameritech merger
initiative, we announced plans to upgrade our network to make broadband services
available to approximately 80% of our United States wireline customers over the
four years through 2003 (Project Pronto). At December 31, 2000, we had
approximately 767,000 DSL subscribers. Additionally, more than half, or 18.3
million wireline customer locations were DSL-capable at December 31, 2000. We
expect to invest an estimated total of $6 billion in fiber, electronics and
other technology for Project Pronto over the next two to three years, of which a
total of approximately $2 billion had been expended as of December 31, 2000. The
build-out will include transferring certain portions of our existing copper
network to a new fiber network. Over the deployment period, marketing costs will
be incurred depending on the rate of customer sign-ups and installations. See
“Promoting Advanced Services” under “Ameritech Merger” below
for further discussion of DSL.
Long
Distance We offer landline interLATA long distance services to
customers in selected areas outside our wireline subsidiaries’ operating
areas. Further, under the SNET brand, we offer interLATA long distance services
to customers in Connecticut. In June 2000, the FCC approved our application to
provide interLATA long distance service for calls originating in Texas. Approval
was effective July 10, 2000, and we officially launched service under the
Southwestern Bell brand at that time, offering domestic residential and business
long distance services as well as international calling plans. In September
2000, the Oklahoma Corporation Commission (OCC) approved our application to
provide interLATA long distance service for calls originating in Oklahoma and in
October 2000 the Kansas Corporation Commission approved our application to
provide such service for calls originating in Kansas. In January 2001, the FCC
approved these applications effective March 7, 2001, and we expect to launch
interLATA long distance service in those states under the Southwestern Bell
brand shortly thereafter. We continue to seek long distance approval in our
other in-region states and have filed applications with state commissions in
Arkansas, California, Missouri and Nevada.
Wireless
In October 2000, we launched Cingular, our wireless joint venture with
BellSouth, creating the second-largest wireless provider in the United States
and a nationwide platform for future growth in wireless services (see Note 6).
Cingular’s top priorities for 2001 include geographic expansion, further
rollout of wireless data services and integration of operations to strengthen
its competitive position and realize cost synergies. The fastest-growing area of
the wireless business is data, and Cingular plans to accelerate its entry into
this business. In late 2000, Cingular launched wireless data services in
California and Nevada and expects to expand into several additional markets in
2001. Additionally, Cingular expects to eventually transition to a third
generation (3G) wireless communications standard, which is used for high-speed
wireless data and Internet services.
Regulatory
Environment
Wireline
Federal Regulation
Under the Telecommunications Act of 1996 (Telecom Act), before
being permitted to offer landline interLATA long distance service in any state
within the 12-state region encompassed by the regulated operating areas of
Southwestern Bell Telephone Company (SWBell), Pacific Bell Telephone Company
(PacBell), Ameritech and Nevada Bell (these areas with the addition of
SNET’s area are referred to as our 13-state area), we are required to apply
for and obtain state-specific approval from the FCC. The FCC’s approval,
which involves consultation with the United States Department of Justice and the
appropriate state commission, requires favorable determinations that our
wireline subsidiaries have entered into interconnection agreement(s) that
satisfy a 14-point “competitive checklist” or, alternatively, the
subsidiaries have a statement of terms and conditions effective in that state
under which they offer the “competitive checklist” items. The FCC also
must make favorable public interest and structural separation determinations in
connection with each application. See “Long Distance” above and
“State Regulation” below for the status of our state applications.
Ameritech Merger On October 8, 1999, we completed the merger of one of our subsidiaries with Ameritech
(see Note 2).
The FCC issued an order
approving the transaction, subject to certain conditions, including fostering
out-of-region competition, promoting advanced services, opening local markets to
competition and improving residential services. These FCC conditions require
specific performance and reporting and contain enforcement provisions that could
potentially trigger more than $2 billion in payments, as described below, if
certain goals are not met. Associated with these conditions, in 2000 we incurred
approximately $355 in additional expenses, including immaterial payments for
failing to meet certain performance measurements. The following is a brief
summary of the major conditions:
- Out-of-Region Competition In 1999, we began implementation of our
“National-Local” strategy in conjunction with our acquisition of
Ameritech. Under the National-Local strategy, we will offer local exchange
services in 30 new markets across the country in combination with other major
national and international initiatives. We introduced service in five new
markets in 2000 (Boston, Fort Lauderdale, Miami, New York and Seattle), and plan
to enter at least 10 more in 2001.
|
We are required by the FCC to enter these 30 markets as a provider of local
services to business and residential customers by April 2002. Failure to meet
the FCC condition requirements could result in a payment of up to $40 for each
market. |
- Opening Local Markets to Competition We are required to file performance
measurement data reflecting 20 different categories with the FCC and relevant
state commissions on a monthly basis. These performance measurements address
functions that the FCC believes may have a particularly direct effect on our
local competitors and their customers, such as our response to competitors’
requests for information and interconnection. If these performance goals are not
met, payments of up to $863 over the three years beginning January 2001 (and an
additional $8 prior to June 2004) could be triggered.
| |
We
are developing and deploying, with competitor input, uniform electronic
operational support systems (OSS) throughout our 13-state area that support the
pre-ordering, ordering, provisioning, maintenance, repair and billing of resold
local services and unbundled network elements. The OSS includes uniform
application-to-application interfaces and graphical user interfaces. We are also
developing uniform business rules for completing competitor service requests
across our 13-state area and are providing free training and OSS expert teams
for competitors with annual revenues under $300. Beginning in 2002, payments of
up to $60 could be triggered if deployment targets for OSS and uniform business
rules are not met. Additionally, we restructured OSS charges to eliminate any
flat rate up-front charge for the right to use our standard interfaces for
accessing OSS. |
- Improving Residential Service We will offer residential customers a plan
with no minimum monthly long distance fees for at least three years after
entering the long distance business in that market. In addition, we will offer a
low-income Lifeline Universal Service plan to low-income residential customers
in each state in our 13-state area.
- Promoting Advanced Services We established separate subsidiaries to
provide advanced services, such as DSL, in order that the subsidiaries be exempt
from a Telecom Act provision requiring them to make the services available for
resale to competitors. These subsidiaries are required to use the same processes
for the ordering and provisioning of our wireline services as competitors, pay
an equivalent price for facilities and services and locate at least 10% of their
DSL service facilities in low-income areas. See “Data and Broadband”
under “Trends” above for further discussion of Project Pronto.
| |
In
January 2001, the United States Court of Appeals for the District of Columbia
(Court of Appeals) struck down the FCC merger condition that allowed our
separate affiliates offering DSL and other advanced services exemption from the
Telecom Act resale requirement. Although the merger condition allows us to
re-absorb the affiliates into our telephone companies under such circumstances,
the final resolution of this issue remains uncertain. However, potential
efficiency benefits likely outweigh resale and unbundling obligations that would
apply to advanced services and we do not believe, at this time, that this issue
will have a material effect on our results of operations or financial position. |
Interconnection
Under the Telecom Act, regional Bell operating companies and GTE Corp. (GTE) were
required to allow competitors to put equipment in their offices "necessary" for connecting to the local
network. In March 1999, the FCC issued rules allowing competitors to install any equipment that is "used" or
"useful" for interconnection, even if some equipment has other functions. In March 2000, the Court of
Appeals overturned that portion of the FCC's interconnection rules, stating that the FCC went beyond what was
authorized by the Telecom Act, and ordered the FCC to reconsider that portion of the rules. The FCC is
expected to issue a decision in response to that order in mid-2001. The effect of any future decisions on
our results of operations and financial position cannot be determined at this time.
In July 2000, the Eighth
Circuit Court of Appeals (8th Circuit) issued a decision striking
down FCC rules governing the rates incumbent local exchange carriers, such as
our wireline subsidiaries, charge competitors for interconnection and for
leasing portions of the incumbents’ telephone networks. The decision
rejected FCC pricing rules that required incumbents to charge competitors rates
based on hypothetical costs and held that prices should instead be based on
actual (but not necessarily historical) costs incurred by carriers to provide
interconnection or access to unbundled network elements. In addition, the
decision rejected FCC rules governing the amount incumbents must discount
services purchased by competitors for resale to end users, holding that the
discount should be based on actual, not hypothetical, avoided costs. The
8th Circuit remanded the pricing issues back to the FCC. The
8th Circuit also reaffirmed its prior conclusion that incumbents
cannot be required to create new combinations of unbundled network elements for
competitors, nor to provide competitors better quality interconnection or access
to unbundled network elements than the incumbents provide to themselves. In
January 2001, the United States Supreme Court (Supreme Court) agreed to hear an
appeal of certain portions of the 8th Circuit’s ruling,
including its invalidation of the FCC’s pricing rules and its rule
governing new combinations of network elements. A Supreme Court decision is not
expected until the fourth quarter of 2001, at the earliest. Until the Supreme
Court issues its decision on the appeal issues, the FCC rules continue in
effect. The effect of any future decision on our financial position or results
of operations cannot currently be determined.
Unbundled Network Elements/Line Sharing In November 1999, the FCC adopted an order providing that
incumbent local exchange carriers must continue leasing certain parts of their telephone network to
competitors at a discount, as well as revised rules that expand the definitions of certain unbundled network
elements (UNE). However, the order limited discounted access to switches serving customers with four or more
lines under certain conditions. In addition, the FCC declined to expand its regulation to include mandatory
leasing of high speed Internet and data equipment. In November 1999, the FCC also issued an order requiring
incumbents to share telephone lines with data competitors. Using a technology called line sharing, the
incumbents split the frequency of a telephone line so that the data competitors' DSL service is carried on a
portion of it.
Several parties have
petitioned the FCC for reconsideration of various aspects of the UNE order. In
addition, the United States Telecom Association and others appealed the UNE
order to the Court of Appeals. Parties have also sought reconsideration of the
FCC’s DSL line sharing order and petitioned the Court of Appeals for review
of their line sharing order. Most notably, several parties requested that the
FCC require our wireline subsidiaries and other incumbents to provide and
support line sharing on a UNE platform as well as make DSL a UNE product. In
January 2001, the FCC released a decision on petitions for reconsideration of
various line sharing provisions of the UNE order, as well as initiating further
notices of proposed rulemaking relating to line sharing. Although we are still
evaluating the effect of this decision, we do not believe it creates any new
obligations. Absent action by the FCC or Court of Appeals modifying or vacating
certain aspects of the UNE or line sharing orders, the effects of both orders on
our results of operations and financial position, although not determinable at
this time, are expected to be unfavorable.
Reciprocal Compensation is billed to our wireline subsidiaries by competitors for the termination of
certain local exchange traffic to their customers. We believe that under the Telecom Act the state
commissions have authority to order reciprocal compensation only for intrastate local traffic, while the FCC
has authority over interstate and interexchange traffic. We believe most Internet traffic is interexchange
and interstate. Several state commissions have taken the position that a connection to the Internet is
intrastate or local traffic and ordered us to pay reciprocal compensation to certain competitors pursuant to
existing contracts. In February 1999, the FCC declared that Internet traffic is not intrastate or local
traffic, but instead is primarily interstate, subject to interstate jurisdiction. However, the FCC found
that existing federal law does not address to what extent, if any, compensation should be paid to competitors
that deliver Internet traffic to Internet service providers and initiated a proceeding to establish such
rules. Pending the completion of that proceeding, the FCC held that state commissions, interpreting existing
contracts and consistent with federal law, might nevertheless order payment of reciprocal compensation for
Internet traffic in certain circumstances. The FCC's February 1999 decision was appealed to the Court of
Appeals by MCI WorldCom, Inc. (MCI), US West, Inc. (US West) and GTE. In its appeal, MCI disputed that a
connection to the Internet is part of interstate communication. US West and GTE appealed the FCC's
conclusion that states may require reciprocal compensation for such traffic pending completion of FCC
rulemaking. In March 2000, the Court of Appeals vacated the FCC's February 1999 holding that Internet
traffic is interstate and remanded to the FCC for a more reasoned explanation of that conclusion. The Court
of Appeals did not decide an appeal of the FCC's February 1999 conclusion that states may require reciprocal
compensation for Internet traffic.
In June 1999, the United
States Court of Appeals for the Seventh Circuit (7th Circuit) issued
an opinion affirming an order of the Illinois Commerce Commission (ICC)
directing us to pay reciprocal compensation on Internet traffic under existing
interconnection agreements. The 7th Circuit only reviewed whether the
ICC’s determination that the parties intended that calls to Internet
service providers would be subject to reciprocal compensation violated federal
law. The 7th Circuit declined to review any contract issues and
concluded that the ICC’s determination did not violate federal law as it
was expressly permitted under the February 1999 FCC ruling regarding reciprocal
compensation. Our petition for rehearing of the 7th Circuit decision
was denied and in November 2000, we filed a petition for review with the Supreme
Court, which remains pending.
Additionally, in December
2000, the United States Court of Appeals for the Tenth Circuit issued an order
affirming the ruling of the OCC directing us to pay reciprocal compensation on
Internet traffic under an existing interconnection agreement.
Other appeals of reciprocal
compensation decisions currently are pending before the United States Court of
Appeals for the Sixth Circuit and United States District Courts in Texas,
Indiana, Ohio, Wisconsin and California. We record expense for amounts sought by
competitors for the termination of Internet traffic to Internet service
providers.
Coalition for Affordable Local and Long Distance Service
(CALLS) In March 2000, members of CALLS - SBC, Verizon Communications (formerly Bell Atlantic
Corp. and GTE), BellSouth, AT&T and Sprint Corp. proposed a plan to significantly restructure
telecommunications industry federal price cap regulation. In May 2000, the FCC approved the
CALLS proposal with an effective date of July 1, 2000.
Significant points of the five-year plan include:
- reduction of switched access rates in 2000 (these are the rates that long distance carriers pay local
telephone companies);
- continuation of a productivity factor after 2000 until a targeted average rate for traffic-sensitive
charges is achieved;
- consolidation of the residential and single-line business customers’
presubscribed interexchange carrier charge with the subscriber line charge into
one lower charge on customer local telephone bills;
- creation of an incremental $650 in universal service funding (universal service
funding helps provide telephone service to economically disadvantaged customers,
rural customers, schools and libraries).
The plan is expected to
produce initial revenue reductions that are somewhat larger than those under
prior price cap requirements, but eliminate mandatory annual price cap
reductions over the life of the plan, resulting in minimal future effects on net
revenues over the life of the plan compared to the prior price cap formula.
During the third and fourth quarters of 2000, we experienced a net reduction in
revenues of approximately $344 as a result of this plan (versus approximately
$205 that would have occurred under prior price cap requirements).
SecurityLink In October 2000, under terms of a consent decree reached with the FCC, we agreed to enter
into an agreement to divest SecurityLink by February 2001 or pay a $1 penalty to the United States
government. The FCC found that certain 1996 and 1997 acquisitions by SecurityLink violated provisions of the
Telecom Act. In December 2000, we reached an agreement to sell SecurityLink and the sale was consummated on
January 26, 2001 (see Note 16).
The effects of the FCC
decisions on the above topics are dependent on many factors including, but not
limited to, the ultimate resolution of the pending appeals; the number and
nature of competitors requesting interconnection, unbundling or resale; and the
results of the state regulatory commissions’ review and handling of related
matters within their jurisdictions. Accordingly, we are not able to assess the
impact of the FCC orders and proposed rulemaking.
State Regulation
The following provides an overview of state regulation in the 13 states in
which our wireline subsidiaries operated at December 31, 2000:
-------------------------------------------------------- ---------------------------
Number of
Signed Wireline
Interconnection Long Distance Application
State Alternative Regulation 1 Agreements 2 Status
---------------------------------------------------------------------------------------
Arkansas Yes 97 Decision expected in 2001 3
------------------------------------------------------------------------------------
California Yes, through 12/2001 197 Decision expected in 2001 3
------------------------------------------------------------------------------------
Connecticut Yes 40 Long distance service
provided
------------------------------------------------------------------------------------
Illinois Yes, 103 Filing planned in 2001 4
pending state approval
------------------------------------------------------------------------------------
Indiana Yes, through 12/2003 92 Filing planned in 2001 4
pending state approval
------------------------------------------------------------------------------------
Kansas Yes 113 FCC approval effective
March 7, 2001
------------------------------------------------------------------------------------
Michigan Yes 75 Filing planned in 2001 4
------------------------------------------------------------------------------------
Missouri Yes 99 Decision expected in 2001 3
------------------------------------------------------------------------------------
Nevada Yes 49 Decision expected in 2001 3
------------------------------------------------------------------------------------
Ohio Yes, through 12/2003 100 Filing planned in 2001 4
------------------------------------------------------------------------------------
Oklahoma Yes 82 FCC approval effective
March 7, 2001
------------------------------------------------------------------------------------
Texas Yes 300 Long distance service
provided effective July 2000
------------------------------------------------------------------------------------
Wisconsin Yes 66 Filing planned in 2001 4
------------------------------------------------------------------------------------
Notes:
- Alternative regulation is other than rate of return regulation.
- Interconnection agreements are signed with competitors for the purpose of
allowing them to exchange local calls with the incumbent telephone company and,
at their option, to resell services and obtain unbundled network elements.
-
Awaiting determination by state commissions on our compliance with the 14-point
competitive checklist. FCC approval is required subsequent to state
determination.
- Will require approval by the state commission and the FCC.
The following presents highlights of certain regulatory developments:
Texas Legislation Effective September 1, 1999, state law extended incentive regulation in Texas
indefinitely, providing more pricing flexibility on certain products offered by SWBell, such as Caller ID,
operator service and directory assistance, and allowing SWBell to package some services in ways attractive to
customers. State law also required SWBell to reduce the intrastate switched access rate it charges to long
distance carriers by 1 cent on September 1, 1999, and by 2 additional cents on July 1, 2000. The 2-cent
reduction in intrastate access rates resulted in a reduction of intrastate network access revenues of
approximately $69 in 2000.
California Marketing Ruling In December 1999, a California Public Utilities Commission (CPUC)
administrative judge ruled that PacBell must pay $44 in penalties and contact customers for potential refunds
for alleged overly aggressive and deceptive marketing practices related to packages of enhanced services such
as Caller ID and call forwarding. We believe the findings in this decision are unwarranted and appealed the
ruling to the CPUC in January 2000. This appeal remains pending.
Michigan Telecommunications Legislation In July 2000, the Michigan legislature amended the Michigan
Telecommunications Act, eliminating the monthly intrastate end-user common line (EUCL) charge and
implementing price caps for telecommunications services to end users, except those covered by individual
contracts, at May 1, 2000 levels for the earlier of four years or until the Michigan Public Service
Commission (MPSC) determines the market for individual services is competitive. The law also authorized an
expansion of local calling areas so that many short toll calls could be reclassified as local calls; however,
in February 2001, the MPSC issued a decision providing that this portion of the law will be implemented in
the narrowest possible fashion and we expect a reduction in 2001 revenues of approximately $29 associated
with the expansion of local calling areas. Additionally, the law gave the MPSC more authority to regulate
disputes between telecommunications companies.
In July 2000, we filed suit in federal court challenging the
constitutionality of this legislation and in September 2000, temporary stays of the price cap provision and
the EUCL charge elimination were issued pending the outcome of that challenge. In October 2000, we
re-implemented the EUCL charge prospectively, which is subject to refund if the legislation is upheld, and at
December 31, 2000, we had approximately $34 accrued in the event of a potential refund. The EUCL charge
legislation reduced revenues by approximately $72 in 2000 and could potentially reduce revenues by more than
$150 in 2001.
Ohio Service Quality Investigation In July 2000, the Public Utilities Commission of Ohio (PUCO) issued
an order finding that we violated Ohio's minimum telephone service standards and required us to issue
approximately $5 in customer credits and to spend an additional $4 on projects that will benefit customers.
The PUCO's findings related to the timeliness of service installation/repair and inadequate recordkeeping,
among other things. The order also placed certain restrictions on the manner in which our employees are able
to sell basic, preferred and inside wire maintenance services. Effective October 1, 2000, the order
precluded the payment of dividends by our Ohio subsidiary to the parent company without prior PUCO approval.
In January 2001, the PUCO held hearings on the dividend restriction issue and is expected to issue an order
regarding whether to remove the prohibition on dividend payment in early 2001. The PUCO also suggested that
we restore service in Ohio to appropriate levels or face additional penalties of up to $122. Additionally,
in October 2000, the PUCO ordered an outside audit of Ohio service conditions covering the period August 1999
to December 2001 and required us to pay certain on-going expenses of the PUCO staff in relation to the Ohio
service quality investigation. We do not expect the payment of these expenses to have a material effect on
our results of operations or financial position.
Illinois Service Standards The ICC has imposed a $30 penalty for failure to satisfy a service repair
standard imposed by the merger with Ameritech. The fine is related to calendar year 2000 performance and was
imposed through credits to customer bills beginning in February 2001. These amounts were recorded as
operating expenses and fully accrued in 2000.
Ameritech Customer Credits In the third quarter of 2000, we announced, as part of both a voluntary
credit program as well as negotiations with state utility commissions in Wisconsin and Michigan to resolve
ongoing service issues in Ameritech areas, that we will provide credits for lost dial tone or delays in
obtaining new service to certain residential customers in the Ameritech region. In addition to matters
discussed above, such credits were recorded as operating expense and totaled approximately $38 in 2000. Any
credits to be provided in 2001 are not determinable at this time; however, we do not expect that these
credits will have a material effect on our financial position or results of operations.
Competition
Competition continues to
increase for telecommunications and information services. Recent changes in
legislation and regulation have increased the opportunities for alternative
communications service providers. Technological advances have expanded the types
and uses of services and products available. As a result, we face increasing
competition as well as new opportunities in significant portions of our
business.
Wireline
Our wireline subsidiaries
expect increased competitive pressure in 2001 and beyond from multiple providers
in various markets, including facilities-based local competitors, interexchange
carriers and resellers. At this time, we are unable to assess the effect of
competition on the industry as a whole, or financially on us, but expect both
losses of market share in local service and gains resulting from new business
initiatives, vertical services and new service areas. Competition also continues
to intensify in our intraLATA long distance markets. For example, it is
estimated that providers other than PacBell serve more than half of the business
intraLATA long distance customers in PacBell’s service areas. In addition,
intraLATA toll dialing parity, implemented throughout our 13-state area in 1999,
will continue to increase competition in intraLATA long distance markets.
Recent state legislative
and regulatory developments allow increased competition for local exchange
services. Companies wishing to provide competitive local service have filed
numerous applications with each of the state commissions throughout our 13-state
area, and the commission of each state has been approving these applications
since late 1995. Under the Telecom Act, companies seeking to interconnect to our
wireline subsidiaries’ networks and exchange local calls must enter into
interconnection agreements with us. These agreements are then subject to
approval by the appropriate state commission. We have reached over 1,400
wireline interconnection agreements with competitive local service providers,
and most have been approved by the relevant state commission. In addition,
AT&T, MCI and other competitors are reselling our local exchange services,
and as of December 31, 2000, we had approximately 1.6 million access lines
(approximately 2.7% of our total access lines) supporting services of resale
competitors throughout our 13-state area, primarily in Texas, California and
Illinois. We expect resale access lines to increase, both absolutely and as a
percentage of our total access lines, in 2001. Many competitors have placed
facilities in service and have begun advertising campaigns and offering
services. We were also granted facilities-based and resale operating authority
in certain territories served by other local exchange carriers and began
offering local services to these areas in late 2000.
In California, the CPUC
authorized facilities-based local services competition effective January 1996
and resale competition effective March 1996. While the CPUC has established
local competition rules and interim prices, several issues still remain to be
resolved, including final rates for line sharing. PacBell has incurred
substantial costs implementing local competition and number portability. In
November 1998, the CPUC issued a decision authorizing PacBell to recover local
competition implementation costs and PacBell will recover approximately $88 via
a customer surcharge over 2001 and 2002. In June 1999, the CPUC issued a ruling
recategorizing certain PacBell services, including the maintenance of inside
wiring, calling card, collect and person to person calls and the provisioning of
directory assistance to interexchange carriers, as competitive products thereby
allowing greater pricing flexibility. In its ruling, the CPUC approved an
increase in the maximum price for both inside wire repair services and
interexchange directory assistance.
In Illinois, the ICC
approved Advantage Illinois in 1994, providing a framework for regulating
Ameritech by capping prices for noncompetitive services. In this order, the ICC
approved a price cap on the monthly line charge for residential customers and
residential calling rates within local calling areas for an initial five year
period that ended in October 1999. In January 2000 the ICC initiated a review of
Advantage Illinois with respect to its effectiveness and whether any
modifications are necessary. We expect the ICC to complete this review by July
2001. The price cap on residential rates will remain in effect until the review
is completed.
In Oklahoma, the OCC
approved a rule in October 1999 creating alternative regulation for companies
that opt into the alternative regulation rule. In March 2000, the Oklahoma
legislature allowed the OCC’s alternative regulation rule to go into
effect. Effective June 2000, SWBell opted into alternative regulation and is now
regulated under price cap regulation instead of rate of return regulation. Under
the new regulation, the cost of network infrastructure deployment, including DSL
and switch replacement deployment, is currently estimated at $200 in total
capital expenditures over the next three years. Other items under the new
regulation include promotional discounts on UNEs provided to competitors,
pricing flexibility and ratepayer benefits. The ratepayer benefits include
SWBell’s obligation to pay $30 into an education information technology
fund as well as waiver of the Oklahoma universal access fund surcharge for five
years. SWBell’s current fund surcharge is approximately $2 annually and
SWBell will pay the current assessment into the fund even though it has waived
collection of this amount from customers.
In Indiana, the Indiana
Court of Appeals (Indiana Court) issued a decision in October 1999 reversing a
portion of the 1997 Indiana Utility Regulatory Commission (IURC) Opportunity
Indiana order, which had directed Ameritech to reduce rates for basic
residential and business services and remanded the rate issue to the IURC. Also
in the October 1999 decision, the Indiana Court affirmed the IURC’s order
requiring Ameritech to comply with the infrastructure investment commitments
made in Opportunity Indiana. Ameritech sought rehearing of this portion of the
decision and in March 2000, the Indiana Court denied the petition for rehearing.
This ruling is not expected to have a material effect on our results of
operations or financial position. In September 2000, a settlement agreement was
executed extending alternative regulation in Indiana through 2003. This
agreement is pending before the IURC for approval, which is expected in 2001.
In Connecticut, the
Connecticut Department of Public Utility Control (CDPUC) approved an alternative
regulation plan for SNET in 1996. With the five-year monitoring period ending in
2001, the CDPUC initiated a docket in July 2000 to review SNET’s
alternative regulation plan. SNET has requested limited modifications to the
current plan, including the ability to adjust local residential service rates
annually based on the rate of inflation and application of a single set of high
quality service standards for SNET and all other companies providing
telecommunications services in Connecticut. The plan is currently under review
by the CDPUC, and a final decision is expected in early 2001.
Wireless
Cingular, our wireless
joint venture formed with BellSouth in April 2000, began operations in October
2000. Cingular serves approximately 19 million customers, is the second-largest
wireless operator in the United States, and has approximately 190 million
potential customers in 38 states, the District of Columbia, Puerto Rico and the
United States Virgin Islands (see Note 6).
Cingular targets further
geographic expansion through possible spectrum exchanges and auctions. In
November 2000, Cingular announced a deal to swap spectrum with VoiceStream
Wireless Corp. adding spectrum in New York City, St. Louis and Detroit in
exchange for surplus spectrum in Los Angeles and San Francisco. This deal is
expected to close in mid-2001. Cingular has also invested in a participant in a
December 2000/January 2001 FCC auction of wireless spectrum licenses once held
by a New York wireless company that filed for bankruptcy protection. A number of
legal issues have emerged in connection with this auction, including the
validity of bids, and it is unclear how a resolution of these issues will affect
Cingular. Another auction of spectrum which can be used to provide high-speed
wireless data Internet services is scheduled for the fourth quarter of 2001 and
Cingular is currently evaluating its alternatives.
Directory and
Other
Our directory subsidiaries
face competition from over 100 publishers of printed directories in their
operating areas. Direct and indirect competition also exists from other
advertising media, including newspapers, radio, television and direct mail
providers, as well as from directories offered over the Internet.
Our cable subsidiary offers
cable television service in approximately 100 communities in the Midwest and
faces competition from other cable and satellite television providers in those
areas. We are currently considering a variety of options for the future of our
cable subsidiary.
International
Telmex
In September 2000, in an effort to promote competition, the
Mexican government passed new telecommunications rules for Telmex effective
January 2001. The rules established interconnection pricing guidelines and also
bar Telmex from charging less for a service than the cost to provide it. Telmex
obtained an injunction in Mexican court against these rules and hearings remain
pending. In December 2000, Telmex and certain competitors reached an agreement
that provided, among other things, that competitors pay approximately $140 to
Telmex for past-due amounts related to interconnection rates and approximately
$550 for local network costs incurred by Telmex in 1997. The agreement also
established an interconnection rate of 1.25 cents per minute for 2001, compared
with approximately 3.34 cents in 2000. In addition, as part of the agreement,
Telmex will continue negotiations with competitors regarding a new cost-based
international settlement model and will review the proportional return
mechanism. In January 2001, the United States Trade Representative (USTR),
attributing progress made under the agreement, discontinued its case against
Telmex before the World Trade Organization; however the USTR reserved the right
to formally request an investigation in the future.
As of December 31, 2000,
Telmex had approximately 70% of the long distance market in Mexico.
Telmex’s share of international long distance traffic is expected to
decline significantly when the proportional return mechanism expires. This
mechanism guarantees Telmex the same percentage of incoming traffic as outgoing
traffic. Mexican regulators postponed the elimination of the proportional return
mechanism, which had been scheduled for year-end 1999. The mechanism may expire
at the end of 2001, but regulators have not yet provided a definitive time frame
for the expiration. Aggressive local competition is expected in 2001, primarily
for business customers. We do not expect the carrier agreement or rules
affecting Telmex to have a material impact on our financial position or results
of operations.
European Union
Regulation In December 2000, the European Parliament issued a
regulation effective December 31, 2000, requiring carriers that hold significant
market power (SMP) in the European Union countries to provide competitors
unbundled access to their local loops. Both Tele Danmark and Belgacom were
determined to hold SMP and therefore must meet this requirement. In order to
meet Danish regulatory requirements, Tele Danmark has been providing this access
since 1998 and Belgacom began complying with the regulation at December 31, 2000
as required.
Liquidity and
Capital Resources
We had $643 of cash and
cash equivalents available at December 31, 2000. Commercial paper borrowings as
of December 31, 2000 totaled $6,437 out of $8,000 authorized. We have entered
into agreements with several banks for lines of credit totaling $4,200, all of
which may be used to support commercial paper borrowings (see Note 9). We had no
borrowings outstanding under these lines of credit as of
December 31, 2000.
Cash from
Operating Activities
During 2000, 1999 and 1998,
our primary source of funds continued to be cash generated from operations, as
shown in the consolidated statements of cash flows. Net cash provided by
operating activities exceeded our construction and capital expenditures during
2000, 1999 and 1998; this excess is referred to as free cash flow, a
supplemental measure of liquidity. We generated free cash flow of $1,175, $6,274
and $4,099 in 2000, 1999 and 1998.
In August 2000, we
announced a definitive agreement under which we will grant the exclusive right
to lease 3,900 communication towers to SpectraSite Communications Inc.
(SpectraSite), plus an estimated 800 new towers under a five-year exclusive
build-to-suit agreement, for a total of at least 4,700 towers. In consideration
for the transaction, which will close incrementally over 18 months, we will
receive prepaid rents totaling $983 in cash and SpectraSite common stock valued
at $325, or $22.659 per share at closing. As of December 31, 2000, we have
closed on 739 towers for proceeds of $175 in cash and $58 in SpectraSite common
stock. As part of the agreement, SpectraSite has committed to sublease space on
the towers to Cingular (see Note 6). This agreement did not have a material
effect on our net income in 2000.
Cash from
Investing Activities
To provide high-quality
communications services to our customers we must make significant investments in
property, plant and equipment. The amount of capital investment is influenced by
demand for services and products, continued growth and regulatory commitments.
Our capital expenditures
totaled $13,124, $10,304 and $8,882 for 2000, 1999 and 1998. Capital
expenditures in the wireline segment, which represented the majority of our
total capital expenditures, increased by 29.0% in 2000 compared to 1999,
primarily attributed to the expansion of our local exchange service into new
markets, DSL, digital and broadband network upgrades and regulatory commitments.
The wireline segment capital expenditures increased by 17.2% in 1999 compared to
1998, due primarily to demand-related growth, network upgrades,
customer-contracted requirements, ISDN projects and regulatory commitments. The
wireline segment’s capital expenditures were relatively unchanged in 1998
compared to 1997.
In 2001, management expects
total capital spending to be between $12,000 and $13,000. Capital expenditures
in 2001 will relate primarily to the continued evolution of the wireline
subsidiaries’ networks, including amounts projected for Project Pronto, our
broadband initiative, DSL, and regulatory processes to gain state approvals for
long distance service offerings.
In 2000, 1999 and 1998,
cash expenses on acquisitions exceeded receipts from dispositions (see Note 15).
Cash from
Financing Activities
Dividends declared by the
Board of Directors of SBC were $1.015 per share in 2000, $0.975 per share in
1999 and $0.935 per share in 1998. These per share amounts do not include
dividends declared and paid by Ameritech and SNET prior to their respective 1999
and 1998 mergers. The total dividends paid by SBC, Ameritech and SNET were
$3,443 in 2000, $3,312 in 1999 and $3,177 in 1998. SBC’s dividend policy
considers both the expectations and requirements of shareowners, internal
requirements of SBC and long-term growth opportunities.
In January 2000, the Board
of Directors approved the repurchase of up to 100 million shares of SBC common
stock. In 2000 we expended $2,255 on these stock repurchases. As of January 31,
2001 we have repurchased a total of approximately 59 million shares of the 100
million that were authorized (see Note 17).
In February 2001, we called
approximately $500 of the Trust Originated Preferred Securities (TOPrS) with an
interest rate of 7.56%. The TOPrS have an original maturity of 30 years and are
included on the balance sheet as corporation-obligated mandatorily redeemable
preferred securities of subsidiary trusts.
In May 2000, we issued
$1,000 in notes through private placement. These notes have a 6.72% interest
rate and will mature May 2001. In April 2000, we issued notes for $1,015 with an
interest rate of 6.33% that also mature in May 2001.
In December 1999, we called
approximately $31 of debt issued by our capital financing subsidiaries that was
scheduled to mature in December 2004. The net income effect of retiring this
debt did not materially impact our financial statements. During 1999, subsequent
to the completion of the acquisitions of Comcast and Cellular Communications, we
retired $1,415 of Comcast’s and Cellular Communications’ long-term
debt with no effect on net income. In May 1999, we issued $750 of unsecured
6.25% Eurodollar notes, due May 2009, through our capital financing
subsidiaries.
During 1998, we redeemed
$2,789 of long-term debt, including mortgage bonds. Also in 1998, we issued
$2,150 of notes and debentures. In February 1998, we also issued $750 of
unsecured 5.88% Eurodollar notes, due February 2003, with proceeds used
primarily to fund our investment in Tele Danmark.
In April 1998, an SBC
subsidiary issued, through private placement, 3,250 shares of stated rate
auction preferred stock (STRAPS) in four separate series. Net proceeds from
these issuances totaled $322.
We expect to fund ongoing
capital expenditures, the repurchase of stock and merger initiative expenses
with cash provided by operations and incremental borrowings.
Other
Our total capital consists
of debt (long-term debt and debt maturing within one year), TOPrS and
shareowners’ equity. Total capital increased $8,850 in 2000 and $3,453 in
1999. The increase in 2000 was primarily due to increased debt levels and 2000
earnings. The 1999 increase was due to 1999 earnings, partially offset by lower
debt levels.
Our debt ratio was 45.2%,
42.9% and 47.3% at December 31, 2000, 1999 and 1998. The debt ratio is affected
by the same factors that affect total capital.
Market Risk
We are exposed to market
risks primarily from changes in interest rates, foreign currency exchange rates
and certain equity stock prices. In managing exposure to these fluctuations, we
may engage in various hedging transactions that have been authorized according
to documented policies and procedures. We do not use derivatives for trading
purposes, to generate income or to engage in speculative activity. Our capital
costs are directly linked to financial and business risks. We seek to manage the
potential negative effects from market volatility and market risk. The majority
of our financial instruments are medium- and long-term fixed rate notes and
debentures. Fluctuations in market interest rates can lead to significant
fluctuations in the fair value of these notes and debentures. It is our policy
to manage our debt structure and foreign exchange exposure in order to manage
capital costs, control financial risks and maintain financial flexibility over
the long term. Where appropriate, we will take actions to limit the negative
effect of interest and foreign exchange rates, liquidity and counterparty risks
on shareowner value.
Quantitative
Information About Market Risk
Interest Rate
Sensitivity The principal amounts by expected maturity, average interest
rate and fair value of SBC’s liabilities that are exposed to interest rate
risk are described in Notes 9 and 10.
Following are our
interest rate derivatives subject to interest rate risk:
---------------------------------------------------------------------------------------------
Maturity
-----------------------------------------------------------------
Fair
After Value
2001 2002 2003 2004 2005 2005 Total 12/31/00
---------------------------------------------------------------------------------------------
Interest Rate Derivatives
---------------------------------------------------------------------------------------------
Interest Rate Swaps:
---------------------------------------------------------------------------------------------
Receive Fixed/Pay Variable
Notional Amount - $130 $315 $200 $25 $325 $995 $4
Variable Rate Payable 1 5.8% 5.6% 5.8% 5.9% 6.0% 6.1%
Weighted Average Fixed
Rate Receivable 5.9% 5.9% 5.9% 5.7% 5.5% 5.6%
---------------------------------------------------------------------------------------------
Receive Variable/Pay Fixed
Notional Amount $20 $5 - - - - $25 -
Fixed Rate Payable 7.5% 8.2% - - - -
Weighted Average Variable
Rate Receivable 2 6.1% 5.6% - - - -
--------------------------------------------------------------------------------------------
Lease Obligations:
--------------------------------------------------------------------------------------------
Variable Rate Leases 3 $42 - - $81 - - $123 $123
Average Interest Rate 3 6.2% 5.8% 5.9% 5.9% - -
=============================================================================================
- Interest payable based on Three Month London Interbank Offer Rate (LIBOR) plus or minus a spread.
- Interest receivable based on Three Month Commercial Paper Index published by The Federal Reserve.
- Average interest rate based on current and implied forward rates for One Month LIBOR plus 30 basis points.
The lease obligations require interest payments only until maturity.
In 2000, a $10 interest
rate swap contract, linked to the variable rate debt, matured and interest rate
swap contracts of $350 linked to variable rate debt were exited with minimal
effect on net income.
There has been no material
change in the market risks shown in the table above since
December 31, 1999.
Qualitative
Information About Market Risk
Foreign Exchange
Risk From time to time we make investments in businesses in foreign
countries, are paid dividends, receive proceeds from sales or borrow funds in
foreign currency. Before making an investment, or in anticipation of a foreign
currency receipt, we will often enter into forward foreign exchange contracts,
generally for short periods of time. The contracts are used to provide currency
at a fixed rate. Our policy is to measure the risk of adverse currency
fluctuations by calculating the potential dollar losses resulting from changes
in exchange rates that have a reasonable probability of occurring. We cover the
exposure that results from changes that exceed acceptable amounts. We do not
speculate in foreign exchange markets.
Equity Risk We have
equity price risk exposure from outstanding employee stock options linked to
Vodafone AirTouch stock. The amount of these stock options is not significant
(see Note 14).
Interest Rate Risk
We issue debt in fixed and floating rate instruments. Interest rate swaps
are used for the purpose of controlling interest expense by managing the mix of
fixed and floating rate debt. We do not seek to make a profit from changes in
interest rates. We manage interest rate sensitivity by measuring potential
increases in interest expense that would result from a probable change in
interest rates. When the potential increase in interest expense exceeds an
acceptable amount, we reduce risk through the issuance of fixed rate (in lieu of
variable rate) instruments and purchasing derivatives.
New Accounting
Standards On January 1, 2001, we adopted Financial Accounting Standards
Board Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, which requires all derivatives to be recorded on the balance
sheet at fair value. Our adoption did not have a significant effect on our
financial position or results of operations.
Cautionary
Language Concerning Forward-Looking Statements
Information set forth in
this report contains forward-looking statements that are subject to risks and
uncertainties. SBC claims the protection of the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could
cause SBC's future results to differ materially from those expressed in the
forward-looking statements:
- Adverse economic changes in the markets served by SBC, or countries in which SBC
has significant investments.
- Changes in available technology.
- The final outcome of FCC rulemakings and judicial review, if any, of such
rulemakings, including issues relating to jurisdiction.
- The final outcome of state regulatory proceedings in SBC’s 13-state area,
and judicial review, if any, of such proceedings, including proceedings relating
to interconnection terms, access charges, universal service, unbundled network
elements and resale rates, and reciprocal compensation.
- Enactment of additional state, federal and/or foreign regulatory laws and
regulations pertaining to SBC’s subsidiaries and foreign investments.
- The timing of entry and the extent of competition in the local and intraLATA
toll markets in SBC’s 13-state area and SBC’s entry into the in-region
long distance market.
- The impact of the Ameritech transaction, including performance with respect to
regulatory requirements and merger integration efforts.
- The timing and cost of deployment of SBC’s broadband initiative, also known
as Project Pronto, its effect on the carrying value of the existing wireline
network and the level of consumer demand for offered services.
- 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 SBC's future earnings.
Report of
Management
The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles in the United States. The integrity and objectivity of the data in
these financial statements, including estimates and judgments relating to
matters not concluded by year end, are the responsibility of management, as is
all other information included in the Annual Report, unless otherwise indicated.
The financial statements of
SBC Communications Inc. (SBC) have been audited by
Ernst & Young LLP, independent auditors. Management has made
available to Ernst & Young LLP all of SBC’s financial
records and related data, as well as the minutes of shareowners’ and
directors’ meetings. Furthermore, management believes that all
representations made to Ernst & Young LLP during its audit
were valid and appropriate.
Management has established
and maintains a system of internal accounting controls that provides reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition and the prevention and
detection of fraudulent financial reporting. The concept of reasonable assurance
recognizes that the costs of an internal accounting controls system should not
exceed, in management’s judgment, the benefits to be derived.
Management also seeks to
ensure the objectivity and integrity of its financial data by the careful
selection of its managers, by organizational arrangements that provide an
appropriate division of responsibility and by communication programs aimed at
ensuring that its policies, standards and managerial authorities are understood
throughout the organization. Management continually monitors the system of
internal accounting controls for compliance. SBC maintains an internal auditing
program that independently assesses the effectiveness of the internal accounting
controls and recommends improvements thereto.
The Audit Committee of the
Board of Directors, which consists of nine directors who are not employees,
meets periodically with management, the internal auditors and the independent
auditors to review the manner in which they are performing their respective
responsibilities and to discuss auditing, internal accounting controls and
financial reporting matters. Both the internal auditors and the independent
auditors periodically meet alone with the Audit Committee and have access to the
Audit Committee at any time.
/s/ Edward E. Whitacre Jr.
Edward E. Whitacre Jr.
Chairman of the Board and
Chief Executive Officer
/s/ Donald E. Kiernan
Donald E. Kiernan
Senior Executive Vice President and
Chief Financial Officer
Report of
Independent Auditors
The Board of Directors and Shareowners
SBC Communications Inc.
We have audited the
accompanying consolidated balance sheets of SBC Communications Inc. (the
Company) as of December 31, 2000 and 1999, and the related consolidated
statements of income, shareowners’ equity, and cash flows for each of the
three years in the period ended December 31, 2000. These consolidated
financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the 1998 financial statements
of Ameritech Corporation, a wholly owned subsidiary, which statements reflect
total operating revenues constituting approximately 37% of the Company’s
related consolidated financial statement total for the year ended
December 31, 1998. Those statements were audited by other auditors
whose report has been furnished to us. Our opinion, insofar as it relates to the
1998 data included for Ameritech Corporation, is based solely on the report of
the other auditors.
We conducted our audits in
accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on
our audits and the report of other auditors, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of SBC Communications Inc. at
December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
San Antonio, Texas
February 9, 2001
SBC Communications Inc.
Consolidated Statements of Income
Dollars in millions except per share amounts
--------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------------
Operating Revenues
Landline local service $ 22,099 $ 19,432 $ 17,506
Wireless subscriber 4,945 5,851 5,265
Network access 10,427 10,094 9,575
Long distance service 3,178 3,485 3,688
Directory advertising 4,439 4,266 3,929
Other 6,388 6,403 6,278
--------------------------------------------------------------------------------------------------------------
Total operating revenues 51,476 49,531 46,241
--------------------------------------------------------------------------------------------------------------
Operating Expenses
Operations and support 30,985 29,380 27,177
Depreciation and amortization 9,748 8,553 7,841
--------------------------------------------------------------------------------------------------------------
Total operating expenses 40,733 37,933 35,018
--------------------------------------------------------------------------------------------------------------
Operating Income 10,743 11,598 11,223
--------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (1,592) (1,430) (1,605)
Interest income 279 127 182
Equity in net income of affiliates 897 912 613
Other income (expense) - net 2,561 (354) 1,702
--------------------------------------------------------------------------------------------------------------
Total other income (expense) 2,145 (745) 892
--------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 12,888 10,853 12,115
--------------------------------------------------------------------------------------------------------------
Income taxes 4,921 4,280 4,380
--------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change 7,967 6,573 7,735
--------------------------------------------------------------------------------------------------------------
Extraordinary items, net of tax - 1,379 (60)
Cumulative effect of accounting change, net of tax - 207 15
--------------------------------------------------------------------------------------------------------------
Net Income $ 7,967 $ 8,159 $ 7,690
==============================================================================================================
Earnings Per Common Share:
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change $ 2.35 $ 1.93 $ 2.27
Net Income $ 2.35 $ 2.39 $ 2.26
==============================================================================================================
Earnings Per Common Share-Assuming Dilution:
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change $ 2.32 $ 1.90 $ 2.24
Net Income $ 2.32 $ 2.36 $ 2.23
==============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
SBC Communications Inc.
Consolidated Balance Sheets
Dollars in millions except per share amounts
-----------------------------------------------------------------------------------------------------
December 31,
------------------------
2000 1999
-----------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 643 $ 495
Accounts receivable - net of allowances for uncollectibles of
$1,032 and $1,099 10,144 9,378
Prepaid expenses 550 651
Deferred income taxes 671 767
Notes receivable from Cingular Wireless 9,568 -
Other current assets 1,640 639
-----------------------------------------------------------------------------------------------------
Total current assets 23,216 11,930
-----------------------------------------------------------------------------------------------------
Property, Plant and Equipment - Net 47,195 46,571
-----------------------------------------------------------------------------------------------------
Intangible Assets - Net of Accumulated Amortization of
$746 and $1,325 5,475 6,796
-----------------------------------------------------------------------------------------------------
Investments in Equity Affiliates 12,378 10,648
-----------------------------------------------------------------------------------------------------
Other Assets 10,387 7,270
-----------------------------------------------------------------------------------------------------
Total Assets $ 98,651 $ 83,215
-----------------------------------------------------------------------------------------------------
Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 10,470 $ 3,374
Accounts payable and accrued liabilities 15,432 11,717
Accrued taxes 3,592 3,386
Dividends payable 863 836
------------------------------------------------------------------------------------------------------
Total current liabilities 30,357 19,313
------------------------------------------------------------------------------------------------------
Long-Term Debt 15,492 17,475
------------------------------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 6,806 4,821
Postemployment benefit obligation 9,767 9,612
Unamortized investment tax credits 318 389
Other noncurrent liabilities 4,448 3,879
------------------------------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 21,339 18,701
------------------------------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable Preferred
Securities Of Subsidiary Trusts# 1,000 1,000
------------------------------------------------------------------------------------------------------
Shareowners' Equity
Preferred shares ($1 par value, 10,000,000 authorized: none issued) - -
Common shares ($1 par value, 7,000,000,000 authorized: issued
3,433,124,836 at December 31, 2000 and 1999) 3,433 3,433
Capital in excess of par value 12,125 12,453
Retained earnings 18,341 13,798
Guaranteed obligations of employee stock ownership plans (ESOP) (21) (106)
Deferred compensation - leveraged ESOP (LESOP) (37) (73)
Treasury shares (46,416,071 at December 31, 2000 and
37,752,621 at December 31, 1999, at cost) (2,071) (1,717)
Accumulated other comprehensive income (1,307) (1,062)
------------------------------------------------------------------------------------------------------
Total shareowners' equity 30,463 26,726
------------------------------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $ 98,651 $ 83,215
======================================================================================================
# The trusts contain assets of $1,030 in principal amount of the Subordinated Debentures of Pacific Telesis Group.
The accompanying notes are an integral part of the consolidated financial statements.
SBC Communications Inc.
Consolidated Statements of Cash Flows
Dollars in millions, increase (decrease) in cash and cash equivalents
-------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 7,967 $ 8,159 $ 7,690
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,748 8,553 7,841
Undistributed earnings from investments in equity affiliates (521) (471) (256)
Provision for uncollectible accounts 885 1,136 896
Amortization of investment tax credits (71) (85) (96)
Deferred income tax expense 1,164 1,061 840
Gain on sales of investments (2,415) (335) (2,215)
Extraordinary items, net of tax - (1,379) 60
Cumulative effect of accounting change, net of tax - (207) (15)
Changes in operating assets and liabilities:
Accounts receivable (1,892) (731) (2,257)
Other current assets (446) 335 310
Accounts payable and accrued liabilities 1,405 2,054 1,175
Other - net (1,525) (1,512) (992)
-------------------------------------------------------------------------------------------------------------
Total adjustments 6,332 8,419 5,291
-------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 14,299 16,578 12,981
-------------------------------------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (13,124) (10,304) (8,882)
Investments in affiliates - 51 (77)
Purchase of short-term investments (539) (26) (42)
Proceeds from short-term investments 84 31 355
Dispositions 4,476 4,867 2,727
Acquisitions (5,299) (5,198) (3,261)
Other (1) 2 11
-------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (14,403) (10,577) (9,169)
-------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 5,169 (787) (589)
Issuance of other short-term borrowings - - 2
Repayment of other short-term borrowings - - (8)
Issuance of long-term debt 1,087 738 2,890
Repayment of long-term debt (1,128) (2,301) (2,860)
Early extinguishment of debt and related call premiums - (31) (765)
Issuance of common shares - 313 464
Issuance of preferred shares of subsidiaries - 103 322
Purchase of treasury shares (2,255) (1,169) (498)
Issuance of treasury shares 732 318 308
Dividends paid (3,418) (3,287) (3,131)
Other 65 (2) 3
-------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 252 (6,105) (3,862)
-------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 148 (104) (50)
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 495 599 649
-------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Year $ 643 $ 495 $ 599
=============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
SBC Communications Inc.
Consolidated Statements of Shareowners' Equity
Dollars and shares in millions except per share amounts
---------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------------------------
Common Stock
Balance at beginning of year 3,433 $ 3,433 3,434 $ 3,434 3,428 $ 3,428
Purchase of shares - - (8) (8) (13) (13)
Issuance of shares - - 7 7 19 19
---------------------------------------------------------------------------------------------------------------
Balance at end of year 3,433 $ 3,433 3,433 $ 3,433 3,434 $ 3,434
===============================================================================================================
Capital in Excess of Par Value
Balance at beginning of year $ 12,453 $ 12,439 $ 12,375
Purchase of shares - (398) (487)
Issuance of shares (678) 215 370
Other 350 197 181
---------------------------------------------------------------------------------------------------------------
Balance at end of year $ 12,125 $ 12,453 $ 12,439
===============================================================================================================
Retained Earnings
Balance at beginning of year $ 13,798 $ 8,948 $ 4,429
Net income ($2.35, $2.39 and $2.26 per share) 7,967 8,159 7,690
Dividends to shareowners
($1.015, $0.975 and $0.935 per share) (3,443) (3,312) (3,177)
Other 19 3 6
---------------------------------------------------------------------------------------------------------------
Balance at end of year $ 18,341 $ 13,798 $ 8,948
===============================================================================================================
Guaranteed Obligations of ESOP
Balance at beginning of year $ (106) $ (261) $ (409)
Reduction of debt associated with ESOP 85 155 148
---------------------------------------------------------------------------------------------------------------
Balance at end of year $ (21) $ (106) $ (261)
===============================================================================================================
Deferred Compensation - LESOP
Balance at beginning of year $ (73) $ (82) $ (119)
Cost of LESOP trust shares allocated to employees 36 9 37
---------------------------------------------------------------------------------------------------------------
Balance at end of year $ (37) $ (73) $ (82)
===============================================================================================================
Treasury Shares
Balance at beginning of year (38) $ (1,717) (28) $ (882) (30) $ (730)
Purchase of shares (49) (2,255) (23) (1,169) (12) (498)
Issuance of shares 41 1,901 13 334 14 346
---------------------------------------------------------------------------------------------------------------
Balance at end of year (46) $ (2,071) (38) $ (1,717) (28) $ (882)
===============================================================================================================
Accumulated Other Comprehensive Income,
net of tax
Balance at beginning of year $ (1,062) $ (822) $ (1,111)
Foreign currency translation adjustment,
net of taxes of $(234), $290 and $37 (435) (336) 224
Reclassification adjustment to net income for
cumulative translation adjustment on securities sold 329 - 56
Unrealized gains (losses) on available-for-sale securities,
net of taxes of $(22), $61 and $37 (40) 113 69
Less reclassification adjustment for net gains
included in net income (99) (17) (60)
---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (245) (240) 289
---------------------------------------------------------------------------------------------------------------
Balance at end of year $ (1,307) $ (1,062) $ (822)
===============================================================================================================
Total Comprehensive Income
Net income $ 7,967 $ 8,159 $ 7,690
Other comprehensive income (loss) per above (245) (240) 289
---------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 7,722 $ 7,919 $ 7,979
===============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Note 1. Summary of Significant Accounting Policies
| |
Basis
of Presentation - Throughout this document, SBC Communications Inc. is
referred to as “we” or “SBC”. The consolidated financial
statements include the accounts of SBC and its majority-owned subsidiaries. The
statements reflect mergers of our subsidiaries with Southern New England
Telecommunications Corporation (SNET) and Ameritech Corporation (Ameritech) as
poolings of interests (see Note 2). Our subsidiaries and affiliates operate in
the communications services industry, providing wireline and wireless
telecommunications services and equipment, directory advertising and cable
television service both domestically and worldwide. |
| |
All
significant intercompany transactions are eliminated in the consolidation
process. Our investment in Cingular Wireless (Cingular) is accounted for under
the equity method of accounting (see Note 6). Investments in partnerships, joint
ventures and less than majority-owned subsidiaries are principally accounted for
under the equity method. Earnings from certain foreign investments accounted for
using the equity method are included for periods ended within three months of
our year end. |
| |
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States (GAAP) requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Certain amounts in prior period financial statements have been
reclassified to conform to the current year’s presentation. |
| |
Income
Taxes - Deferred income taxes are provided for temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for tax purposes. |
| |
Investment
tax credits earned prior to their repeal by the Tax Reform Act of 1986 are
amortized as reductions in income tax expense over the lives of the assets which
gave rise to the credits. |
| |
Cash
Equivalents - Cash and cash equivalents include all highly liquid
investments with original maturities of three months or less and the carrying
amounts approximate fair value. |
| |
Deferred
Charges - Directory advertising costs are deferred until the directory is
published and advertising revenues related to these costs are recognized. |
| |
Revenue
Recognition/Cumulative Effect of Accounting Change - In December 1999, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
101, “Revenue Recognition in Financial Statements” (SAB 101), which we
adopted effective January 1, 2000. SAB 101 addresses, among other items, when
revenue relating to nonrefundable, up-front fees should be recognized. Upon
adoption, we performed a detailed analysis of our activation fees and recorded
deferred revenues and associated expenses accordingly. These deferred amounts
will be recognized over the average customer life of five years. Expenses,
though exceeding revenue, were only deferred to the extent of revenue.
Accordingly, these adjustments had no significant effect on operating or net
income. |
| |
Certain
revenues derived from local telephone and wireless services are billed monthly
in advance and are recognized the following month when services are provided.
Revenues derived from other telecommunications services, principally network
access, long distance and wireless airtime usage, are recognized monthly as
services are provided. |
| |
Ameritech,
prior to January 1, 1999, and SNET, prior to January 1, 1998,
recognized revenues and expenses related to publishing directories using the
“amortization” method, under which revenues and expenses were
recognized over the lives of the directories, generally one year. Effective
January 1, 1999, for Ameritech and January 1, 1998, for SNET, the
accounting was changed to the “issue basis” method of accounting,
which recognizes the revenues and expenses at the time the related directory
is published. The change in methodology was made because the issue basis method
is generally followed in the publishing industry, including by our other
directory subsidiaries, and better reflects the operating activity of the
business. |
| |
The
cumulative after-tax effect of applying the changes in method to prior years was
recognized as of January 1, 1999 and 1998, as one-time, non-cash gains
of $207, or $0.06 per share, and $15, or $0.01 per share, net of deferred taxes
of $125 and $11. Had the current method been applied during prior periods,
income before extraordinary items and cumulative effect of accounting change
would not have been materially affected. |
| |
Property,
Plant and Equipment - Property, plant and equipment is stated at cost. The
cost of additions and substantial improvements to property, plant and equipment
is capitalized. The cost of maintenance and repairs of property, plant and
equipment is charged to operating expenses. Property, plant and equipment is
depreciated using straight-line methods over their estimated economic lives.
Certain subsidiaries follow composite group depreciation methodology;
accordingly, when a portion of their depreciable property, plant and equipment
is retired in the ordinary course of business, the gross book value is
reclassified to accumulated depreciation; no gain or loss is recognized on the
disposition of this plant. |
| |
Software
Costs - It is our policy to capitalize certain costs incurred in connection
with developing or obtaining internal use software. Capitalized software costs
are included in Property, Plant and Equipment and are being amortized over three
years. |
| |
Intangible
Assets - Intangible assets consist primarily of customer lists and the
excess of consideration paid over net assets acquired in business combinations.
These assets are being amortized using the straight-line method, over periods
generally ranging from three to forty years. Management periodically reviews the
carrying value and lives of all intangible assets based on expected future cash
flows. |
| |
Advertising Costs - Costs for advertising products and services or corporate image are expensed as
incurred. |
| |
Foreign
Currency Translation - Local currencies are generally considered the
functional currency for our share of foreign investments, except in countries
considered highly inflationary. We translate our share of foreign assets and
liabilities at exchange rates in effect at the balance sheet dates. Revenues and
expenses are translated using average rates for the year. The resulting foreign
currency translation adjustments are recorded as a separate component of
accumulated other comprehensive income in the accompanying consolidated balance
sheets. Other transaction gains and losses resulting from exchange rate changes
on transactions denominated in a currency other than the local currency are
included in earnings as incurred. |
| |
Derivative
Financial Instruments - In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (FAS 133), which will require all derivatives to be
recorded on the balance sheet at fair value, and will require changes in the
fair value of the derivatives to be recorded in net income or comprehensive
income. We adopted FAS 133 on January 1, 2001, as a one-time, non-cash
cumulative effect of accounting change. However, because of our minimal use of
derivatives, the adoption of this standard did not have a significant effect on
our financial position or results of operations. |
| |
We
do not invest in derivatives for trading purposes. From time to time as part of
our risk management strategy, we use derivative financial instruments, including
interest rate swaps, to hedge exposures to interest rate risk on debt
obligations, and foreign currency forward exchange contracts to hedge exposures
to changes in foreign currency rates for transactions related to foreign
investments. Derivative contracts are entered into for hedging of firm
commitments only. Interest rate swap settlements are recognized as adjustments
to interest expense in the consolidated statements of income when paid or
received. Foreign currency forward exchange contracts are set up to coincide
with firm commitments. Gains and losses are deferred until the underlying
transaction being hedged occurs, and then are recognized as part of that
transaction (see Note 10). |
Note 2. Completion of Mergers
| |
In
October 1999, SBC and Ameritech completed the merger of an SBC subsidiary with
Ameritech in a transaction in which each share of Ameritech common stock was
exchanged for 1.316 shares of SBC common stock (equivalent to approximately
1,446 million shares). Ameritech became a wholly owned subsidiary effective with
the merger, and the transaction has been accounted for as a pooling of interests
and a tax-free reorganization. Financial statements for prior periods have been
restated to include the accounts of Ameritech. Transaction costs related to the
merger were $77 ($48 net of tax). Of this total, $25 ($16 net of tax) is
included in expenses in 1999 and $52 ($32 net of tax) in 1998. |
| |
In
October 1998, SBC and SNET completed the merger of an SBC subsidiary with SNET
in a transaction in which each share of SNET common stock was exchanged for
1.7568 shares of SBC common stock (equivalent to approximately 120 million
shares). SNET became a wholly owned subsidiary effective with the merger, and
the transaction was accounted for as a pooling of interests and a tax-free
reorganization. |
| |
Upon
completion of each merger, we reviewed operations throughout the merged company.
We formed review teams that performed comprehensive evaluations of companywide
operations. Based on these merger integration reviews, we made certain strategic
decisions, integrated certain operations and consolidated some administrative
and support functions resulting in one-time charges. The following tables
summarize the charges incurred for each merger related to these reviews and
decisions: |
-----------------------------------------------------------------------
Pre-tax charges Ameritech SNET
-----------------------------------------------------------------------
Reorganization $ 582 $ 82
Impairments/asset valuation 690 321
Wireless conversion 220 -
Regulatory and legal 164 -
Merger approval 31 -
Other items and estimates of other obligations 79 -
-----------------------------------------------------------------------
Total one-time charges $ 1,766 $ 403
=======================================================================
-----------------------------------------------------------------------
After-tax charges Ameritech SNET
-----------------------------------------------------------------------
Reorganization $ 379 $ 50
Impairments/asset valuation 472 199
Wireless conversion 143 -
Regulatory and legal 102 -
Merger approval 19 -
Other items and estimates of other obligations 342 -
-----------------------------------------------------------------------
Total one-time charges $ 1,457 $ 249
=======================================================================
| |
One-time
charges incurred in the third and fourth quarter of 1999 totaled $1,766 ($1,457
net of tax). These charges included various regulatory and legal issues, merger
approval and other related costs of $274 ($174 net of tax). In addition, these
charges included costs related to strategic decisions reached by the review
teams of $1,492 ($1,283 net of tax) in 1999. Charges in the fourth quarter of
1998 for the SNET merger of $403 ($249 net of tax) also related to the strategic
decisions reached by the review teams. At December 31, 2000, 1999 and
1998, remaining accruals for anticipated cash expenditures related to the SNET
decisions and decisions related to the 1997 pooling of interests with Pacific
Telesis Group (PAC) were approximately $11, $52 and $323. Anticipated cash
expenditures related to the accruals for the Ameritech merger decisions totaled
$147 and $703 at December 31, 2000 and 1999. In addition, as discussed in Note
8, we have ongoing expenses associated with the mergers. |
| |
Reorganization
- We centralized several key functions that will support the wireline operations
including network planning, strategic marketing and procurement. We also
consolidated a number of corporatewide support activities, including research
and development, information technology, financial transaction processing and
real estate management. These initiatives resulted in the creation of some jobs
and the elimination and realignment of others, with many of the affected
employees changing job responsibilities and in some cases assuming positions in
other locations. |
| |
We
recognized net charges of approximately $582 ($379 net of tax) during the fourth
quarter of 1999 and $82 ($50 net of tax) during the fourth quarter of 1998 in
connection with these initiatives. The charges were comprised mainly of
postemployment benefits, primarily related to severance, and costs associated
with closing duplicate operations, primarily contract cancellations. Other
charges arising out of the mergers related to relocation, retraining and other
effects of consolidating certain operations are being recognized in the periods
those charges are incurred. The fourth quarter 1999 charge is net of $45 ($29
net of tax) of reversals of accruals made in connection with the SNET and PAC
mergers that were related to plans now superseded by the current reorganization
plans. |
| |
Impairments/Asset
Valuation - As a result of our merger integration plans, strategic review of
domestic operations and organizational alignments, we reviewed the carrying
values of the long-lived assets in the third and fourth quarter of 1999 and the
fourth quarter of 1998. The reviews were conducted companywide, although the
1998 review focused primarily on SNET and the 1999 review focused primarily on
Ameritech. These reviews included estimating remaining useful lives and cash
flows and identifying assets to be abandoned. Where this review indicated
impairment, fair market values including, in some cases, discounted cash flows
as an estimate of fair value, related to those assets were analyzed to determine
the amount of the impairment. As a result of these reviews, we wrote off certain
assets and recognized impairments to the value of other assets with a combined
charge of $690 ($472 net of tax) in the third and fourth quarter of 1999 and
$321 ($199 net of tax) in the fourth quarter of 1998. |
| |
The
1999 adjustments include an impairment of $300 ($224 net of tax) related to
SecurityLink. This impairment adjustment, taken as a reduction in goodwill of
$300, reflects a reduction of the investment to fair market value based upon the
value of comparable businesses. In connection with this adjustment, we shortened
the estimated life of the remaining goodwill on the security business from 40 to
15 years. In January 2001, we sold SecurityLink. As a result of the sale, we
took an additional charge of $614 ($454 net of tax) (see Note 16). |
| |
Also
in 1999, we performed a review of the allowance for doubtful accounts at the
Ameritech subsidiaries and recognized a charge of $212 ($135 net of tax). This
charge resulted from adjusting Ameritech’s estimation methods to the method
we use. Other 1999 adjustments consisted primarily of valuation adjustments on
certain analog switching equipment at Ameritech and certain cost investments. |
| |
The
1998 impairments and writeoffs primarily related to recognition of an impairment
of the assets supporting SNET’s video and telephony operations, and also
included charges for required changes in wireless equipment, inventory and
sites. |
| |
Wireless
Conversion - In December 1999, Ameritech notified its wireless customers
that the current wireless network platform (Code Division Multiple Access or
CDMA) would be converted to our network platform (Time Division Multiple Access
or TDMA). As part of the conversion, we sold the CDMA network assets and leased
them back over the conversion period. A charge of $220 ($143 net of tax) was
recognized in the fourth quarter of 1999 to recognize the loss on the sale and
leaseback and to replace the customers’ CDMA handsets. |
| |
Other
Items and Estimates of Other Obligations - We performed
reviews of Ameritech’s accounting operations and applied consistent
accounting techniques between the merging companies. As a result, we recognized
charges in 1999 related to the impact of several regulatory and legal rulings of
$164 ($102 net of tax). Also in 1999, we incurred a charge of $31 ($19 net of
tax) for Ameritech merger approval costs. In 1999 charges for deferred taxes on
Ameritech’s international investments of $289, net charges related to the
routine deferral of certain costs and revenues by Ameritech of $62 ($40 net of
tax) and other miscellaneous items of $17 ($13 net of tax) were recognized. |
Note 3.
Subsidiary Financial Information
| |
We
have fully and unconditionally guaranteed certain outstanding capital securities
of PAC, Pacific Bell Telephone Company (PacBell), and Southwestern Bell
Telephone Company (SWBell), each of which is a wholly owned subsidiary of SBC.
In September 2000, new SEC rules became effective for reporting parent company
guarantees of subsidiary securities. In accordance with these new rules, we are
providing the following condensed consolidating financial information. |
| |
The
Parent column presents investments in all subsidiaries under the equity method
of accounting. PAC, PacBell and SWBell are listed separately because each has
securities that we have guaranteed that would otherwise require SEC periodic
reporting. PacBell is a wholly owned subsidiary of PAC, and the new rules
require that its financial information also be included in the PAC column. All
other 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, as well as removing the double
presentation of PacBell, in order to reconcile to the SBC consolidated financial
information. See Note 8 for a discussion of conforming items on the segments and
subsidiaries. |
Condensed Consolidating Statements of Income
For the Twelve Months Ended December 31, 2000
Parent PAC PacBell SWBell Other Adjs. Total
-------------------------------------------------------------------------------------------------- ------------
Total operating revenues $ - $ 11,978 $ 10,356 $ 11,580 $ 29,121 $ (11,559) $ 51,476
Total operating expenses (1,119) 7,974 7,437 8,636 26,445 (8,640) 40,733
-------------------------------------------------------------------------------------------------- ------------
Operating income 1,119 4,004 2,919 2,944 2,676 (2,919) 10,743
-------------------------------------------------------------------------------------------------- ------------
Interest expense 504 434 391 383 1,280 (1,400) 1,592
Equity in net income of affiliates 7,417 16 - - 945 (7,481) 897
Royalty income (expense) 460 (415) (407) (460) 415 407 -
Other income (expense) - net (192) 9 2 10 3,961 (950) 2,840
-------------------------------------------------------------------------------------------------- ------------
Income before income taxes 8,300 3,180 2,123 2,111 6,717 (9,543) 12,888
-------------------------------------------------------------------------------------------------- ------------
Income taxes 333 1,243 847 778 2,567 (847) 4,921
-------------------------------------------------------------------------------------------------- ------------
Net Income $ 7,967 $ 1,937 $ 1,276 $ 1,333 $ 4,150 $ (8,696) $ 7,967
================================================================================================== ============
Condensed Consolidating Statements of Income
For the Twelve Months Ended December 31, 1999
Parent PAC PacBell SWBell Other Adjs. Total
---------------------------------------------------------------------------------------------------- ----------
Total operating revenues $ - $ 11,727 $ 9,718 $ 11,173 $ 27,558 $ (10,645) $ 49,531
Total operating expenses (228) 8,861 7,459 8,358 21,869 (8,386) 37,933
---------------------------------------------------------------------------------------------------- ----------
Operating income 228 2,866 2,259 2,815 5,689 (2,259) 11,598
---------------------------------------------------------------------------------------------------- ----------
Interest expense 206 455 388 384 1,327 (1,330) 1,430
Equity in net income of affiliates 8,137 - - - 937 (8,162) 912
Other income (expense) - net 113 100 42 6 471 (959) (227)
---------------------------------------------------------------------------------------------------- ----------
Income before income taxes 8,272 2,511 1,913 2,437 5,770 (10,050) 10,853
---------------------------------------------------------------------------------------------------- ----------
Income taxes 106 990 752 896 2,288 (752) 4,280
---------------------------------------------------------------------------------------------------- ----------
Income before extraordinary items
and cumulative effect of
accounting change 8,166 1,521 1,161 1,541 3,482 (9,298) 6,573
---------------------------------------------------------------------------------------------------- ----------
Extraordinary items - - - - 1,379 - 1,379
Cumulative effect of accounting
change (7) (218) (1,010) (274) 706 1,010 207
---------------------------------------------------------------------------------------------------- ----------
Net Income $ 8,159 $ 1,303 $ 151 $ 1,267 $ 5,567 $ (8,288) $ 8,159
==================================================================================================== ==========
Condensed Consolidating Statements of Income
For the Twelve Months Ended December 31, 1998
Parent PAC PacBell SWBell Other Adjs. Total
---------------------------------------------------------------------------------------------------- ----------
Total operating revenues $ - $ 11,288 $ 9,406 $ 10,752 $ 25,189 $ (10,394) $ 46,241
Total operating expenses (135) 8,613 7,107 7,958 19,570 (8,095) 35,018
---------------------------------------------------------------------------------------------------- ----------
Operating income 135 2,675 2,299 2,794 5,619 (2,299) 11,223
---------------------------------------------------------------------------------------------------- ----------
Interest expense 359 504 426 374 1,107 (1,165) 1,605
Equity in net income of affiliates 7,371 - - - 616 (7,374) 613
Other income (expense) - net 624 (2) (1) (10) 2,011 (738) 1,884
---------------------------------------------------------------------------------------------------- ----------
Income before income taxes 7,771 2,169 1,872 2,410 7,139 (9,246) 12,115
---------------------------------------------------------------------------------------------------- ----------
Income taxes 81 896 734 883 2,520 (734) 4,380
Income before extraordinary items
and cumulative effect of
accounting change 7,690 1,273 1,138 1,527 4,619 (8,512) 7,735
---------------------------------------------------------------------------------------------------- ----------
Extraordinary items - (62) (61) - 2 61 (60)
Cumulative effect of accounting
change - - - - 15 - 15
---------------------------------------------------------------------------------------------------- ----------
Net Income $ 7,690 $ 1,211 $ 1,077 $ 1,527 $ 4,636 $ (8,451) $ 7,690
==================================================================================================== ==========
Condensed Consolidating Balance Sheets
December 31, 2000
Parent PAC PacBell SWBell Other Adjs. Total
---------------------------------------------------------------------------------------------------- ----------
Cash and cash equivalents $ 436 $ 5 $ 9 $ 52 $ 150 $ (9) $ 643
Accounts receivable - net 9,503 2,838 2,219 2,111 8,662 (15,189) 10,144
Other current assets 2,195 480 474 697 9,057 (474) 12,429
---------------------------------------------------------------------------------------------------- ----------
Total current assets 12,134 3,323 2,702 2,860 17,869 (15,672) 23,216
---------------------------------------------------------------------------------------------------- ----------
Property, plant and equipment - net 138 13,461 13,028 14,984 18,612 (13,028) 47,195
---------------------------------------------------------------------------------------------------- ----------
Intangible assets - net - - - - 5,475 - 5,475
---------------------------------------------------------------------------------------------------- ----------
Investments in equity affiliates 30,072 611 - - 14,952 (33,257) 12,378
---------------------------------------------------------------------------------------------------- ----------
Other assets 2,186 2,136 2,061 272 10,643 (6,911) 10,387
---------------------------------------------------------------------------------------------------- ----------
Total Assets $ 44,530 $ 19,531 $ 17,791 $ 18,116 $ 67,551 $ (68,868) $ 98,651
==================================================================================================== ==========
Debt maturing within one year $ 8,918 $ 1,214 $ 1,776 $ 2,648 $ 4,157 $ (8,243) $ 10,470
Other current liabilities 2,527 3,906 3,794 4,112 15,845 (10,297) 19,887
---------------------------------------------------------------------------------------------------- ----------
Total current liabilities 11,445 5,120 5,570 6,760 20,002 (18,540) 30,357
---------------------------------------------------------------------------------------------------- ----------
Long-term debt 568 4,353 4,293 3,976 11,445 (9,143) 15,492
---------------------------------------------------------------------------------------------------- ----------
Postemployment benefit obligation 83 3,000 2,817 2,993 3,691 (2,817) 9,767
---------------------------------------------------------------------------------------------------- ----------
Other noncurrent liabilities 1,971 1,686 1,536 1,314 6,601 (1,536) 11,572
---------------------------------------------------------------------------------------------------- ----------
Corporation-obligated mandatorily
redeemable preferred securities of
subsidiary trusts - 1,000 - - - - 1,000
---------------------------------------------------------------------------------------------------- ----------
Total shareowners' equity 30,463 4,372 3,575 3,073 25,812 (36,832) 30,463
---------------------------------------------------------------------------------------------------- ----------
Total Liabilities
and Shareowners' Equity $ 44,530 $ 19,531 $ 17,791 $ 18,116 $ 67,551 $ (68,868) $ 98,651
==================================================================================================== ==========
Condensed Consolidating Balance Sheets
December 31, 1999
Parent PAC PacBell SWBell Other Adjs. Total
---------------------------------------------------------------------------------------------------- ----------
Cash and cash equivalents $ 100 $ 13 $ 11 $ 49 $ 333 $ (11) $ 495
Accounts receivable - net 8,012 2,538 1,929 1,913 11,678 (16,692) 9,378
Other current assets 224 471 378 491 871 (378) 2,057
---------------------------------------------------------------------------------------------------- ----------
Total current assets 8,336 3,022 2,318 2,453 12,882 (17,081) 11,930
---------------------------------------------------------------------------------------------------- ----------
Property, plant and equipment - net 89 12,628 12,213 13,958 19,896 (12,213) 46,571
---------------------------------------------------------------------------------------------------- ----------
Intangible assets - net - 824 - - 5,972 - 6,796
---------------------------------------------------------------------------------------------------- ----------
Investments in equity affiliates 23,461 199 - - 13,125 (26,137) 10,648
---------------------------------------------------------------------------------------------------- ----------
Other assets 2,203 1,683 1,407 20 8,563 (6,606) 7,270
---------------------------------------------------------------------------------------------------- ----------
Total Assets $ 34,089 $ 18,356 $ 15,938 $ 16,431 $ 60,438 $ (62,037) $ 83,215
==================================================================================================== ==========
Debt maturing within one year $ 3,364 $ 1,869 $ 1,674 $ 2,086 $ 9,180 $ (14,799) $ 3,374
Other current liabilities 1,347 3,075 2,865 3,041 10,114 (4,503) 15,939
---------------------------------------------------------------------------------------------------- ----------
Total current liabilities 4,711 4,944 4,539 5,127 19,294 (19,302) 19,313
---------------------------------------------------------------------------------------------------- ----------
Long-term debt 685 4,551 4,491 4,211 13,201 (9,664) 17,475
---------------------------------------------------------------------------------------------------- ----------
Postemployment benefit obligation 111 2,888 2,703 3,049 3,564 (2,703) 9,612
---------------------------------------------------------------------------------------------------- ----------
Other noncurrent liabilities 1,856 1,845 1,486 1,143 4,271 (1,512) 9,089
---------------------------------------------------------------------------------------------------- ----------
Corporation-obligated mandatorily
redeemable preferred securities of
subsidiary trusts - 1,000 - - - - 1,000
---------------------------------------------------------------------------------------------------- ----------
Total shareowners' equity 26,726 3,128 2,719 2,901 20,108 (28,856) 26,726
---------------------------------------------------------------------------------------------------- ----------
Total Liabilities
and Shareowners' Equity $ 34,089 $ 18,356 $ 15,938 $ 16,431 $ 60,438 $ (62,037) $ 83,215
===================================================================================================== ==========
Condensed Consolidating Statements of Cash Flows
Twelve Months Ended December 31, 2000
Parent PAC PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------------------------------- ----------
Net cash from operating activities $ 4,008 $ 4,306 $ 3,196 $ 4,152 $ 3,914 $ (5,277) $ 14,299
Net cash from investing activities (4,309) (2,797) (2,679) (3,630) (4,081) 3,093 (14,403)
Net cash from financing activities 637 (1,517) (519) (519) (16) 2,186 252
----------------------------------------------------------------------------------------------------- ----------
Net Increase (Decrease) in Cash $ 336 $ (8)$ (2)$ 3 $ (183)$ 2 $ 148
===================================================================================================== ==========
Condensed Consolidating Statements of Cash Flows
Twelve Months Ended December 31, 1999
Parent PAC PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------------------------------- ----------
Net cash from operating activities $ 2,337 $ 3,212 $ 3,233 $ 4,393 $ 9,639 $ (6,236) $ 16,578
Net cash from investing activities (268) (2,787) (2,437) (2,882) (4,447) 2,244 (10,577)
Net cash from financing activities (2,283) (431) (799) (1,522) (5,065) 3,995 (6,105)
----------------------------------------------------------------------------------------------------- ----------
Net Increase (Decrease) in Cash $ (214)$ (6)$ (3)$ (11)$ 127 $ 3 $ (104)
===================================================================================================== ==========
Condensed Consolidating Statements of Cash Flows
Twelve Months Ended December 31, 1998
Parent PAC PacBell SWBell Other Adjs. Total
----------------------------------------------------------------------------------------------------- ----------
Net cash from operating activities $ 1,707 $ 3,023 $ 2,443 $ 3,126 $ 4,589 $ (1,907) $ 12,981
Net cash from investing activities 563 (2,420) (2,140) (2,566) (5,029) 2,423 (9,169)
Net cash from financing activities (2,166) (631) (332) (579) 333 (487) (3,862)
----------------------------------------------------------------------------------------------------- ----------
Net Increase (Decrease) in Cash $ 104 $ (28)$ (29)$ (19)$ (107)$ 29 $ (50)
===================================================================================================== ==========
Note 4.
Earnings Per Share
| |
A
reconciliation of the numerators and denominators of basic earnings per share
and diluted earnings per share for income before extraordinary items and
cumulative effect of accounting change for the years ended
December 31, 2000, 1999 and 1998 are shown in the table below: |
-------------------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
-------------------------------------------------------------------------------------------
Numerators
Numerator for basic earnings per share:
Income before extraordinary items and
cumulative effect of accounting change $ 7,967 $ 6,573 $ 7,735
Dilutive potential common shares:
Other stock-based compensation 6 4 4
-------------------------------------------------------------------------------------------
Numerator for diluted earnings per share $ 7,973 $ 6,577 $ 7,739
===========================================================================================
Denominators
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding (000,000) 3,392 3,409 3,406
Dilutive potential common shares (000,000):
Stock options 33 42 38
Other stock-based compensation 8 7 6
-------------------------------------------------------------------------------------------
Denominator for diluted earnings per share 3,433 3,458 3,450
===========================================================================================
Basic earnings per share
Income before extraordinary items and
cumulative effect of accounting change $ 2.35 $ 1.93 $ 2.27
Extraordinary items - 0.40 (0.02)
Cumulative effect of accounting change - 0.06 0.01
-------------------------------------------------------------------------------------------
Net income $ 2.35 $ 2.39 $ 2.26
===========================================================================================
Diluted earnings per share
Income before extraordinary items and
cumulative effect of accounting change $ 2.32 $ 1.90 $ 2.24
Extraordinary items - 0.40 (0.02)
Cumulative effect of accounting change - 0.06 0.01
-------------------------------------------------------------------------------------------
Net income $ 2.32 $ 2.36 $ 2.23
===========================================================================================
Note 5.
Property, Plant and Equipment
| |
Property,
plant and equipment is summarized as follows at December 31: |
--------------------------------------------------------------------------- ------------
Lives (years) 2000 1999
--------------------------------------------------------------------------- ------------
Land - $ 592 $ 589
Buildings 35-45 9,864 10,284
Central office equipment 3-10 47,094 43,335
Cable, wiring and conduit 10-50 47,143 48,785
Other equipment 5-15 10,529 10,455
Software 3 1,438 786
Under construction - 3,093 2,098
--------------------------------------------------------------------------- ------------
119,753 116,332
--------------------------------------------------------------------------- ------------
Accumulated depreciation and amortization 72,558 69,761
--------------------------------------------------------------------------- ------------
Accumulated depreciation and amortization 72,558 69,761
--------------------------------------------------------------------------- ------------
Property, plant and equipment - net $ 47,195 $ 46,571
========================================================================================
| |
Our
depreciation expense was $8,480, $8,175 and $7,566 for 2000, 1999 and
1998. |
| |
Certain
facilities and equipment used in operations are leased under operating or
capital leases. Rental expenses under operating leases for 2000, 1999 and 1998
were $755, $707 and $683. At December 31, 2000, the future minimum
rental payments under noncancelable operating leases for the years 2001 through
2005 were $393, $350, $275, $288 and $169 with $479 due thereafter. Capital
leases are not significant. |
Note 6.
Investment in Cingular Wireless
| |
In
October 2000, SBC and BellSouth Corporation (BellSouth) began contributions of
their wireless properties and formally began operations of their wireless joint
venture, Cingular, formed in April 2000. Cingular serves approximately 19
million customers, is the second-largest wireless operator in the United States,
and has approximately 190 million potential customers in 38 states, the District
of Columbia, Puerto Rico and the United States Virgin Islands. Economic
ownership in Cingular is held 60% by SBC and 40% by BellSouth, with control
shared equally. Cingular is managed jointly with a four-seat board of directors
(two seats from each company). We are accounting for our investment under the
equity method of accounting. The contributions to Cingular were made after we
received the approval of the United States Department of Justice and the FCC. |
| |
The following table is a reconciliation of our investment in Cingular: |
--------------------------------------------------------
2000
--------------------------------------------------------
Beginning of year $ -
Contributions 2,688
Equity in net income 80
--------------------------------------------------------
End of year $ 2,768
========================================================
| |
Undistributed earnings from Cingular were $80 at December 31, 2000. |
| |
Our
initial contributions to Cingular included the assets and liabilities of the
wireless operations contributed, totaling a net asset contribution of $2,688.
Included in these amounts were approximately $9,400 payable to SBC and $2,500
receivable from SBC, amounts which were previously eliminated in the
consolidation process. The notes receivable from Cingular are shown separately
in the consolidated balance sheets; their payment is expected in conjunction
with Cingular obtaining alternative financing. The payables to Cingular are
included in accounts payable and accrued liabilities as shown in Note 18. |
| |
In
August 2000, we announced a definitive agreement under which we will grant the
exclusive right to lease 3,900 communication towers to SpectraSite
Communications Inc. (SpectraSite), plus an estimated 800 new towers under a
five-year exclusive build-to-suit agreement, for a total of at least 4,700
towers. As part of the agreement, SpectraSite has committed to sublease space on
the towers to Cingular under terms similar to Cingular’s current lease from
us. As of December 31, 2000, we have closed on 739 towers. |
| |
We
continue to employ approximately 15,000 wireless employees, incurring costs for
their salaries and related benefits. We have entered into a services contract
with Cingular under which these employees provide services to Cingular, and we
bill Cingular for these costs. For the fourth quarter of 2000, we billed
Cingular approximately $117 for these employee-related costs. |
| |
In
addition, our wireline operations have historically recorded network access
revenue from interconnection agreements with our wireless properties, which was
eliminated in the consolidation process. For operations contributed to Cingular,
this network access revenue is no longer eliminated. During the fourth quarter
of 2000, the incremental amount of network access revenue from Cingular, which
was previously eliminated, was approximately $37. |
| |
At
December 31, 2000, we had accounts receivable from Cingular of $134, accounts
payable to Cingular of $3,072 and notes receivable from Cingular of $9,568 with
an interest rate of 7.5%, which includes a net interest receivable of $159.
Included in the accounts payable to Cingular is approximately $558 for
properties we committed to contribute to Cingular at a future date. |
| |
The following table presents summarized financial information for Cingular at December 31, or for
the three months then ended: |
----------------------------------------------------------
Income Statement 2000
----------------------------------------------------------
Operating revenues $ 3,060
Operating income 381
Net income 127
==========================================================
Balance Sheet
----------------------------------------------------------
Current assets $ 2,343
Noncurrent assets 15,575
Current liabilities 3,467
Noncurrent liabilities 12,000
==========================================================
Note 7. Other
Equity Investments
| |
Investments
in equity affiliates are accounted for under the equity method and include the
June 1999 purchase of a 20% interest in Bell Canada, the largest supplier of
telecommunications services in Canada, and a 41.6% interest in Tele Danmark A.S.
(Tele Danmark), the national communications provider in Denmark (see Note 15).
SBC currently is able to elect six of twelve members of the Tele Danmark Board
of Directors, including the Chairman, who would cast any tie-breaking vote. |
| |
In
November 2000, Tele Danmark signed agreements to increase its investment in
Sunrise, a Swiss landline and Internet operator, and to purchase a 70% stake in
diAx A.G. (diAx), a Swiss mobile and landline operator, with the intent of
consolidating its Swiss operations by subsequently merging diAx with Sunrise. As
part of this transaction, Tele Danmark will obtain our 40% interest in diAx and
we will receive 1,200 million Swiss francs (approximately $783) in cash and
notes. The transaction received regulatory approval and closed in January 2001.
Due to the nature of our investment in Tele Danmark, we will account for the
consideration received as a dividend from an equity investee. |
| |
Investments
in equity affiliates also include our investment in Teléfonos de
México, S.A. de C.V. (Telmex), Mexico’s national telecommunications
company. We are a member of a consortium that holds all of the AA shares of
Telmex stock, representing voting control of the company. Another member of the
consortium, Carso Global Telecom, S.A. de C.V., has the right to appoint a
majority of the directors of Telmex. In 1999 and through the third quarter of
2000, we also owned class L shares, which have limited voting rights. Throughout
1999 and the first seven months of 2000, we sold portions of our class L shares
in response to open market share repurchases by Telmex, so that our total equity
investment remained below 10% of Telmex’s total equity capitalization. In
September of 2000, we sold the remainder of our class L shares in conjunction
with the purchase of a note receivable with characteristics that will
essentially offset future mark to market adjustments on our Debt Exchangeable
for Common Stock (DECS), which are redeemable in either L shares or cash upon
maturity in 2001. At December 31, 2000 and 1999, we held an approximate 7.6% and
8.9% equity interest in Telmex. |
| |
In
September 2000, Telmex announced the spinoff of its cellular business and most
of its international investments, into a new company called América
Móvil S.A. de C.V. (America Movil). Telmex shareholders received an
equivalent number of America Movil shares upon commencement of trading, which
occurred in February 2001. As a result, we have an approximate 7.6% equity
interest in America Movil. |
| |
Other
major equity investments that we hold include a 17.5% interest in Belgacom S.A.
(Belgacom), the national communications provider in Belgium, an 18% interest in
Telkom S.A. Limited (Telkom), the state-owned telecommunications company of
South Africa, a 43.6% interest in TransAsia, a Taiwanese wireless company, and a
15% interest in Cegetel S.A., a joint venture providing a broad range of
telecommunications offerings in France. Tele Danmark also holds a 16.5% interest
in Belgacom. |
| |
In the third quarter of 2000, we exercised our rights to sell our interest in MATAV, a Hungarian
telecommunications company, and our interest in Netcom GSM, a wireless telecommunications provider in
Norway (see Note 15). |
| |
In
January 2000, we purchased a 25% investment in ATL - Algar Telecom Leste S.A.
(ATL), a Brazilian telecommunications company. In the fourth quarter of 2000, we
closed an agreement with America Movil and Bell Canada International to form a
new, facilities-based communications company, Telecom Américas Ltd.
(Telecom Americas), which will serve as the three companies’ principal
vehicle for expansion in Latin America. We obtained an 11.4% stake in Telecom
Americas by contributing our investment in ATL. Our investment in Telecom
Americas will be accounted for under the cost method of accounting. As a result
of the transaction, we recognized a direct gain of approximately $179 ($116 net
of tax). |
| |
The
following table is a reconciliation of our investments in equity affiliates other than Cingular: |
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------
Beginning of year $ 10,648 $ 7,412 $ 4,453
Additional investments 783 3,702 3,159
Equity in net income 817 912 613
Dividends received (376) (445) (344)
Currency translation adjustments (849) (707) 169
Dispositions and other adjustments (1,413) (226) (638)
-------------------------------------------------------------------------------------
End of year $ 9,610 $ 10,648 $ 7,412
=====================================================================================
| |
The
currency translation adjustment for 2000 primarily reflects the effect of
exchange rate fluctuations on our investments in Tele Danmark, Telmex, Telkom
and Bell Canada. Dispositions and other adjustments for 2000 reflect the sale of
Telmex L shares, the sale of our investment in MATÁV and the contribution
of ATL to Telecom Americas. |
| |
The
currency translation adjustment for 1999 primarily reflects the effect of
exchange rate fluctuations on our investments in Tele Danmark and Belgacom.
Dispositions and other adjustments for 1999 reflect the sale of portions of
Telmex L shares and the sale of our investment in Chile. |
| |
The
currency translation adjustment for 1998 primarily reflects the effect of
exchange rate fluctuations on our investment in Tele Danmark partially offset by
exchange rate fluctuations on our investment in Telkom. Dispositions and other
adjustments for 1998 reflect the sale of Telecom Corporation of New Zealand
Limited (TCNZ) shares, a write-down of an international investment and the sale
of portions of Telmex L shares. |
| |
Undistributed
earnings from equity affiliates were $2,060 and $1,788 at December 31, 2000 and 1999. |
| |
The
following table presents summarized financial information of significant
international investments accounted for using the equity method taking into
account all adjustments necessary to conform to GAAP, but excluding our purchase
adjustments including goodwill, at December 31, or for the year then ended: |
---------------------------------------------------------------------------------
Income Statements 2000 1999 1998
---------------------------------------------------------------------------------
Operating revenues $ 40,190 $ 32,776 $ 24,232
Operating income 11,911 8,941 6,383
Net income 5,714 4,892 3,515
=================================================================================
Balance Sheets
---------------------------------------------------------------------------------
Current assets $ 17,092 $ 13,961
Noncurrent assets 37,052 40,616
Current liabilities 16,490 13,395
Noncurrent liabilities 25,318 23,376
=================================================================================
| |
At
December 31, 2000, we had goodwill, net of accumulated amortization of
approximately $5,265 related to investments in equity affiliates. Based on the
December 31, 2000, quoted market price, the aggregate market value of our
investment in Tele Danmark was approximately $3,700. The fair value of our
investment in Telmex, based on the equivalent value of Telmex L shares, at
December 31, 2000, was approximately $2,400. Our weighted average
share of operating revenues shown above was 17% in 2000 and 19% in 1999 and
1998. |
Note 8.
Segment Information
| |
Our
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. Transactions among
segments are reported at fair value and the accounting policies of the segments
are the same as those described in Note 1. |
| |
As
a result of the reorganization of management in the fourth quarter of 2000, we
have adjusted our segment reporting structure. We now have five reportable
segments that reflect the current management of our business: wireline,
wireless, directory, international and other. Directory, which was formerly
included in the information and entertainment segment, is now a stand-alone
segment. SecurityLink and Ameritech’s cable television operations, which
were formerly included in the information and entertainment segment, as well as
Ameritech’s paging operations, which were formerly included in the wireless
segment, and all corporate operations, which were formerly included in
corporate, adjustments, and eliminations have been moved to the other segment. |
| |
The
wireline segment provides landline telecommunications services, including local,
network access and long distance services, messaging and Internet services and
sells customer premise and private business exchange equipment. |
| |
Prior
to the fourth quarter of 2000, the wireless segment included our consolidated
businesses that provided wireless telecommunications services and sold wireless
equipment. In October 2000, we contributed substantially all of our wireless
businesses to Cingular and began reporting results from Cingular’s
operations as equity income in the consolidated financial statements (see Note
6). 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 of SBC including yellow and
white pages advertising and electronic publishing. All investments with
primarily international operations are included in the international segment.
Included in the other segment are differences in accounting between subsidiaries
and consolidated financial statements for pension and postretirement benefits
and the treatment of conforming accounting adjustments arising out of the
pooling of interests transactions with Ameritech, SNET and PAC that were
required to be treated as cumulative effect of accounting changes by the
subsidiaries. |
| |
Normalized results for 2000 exclude the following items: |
- Gains of $1,886 ($1,248 net of tax) related to the sale of direct and indirect
investments in MATÁV and Netcom GSM, two international equity affiliates,
and from the contribution of our investment in ATL to Telecom Americas.
- Gains of $238 ($155 net of tax) on the sale of Telmex L shares associated with
our private purchase of a note receivable with characteristics that will
essentially offset future mark to market adjustments on DECS.
- Pension settlement gains of $512 ($328 net of tax) associated with pension
litigation, first quarter payments primarily related to employees who terminated
employment during 1999 and gains resulting from a voluntary retirement program
net of enhanced pension and postretirement benefits associated with that program
(see Note 12).
- Costs of $1,205 ($800 net of tax) associated with strategic initiatives and
other adjustments resulting from the merger integration process with Ameritech.
- A charge of $132 (with no tax effect) related to in-process research and
development from the March 2000 acquisition of Sterling Commerce, Inc.
(Sterling) (see Note 15).
- Combined charges of $971 ($677 net of tax) related to valuation adjustments of
SecurityLink and certain cost investments accounted for under Financial
Accounting Standards Board Statement No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” (FAS 115), and the restructure
of agreements with Prodigy Communications Corporation (Prodigy), including the
extension of a credit facility and recognition of previously unrecognized equity
losses from our investment (see Note 16).
- Gains of $359 ($99 net of tax) primarily related to our required disposition of
overlapping wireless properties in connection with our contribution of
operations to Cingular.
| |
Normalized results for 1999 exclude the following items: |
- Charges totaling $1,766 ($1,457 net of tax) including, recognition of impairment
of long-lived assets, adjustments to the estimate of allowance for doubtful
accounts, estimation of deferred taxes on international investments, wireless
conversion costs and other items (see Note 2).
- Elimination of income of $197 ($119 net of tax) from the incremental impacts of
overlapping wireless properties sold in October 1999 related to the Ameritech
merger.
- Pension settlement gains of $566 ($368 net of tax) associated with lump sum
pension payments that exceeded the projected service and interest costs.
- Gains of $131 ($77 net of tax) recognized from the sale of property by an
international equity affiliate.
- A reduction of $45 ($27 net of tax) related to a portion of a first quarter 1998
charge to cover the cost of consolidating security monitoring centers and
company-owned wireless retail stores.
| |
Normalized results for 1998 exclude the following items: |
- Gain of $1,543 ($1,012 net of tax) from the sale of TCNZ shares.
- Charges of $433 ($268 net of tax) related to strategic initiatives resulting
from the merger integration process with SNET.
- Gains of $358 ($219 net of tax) from the sale of certain non-core businesses,
principally the required disposition of our investment in MTN, a cellular
company in South Africa.
- Elimination of income of $221 ($123 net of tax) from the incremental impacts of
overlapping wireless properties sold in October 1999 related to the Ameritech
merger.
- Gains of $170 ($102 net of tax) from the sale of certain telephone and directory assets.
- Charges of $104 ($64 net of tax) to cover the cost of consolidating security monitoring centers and
company-owned wireless retail stores.
Segment results, including
a reconciliation to SBC consolidated results, for 2000, 1999 and 1998 are as
follows:
------------------------------------------------------------------------------------------------------------------------------------------------------
Cingular De- Normalizing
At December 31, 2000 or for the year ended Wireline Wireless Directory International Other consolidation Eliminations Adjustments Total
------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 39,789 $ 7,941 $ 4,251 $ 320 $ 1,034 $ (1,836) $ - $ (23) $ 51,476
Intersegment revenues 187 1 89 8 86 - (371) - -
Depreciation and amortization 7,656 1,086 32 17 560 (253) - 650 9,748
Equity in net income of affiliates (12) 12 - 862 (1) 72 - (36) 897
Interest expense 1,240 424 4 174 898 (139) (1,009) - 1,592
Income before income taxes 7,192 975 2,361 930 743 2 - 685 12,888
Segment assets 64,565 12,475 2,808 12,282 58,315 (10,751) (41,043) - 98,651
Investment in equity method investees 23 232 20 9,394 2,749 (40) - - 12,378
Expenditures for additions to 11,293 856 35 - 940 - - - 13,124
long-lived assets
======================================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------------------------
Cingular De- Normalizing
At December 31, 1999 or for the year ended Wireline Wireless Directory International Other consolidation Eliminations Adjustments Total
------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 37,108 $ 6,624 $ 4,045 $ 242 $ 983 $ - $ - $ 529 $ 49,531
Intersegment revenues 322 1 81 13 97 - (514) - -
Depreciation and amortization 6,825 918 33 17 345 - - 415 8,553
Equity in net income of affiliates (2) 42 - 739 2 - - 131 912
Interest expense 1,188 226 9 235 702 - (942) 12 1,430
Income before income taxes 8,046 883 2,011 702 39 - - (828) 10,853
Segment assets 53,692 11,559 2,422 12,613 44,815 - (41,886) - 83,215
Investment in equity method investees 31 216 48 10,372 (19) - - - 10,648
Expenditures for additions to 8,754 988 52 1 509 - - - 10,304
long-lived assets
======================================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------------------------
Cingular De- Normalizing
At December 31, 1998 or for the year ended Wireline Wireless Directory International Other consolidation Eliminations Adjustments Total
------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 35,059 $ 5,475 $ 3,680 $ 132 $ 1,011 $ - - $ 884 $ 46,241
Intersegment revenues 305 1 73 17 126 - (522) - -
Depreciation and amortization 6,437 680 36 18 345 - - 325 7,841
Equity in net income of affiliates (5) 25 - 588 5 - - - 613
Interest expense 1,250 189 9 213 662 - (739) 21 1,605
Income before income taxes 7,315 545 1,797 453 250 - - 1,755 12,115
Segment assets 50,921 9,124 2,065 11,230 38,385 - (36,759) - 74,966
Investment in equity method investees 47 244 34 7,106 (19) - - - 7,412
Expenditures for additions to 7,471 978 35 13 385 - - - 8,882
long-lived assets
======================================================================================================================================================
Geographic
Information
| |
SBC’s
investments outside of the United States are primarily accounted for under the
equity method of accounting, and accordingly, we do not include in our operating
revenues and expenses, the revenues and expenses of our individual investees.
Specifically, less than 1% of total operating revenues for all years presented
are from outside the United States. |
| |
Long-lived
assets consist primarily of net property, plant and equipment, net goodwill and
the book value of our equity investees and are shown in the table below: |
---------------------------------------------------------
December 31, 2000 1999
---------------------------------------------------------
United States $ 53,885 $ 48,924
Canada 3,593 3,770
Denmark 3,024 3,019
Mexico 738 906
Belgium 861 831
South Africa 596 708
Hungary - 532
France 406 459
Other foreign countries 189 129
---------------------------------------------------------
Total $ 63,292 $ 59,278
=========================================================
Note 9. Debt
| |
Long-term debt of SBC and its subsidiaries, including interest rates and maturities, is
summarized as follows at December 31: |
--------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------------
Notes and debentures
4.38% - 6.00% 2000 - 2008 1 $ 2,831 $ 3,056
6.03% - 7.85% 2000 - 2048 2 14,584 13,990
8.00% - 10.50% 2000 - 2031 556 577
--------------------------------------------------------------------------------------------
17,971 17,623
Unamortized discount - net of premium 51 236
--------------------------------------------------------------------------------------------
Total notes and debentures 18,022 17,859
--------------------------------------------------------------------------------------------
Guaranteed obligations of ESOP 3
8.10% - 9.40% 2000 - 88
Capitalized leases 84 258
--------------------------------------------------------------------------------------------
Total long-term debt, including current maturities 18,106 18,205
Current maturities (2,614) (730)
--------------------------------------------------------------------------------------------
Total long-term debt $ 15,492 $ 17,475
============================================================================================
- Includes $250 of 5.9% debentures maturing in 2038 with a put option by holder in 2005.
- Includes $125 of 6.35% debentures maturing in 2026 with a put option by holder in 2006.
- See Note 13.
| |
At December 31, 2000, the aggregate principal amounts of long-term debt and weighted average interest
rate scheduled for repayment for the years 2001 through 2005 were $2,614 (6.7%), $1,089 (6.6%), $1,678
(6.0%), $1,097 (6.5%) and $1,158 (6.9%) with $10,419 (6.9%) due thereafter. As of December 31, 2000, we
were in compliance with all covenants and conditions of instruments governing our debt. Substantially
all of our outstanding long-term debt is unsecured. |
| |
In January 2000, we voluntarily guaranteed existing publicly, but unlisted, issued debt securities issued
by Ameritech Capital Funding Corporation, Illinois Bell Telephone Company, Indiana Bell Telephone
Company, Inc., Michigan Bell Telephone Company, The Ohio Bell Telephone Company, PacBell, SNET, The
Southern New England Telephone Company, SWBell and Wisconsin Bell, Inc. Each guarantee will apply as
long as the individual company remains a wholly owned subsidiary of SBC. |
| |
Financing Activities - In May 2000, we issued $1,000 in notes through private placement. These notes
have a 6.72% interest rate and will mature May 2001. In April 2000, we issued notes for $1,015 with an
interest rate of 6.33% that also mature in May 2001. |
| |
In December 1999, we called approximately $31 of debt that was scheduled to mature in December 2004. The
net income effect of retiring this debt did not materially impact our financial statements. During 1999,
subsequent to the completion of the acquisitions of Comcast Cellular Corporation (Comcast) and Cellular
Communications of Puerto Rico, Inc. (Cellular Communications), we retired $1,415 of Comcast's and
Cellular Communications' long-term debt with no effect on net income. In May 1999, we issued $750 of
6.25% unsecured Eurodollar notes, due May 2009. |
| |
In 1998, we issued approximately $2,150 in notes and debentures. The notes and debentures bear interest
rates ranging from 5.65% to 6.88% and mature between 2001 and 2048. Also, in 1998, we issued $750 of
5.88% unsecured Eurodollar notes, due February 2003. We used proceeds from these borrowings primarily to
fund our investment in Tele Danmark. |
| |
Debt maturing within one year consists of the following at December 31: |
--------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------
Commercial paper $ 6,437 $ 2,623
Current maturities of long-term debt 2,614 730
Other short-term debt 1,419 21
--------------------------------------------------------------------------------------
Total $ 10,470 $ 3,374
======================================================================================
| |
The
weighted average interest rate on commercial paper debt at December 31,
2000 and 1999 was 6.51% and 5.72%. We have entered into agreements with several
banks for committed lines of credit totaling $4,200, all of which may be used to
support commercial paper borrowings. We had no borrowings outstanding under
these lines of credit as of December 31, 2000 or 1999. |
Note 10.
Financial Instruments
| |
The
carrying amounts and estimated fair values of our long-term debt, including
current maturities and other financial instruments, are summarized as follows at
December 31: |
---------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------------
Notes and debentures $ 18,022 $ 17,592 $ 17,859 $ 17,086
TOPrS 1,000 990 1,000 924
Preferred stock of subsidiaries 820 820 820 820
Guaranteed obligations of ESOP 1 - - 88 94
=============================================================================================
- See Note 13.
| |
The
fair values of our notes and debentures, including ESOP obligations, were
estimated based on quoted market prices, where available, or on the net present
value method of expected future cash flows using current interest rates. The
fair value of the Trust Originated Preferred Securities (TOPrS) was estimated
based on quoted market prices. The carrying amounts of preferred stock of
subsidiaries and commercial paper debt approximate fair values. Our short-term
investments and customer deposits are recorded at amortized cost and the
carrying amounts approximate fair values. |
| |
Preferred
Stock Issuances by Subsidiaries - In April 1998, a subsidiary issued,
through private placement, 3,250 shares in multiple series of stated rate
auction preferred stock (STRAPS). Net proceeds from these issuances totaled
$322. Dividends accrue on the STRAPS at varying rates, which are adjusted
periodically through separate auctions on each series. Dividends are cumulative
from the date of issuance. The dividend rates for each series ranged from 4.88%
to 4.98% as of December 31, 2000. |
| |
In
June 1997 and December 1999, a subsidiary issued $250 and $100 of preferred
stock in private placements. The holders of the preferred stock may require
SBC’s subsidiary to redeem the shares after May 20, 2004. Holders receive
quarterly dividends based on a rolling three-month London Interbank Offer Rate
(LIBOR). The dividend rate for the December 31, 2000 payment was
7.59%. |
| |
As
of December 31, 2000, a subsidiary has outstanding $85 of Series A Preferred
Stock (7.04%, subject to mandatory redemption in 2001) and $60 of Series B
Preferred Stock (variable rate, 4.98% as of December 31, 2000, not subject to
mandatory redemption). |
| |
The preferred stock of subsidiaries discussed above is included in other noncurrent liabilities on the
consolidated balance sheets. |
| |
Pacific
Telesis Financing I and II (the Trusts) were formed in 1996 for the exclusive
purpose of issuing preferred and common securities representing undivided
beneficial interests in the Trusts and investing the proceeds from the sales of
TOPrS in unsecured subordinated debt securities of PAC. Under certain
circumstances, dividends on TOPrS could be deferred for up to a period of five
years. As of December 31, 2000, the Trusts held subordinated debt
securities of PAC in principal amounts of $516 and $514 with interest rates of
7.56% and 8.50%. The TOPrS are priced at $25 per share, have an original
30-year maturity that may be extended up to 49 years, are callable in 2001
at par and are included on the balance sheets as corporation-obligated
mandatorily redeemable preferred securities of subsidiary trusts. The proceeds
were used to retire short-term indebtedness, primarily commercial paper. SBC has
guaranteed payment of the obligations of the TOPrS. We redeemed approximately
$500 of the TOPrS with an interest rate of 7.56% in February of 2001. |
| |
Derivatives
- We enter into foreign currency contracts to hedge exposure to adverse exchange
rate fluctuations. We also use interest rate swaps to manage interest rate risk.
Related gains and losses are reflected in net income. The carrying amounts and
estimated fair values of our derivative financial instruments are summarized as
follows at December 31: |
---------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------
Carrying/ Carrying/
Notional Fair Notional Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------------
Foreign exchange contracts - long $ - $ - $ - $ 142
Foreign exchange contracts - short 11 - - -
Interest rate swaps 1,020 4 1,180 (14)
=============================================================================================
| |
Prior
to its merger with an SBC subsidiary, PAC issued stock options to its employees
during a spinoff of certain wireless properties. Some of these options were
still outstanding when PAC merged with an SBC subsidiary in 1997 (see Note 13).
SBC had used equity swaps to hedge the equity
price risk related to these spunoff operations’ employee stock options.
However, in 1999 we evaluated the related risk level and exited all of our
related equity swap contracts, receiving cash for the appreciated value of the
contracts and recognizing a minimal gain. |
Note 11.
Income Taxes
| |
Significant components of our deferred tax liabilities and assets are as follows at December 31: |
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
Depreciation and amortization $ 7,683 $ 6,865
Equity in foreign affiliates 789 540
Deferred directory expenses 533 524
Other 1,794 1,254
--------------------------------------------------------------------------------
Deferred tax liabilities 10,799 9,183
--------------------------------------------------------------------------------
Employee benefits 2,069 2,418
Currency translation adjustments 698 586
Allowance for uncollectibles 205 222
Unamortized investment tax credits 122 147
Other 2,052 1,850
--------------------------------------------------------------------------------
Deferred tax assets 5,146 5,223
--------------------------------------------------------------------------------
Deferred tax assets valuation allowance 156 99
--------------------------------------------------------------------------------
Net deferred tax liabilities $ 5,809 $ 4,059
================================================================================
| |
The
increase in the valuation allowance is the result of an evaluation of the
uncertainty associated with the realization of certain deferred tax assets. The
valuation allowance is maintained in deferred tax assets for certain unused
federal and state loss carryforwards. |
| |
The components of income tax expense are as follows: |
---------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------
Federal:
Current $ 3,249 $ 2,883 $ 3,151
Deferred - net 1,051 814 671
Amortization of investment tax credits (71) (85) (96)
---------------------------------------------------------------------------------------------
4,229 3,612 3,726
---------------------------------------------------------------------------------------------
State and local:
Current 575 421 485
Deferred - net 113 247 169
Foreign 4 - -
---------------------------------------------------------------------------------------------
692 668 654
---------------------------------------------------------------------------------------------
Total $ 4,921 $ 4,280 $ 4,380
=============================================================================================
| |
A
reconciliation of income tax expense and the amount computed by applying the
statutory federal income tax rate (35%) to income before income taxes,
extraordinary items and cumulative effect of accounting change is as follows: |
----------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------
Taxes computed at federal statutory rate $ 4,511 $ 3,798 $ 4,240
Increases (decreases) in income taxes resulting from:
Amortization of investment tax credits over the life of the plant
that gave rise to the credits (46) (55) (62)
State and local income taxes - net of federal income tax benefit 450 440 424
Other - net 6 97 (222)
----------------------------------------------------------------------------------------------------
Total $ 4,921 $ 4,280 $ 4,380
====================================================================================================
Note 12. Employee Benefits
| |
Pensions
- Substantially all of our employees are covered by one of various
noncontributory pension and death benefit plans. Management employees
participate in either cash balance or defined lump sum pension plans. The
pension benefit formula for most nonmanagement employees is based on a flat
dollar amount per year according to job classification. Most employees can elect
to receive their pension benefits in either a lump sum payment or annuity. |
| |
Our
objective in funding the plans, in combination with the standards of the
Employee Retirement Income Security Act of 1974 (as amended), is to accumulate
funds sufficient to meet its benefit obligations to employees upon their
retirement. Contributions to the plans are made to a trust for the benefit of
plan participants. Plan assets consist primarily of stocks, U.S. government and
domestic corporate bonds, index funds and real estate. |
| |
Effective
with the Ameritech merger, we performed a midyear valuation for all pension
plans in 1999. The amounts that follow reflect the impacts and assumptions of
the midyear valuation. |
| |
The following table presents the change in the pension plan benefit obligation for the years ended
December 31: |
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
Benefit obligation at beginning of year $ 25,685 $ 27,528
Service cost - benefits earned during the period 525 584
Interest cost on projected benefit obligation 1,927 1,831
Amendments 425 460
Actuarial (gain)/loss 940 (1,121)
Special termination benefits 1,104 32
Benefits paid (5,029) (3,629)
----------------------------------------------------------------------------
Benefit obligation at end of year $ 25,577 $ 25,685
============================================================================
| |
The
following table presents the change in pension plan assets for the years ended
December 31 and the pension plans’ funded status at December 31: |
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 45,958 $ 41,794
Actual return on plan assets 95 8,065
Benefits paid (5,239) (3,901)
----------------------------------------------------------------------------
Fair value of plan assets at end of year 1 $ 40,814 $ 45,958
============================================================================
Funded status $ 15,237 $ 20,273
Unrecognized prior service cost 1,963 1,898
Unrecognized net gain (11,395) (17,926)
Unamortized transition asset (683) (1,036)
----------------------------------------------------------------------------
Prepaid pension cost $ 5,122 $ 3,209
============================================================================
| | 1 Plan assets include SBC common stock of $18 at December 31, 2000, and $34
at December 31, 1999. |
| | The following table presents amounts recognized in our consolidated balance sheets at December 31: |
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
Prepaid pension cost $ 5,122 $ 3,539
Accrued pension liability - (330)
----------------------------------------------------------------------------
Net amount recognized $ 5,122 $ 3,209
============================================================================
| |
Net pension benefit is composed of the following: |
-----------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 525 $ 584 $ 548
Interest cost on projected benefit obligation 1,927 1,831 1,813
Expected return on plan assets (3,149) (2,951) (2,722)
Amortization of prior service cost 43 (35) (57)
Recognized actuarial gain (491) (273) (161)
-----------------------------------------------------------------------------------------
Net pension benefit $ (1,145) $ (844) $ (579)
=========================================================================================
| | Significant weighted-average assumptions used in developing pension information include: |
---------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------
Discount rate for determining projected benefit obligation 7.75% 7.75% 7.0%
Long-term rate of return on plan assets 8.50% 8.50% 8.5%
Composite rate of compensation increase 4.25% 4.25% 4.2%
=============================================================================================
| |
The
projected benefit obligation is the actuarial present value of all benefits
attributed by the pension benefit formula to previously rendered employee
service. It is measured based on assumptions concerning future interest rates
and employee compensation levels. Should actual experience differ from the
actuarial assumptions, the benefit obligation will be affected. |
| |
In
October 2000, we implemented a voluntary enhanced pension and retirement program
(EPR) to reduce the number of management employees. The program offered eligible
management employees who decided to terminate employment an enhanced pension
benefit and increased eligibility for post-retirement medical and dental
benefits. Enhanced pension benefits related to this program were recognized as
an expense of $1.1 billion in 2000. Approximately 7,000 of the employees who
accepted this offer terminated employment before December 31, 2000; however,
under the program, approximately 2,400 employees were retained for up to one
year. Lump sum payments for settlement of pension balances, which are paid by
the pension trusts, are expected to occur throughout 2001. We recognized $896 in
net settlement and curtailment gains in the fourth quarter of 2000 associated
with the EPR program. |
| |
In
addition to the net pension benefit and EPR related amounts reported above, we
recognized $1.2 billion in net settlement gains in 2000 and $566 in 1999. In
addition to payments made for EPR, there were a significant amount of lump sum
pension payments that caused a partial settlement of Ameritech’s pension
plans. We anticipate that additional lump sum payments will require the
recognition of additional settlement gains in 2001. |
| |
In
December 2000 and December 1999, under the provisions of Section 420 of the
Internal Revenue Code, we transferred $220 and $280 in pension assets to a
health care benefit account for the reimbursement of certain retiree health care
benefits paid by us. |
| |
Supplemental
Retirement Plans - We also provide senior and middle management employees
with nonqualified, unfunded supplemental retirement and savings plans. These
plans include supplemental defined pension benefits as well as compensation
deferral plans, some of which include a corresponding match by us based on a
percentage of the compensation deferral. Expenses related to these plans were
$191, $146 and $114 in 2000, 1999 and 1998. Liabilities of $1,283 and $1,287
related to these plans have been included in other noncurrent liabilities in our
consolidated balance sheets at December 31, 2000 and 1999. |
| |
Postretirement
Benefits - We provide certain medical, dental and life insurance benefits to
substantially all retired employees under various plans and accrue actuarially
determined postretirement benefit costs as active employees earn these benefits.
In 1998, for certain plans, postretirement benefit cost reflects an estimate of
potential future cost sharing by retirees. We maintain Voluntary Employee
Beneficiary Association trusts to fund postretirement benefits. Assets consist
principally of stocks and U.S. government and corporate bonds. |
| |
The following table sets forth the change in the benefit obligation for the years ended December 31: |
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
Benefit obligation at beginning of year $ 15,511 $ 15,489
Service cost - benefits earned during the period 245 260
Interest cost on projected benefit obligation 1,201 1,050
Amendments (134) (2)
Actuarial (gain)/loss 1,776 (515)
Special termination benefits 79 -
Benefits paid (876) (771)
----------------------------------------------------------------------------
Benefit obligation at end of year $ 17,802 $ 15,511
============================================================================
| |
The following table sets forth the change in plan assets for the years ended December 31 and the plans'
funded status at December 31: |
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 7,871 $ 6,869
Actual return on plan assets (401) 1,199
Employer contribution 42 93
Benefits paid (292) (290)
----------------------------------------------------------------------------
Fair value of plan assets at end of year 1 $ 7,220 $ 7,871
============================================================================
Funded status $ (10,582) $ (7,640)
Unrecognized prior service cost 680 960
Unrecognized net (gain)/loss 203 (2,460)
----------------------------------------------------------------------------
Accrued postretirement benefit obligation $ (9,699) $ (9,140)
============================================================================
| | 1 Plan assets include SBC common stock of $1 at December 31, 2000, and $10
at December 31, 1999. |
| |
Postretirement benefit cost is composed of the following: |
-----------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 245 $ 260 $ 193
Interest cost on accumulated postretirement
benefit obligation (APBO) 1,201 1,050 904
Expected return on assets (549) (504) (419)
Amortization of prior service cost 147 157 (260)
Recognized actuarial gain (33) (13) (12)
-----------------------------------------------------------------------------------------
Postretirement benefit cost $ 1,011 $ 950 $ 406
=========================================================================================
| |
The
fair value of plan assets restricted to the payment of life insurance benefits
was $1,114 and $1,277 at December 31, 2000 and 1999. At December 31, 2000 and
1999, the accrued life insurance benefits included in the APBO were $593 and
$540. |
| |
In
addition to the postretirement benefit cost reported in the table above, we
recognized $107 in net curtailment losses in 2000 associated with EPR. Enhanced
benefits related to this program were recognized as an expense of $71 in 2000. |
| |
The
assumed medical cost trend rate in 2001 is 8.0% for retirees 64 and under and
9.0% for retirees 65 and over, decreasing to 5.0% in 2006, prior to adjustment
for cost-sharing provisions of the medical and dental plans for active and
certain recently retired employees. The assumed dental cost trend rate in 2001
is 5.25%, reducing to 5.0% in 2002. A one percentage-point change in the assumed
health care cost trend rate would have the following effects: |
----------------------------------------------------------------------------------------
One Percentage- One Percentage-
Point Increase Point Decrease
----------------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 192 $ 155
Effect on postretirement
benefit obligation 1,999 1,651
----------------------------------------------------------------------------------------
| |
Significant
assumptions for the discount rate, long-term rate of return on plan assets and
composite rate of compensation increase used in developing the APBO and related
postretirement benefit costs were the same as those used in developing the
pension information. Due to the Ameritech merger, a midyear valuation also was
performed for all postretirement benefit plans in 1999. |
Note 13. Other Employee Benefits
| |
Employee
Stock Ownership Plans - We maintain contributory savings plans that cover
substantially all employees. Under the savings plans, we match a stated
percentage of eligible employee contributions, subject to a specified ceiling. |
| |
As
a result of past mergers, we have six leveraged ESOPs as part of our existing
savings plans. Five of the ESOPs were funded with notes issued by the savings
plans to various lenders, the proceeds of which were used to purchase shares of
SBC’s common stock in the open market. The original principal amounts were
paid off in 2000 with our contributions to the savings plans, dividends paid on
SBC shares and interest earned on funds held by the ESOPs. We extended the terms
of certain ESOPs through previous internal refinancing of the debt, resulting in
unallocated shares remaining in those ESOPs at December 31, 2000. |
| |
One
ESOP purchased PAC treasury shares in exchange for a promissory note from the
plan to PAC. Principal and interest on the note are paid from employer
contributions and dividends received by the trust. All PAC shares were exchanged
for SBC shares effective with the merger April 1, 1997. The provisions of the
ESOP were unaffected by this exchange. |
| |
Our
match of employee contributions to the savings plans is fulfilled with shares of
stock allocated from the ESOPs and with purchases of SBC’s stock in the
open market. Shares held by the ESOPs are released for allocation to the
accounts of employees as employer-matching contributions are earned. Benefit
cost is based on a combination of the contributions to the savings plans and the
cost of shares allocated to participating employees’ accounts. Both benefit
cost and interest expense on the notes are reduced by dividends on SBC’s
shares held by the ESOPs and interest earned on the ESOPs’ funds. |
| |
Information related to the ESOPs and the savings plans is summarized below: |
--------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------
Benefit expense - net of dividends and interest income $ 134 $ 90 $ 77
Interest expense - net of dividends and interest income 5 10 25
--------------------------------------------------------------------------------------------
Total expense $ 139 $ 100 $ 102
============================================================================================
Company contributions for ESOPs $ 47 $ 104 $ 142
============================================================================================
Dividends and interest income for debt service $ 93 $ 75 $ 100
============================================================================================
| |
SBC shares held by the ESOPs are summarized as follows at December 31 (in millions): |
--------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------
Unallocated 8 16
Allocated to participants 103 101
--------------------------------------------------------------------------
Total 111 117
==========================================================================
Note 14.
Stock-Based Compensation
| |
Under
our various plans, senior and other management employees and non-employee
directors have received stock options, stock appreciation rights (SARs),
performance stock units and nonvested stock units. Stock options issued through
December 31, 2000, carry exercise prices equal to the market price of the
stock at the date of grant and have maximum terms ranging from five to ten
years. Beginning in 1994 and ending in 1999, certain Ameritech employees were
awarded grants of nonqualified stock options with dividend equivalents.
Depending upon the grant, vesting of stock options may occur up to four years
from the date of grant. Performance stock units are granted to key employees
based upon the common stock price at the date of grant and are awarded in the
form of common stock and cash at the end of a two- or three-year period, subject
to the achievement of certain performance goals. Nonvested stock units are
valued at the market price of the stock at the date of grant and vest over a
three- to five-year period. Up to 431 million shares may be issued under these
plans. |
| |
We
measure compensation cost for these plans using the intrinsic value-based method
of accounting as allowed in Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation” (FAS 123).
Accordingly, no compensation cost for our stock option plans has been
recognized. Had compensation cost for stock option plans been recognized using
the fair value-based method of accounting at the date of grant for awards in
2000, 1999 and 1998 as defined by FAS 123, our net income would have been
$7,800, $7,969 and $7,537, and basic net income per share would have been $2.30,
$2.34 and $2.21. The compensation cost that has been charged against income for
our other stock-based compensation plans totaled $4, $36 and $83 for 2000, 1999
and 1998. |
| |
For
purposes of these pro forma disclosures, the estimated fair value of the options
granted is amortized to expense over the options’ vesting period. The fair
value for these options was estimated at the date of grant, using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: risk-free interest rate of
6.67%, 5.31% and 5.69%; dividend yield of 2.19%, 1.65% and 2.38%; expected
volatility factor of 16%, 15% and 18%; and expected option life of 4.6, 4.5 and
5.0 years. |
| |
As
of December 31, 1998, 29,390 shares of nonperformance-based restricted stock
issued to Ameritech employees were outstanding under the Ameritech plans.
Shareowners’ equity reflects deferred compensation for the unvested stock
awarded. This amount was reduced and charged against operations (together with
any change in market price) as the employees vested in the stock. All restricted
stock under Ameritech plans vested as a result of the Ameritech merger with one
of our subsidiaries in 1999. |
| |
Information related to options and SARs is summarized below (shares in millions): |
-------------------------------------------------------------------------------------
Weighted-
Average Exercise
Number Price
-------------------------------------------------------------------------------------
Outstanding at January 1, 1998 144 $22.27
Granted 35 39.46
Exercised (26) 20.61
Forfeited/Expired (7) 29.64
-------------------------------------------------------------------
Outstanding at December 31, 1998
(73 exercisable at weighted-average price of $20.85) 146 26.26
Granted 26 48.70
Exercised (19) 23.13
Forfeited/Expired (4) 39.06
-------------------------------------------------------------------
Outstanding at December 31, 1999
(116 exercisable at weighted-average price of $26.91) 149 30.24
Granted 51 39.62
Exercised (30) 24.14
Forfeited/Expired (14) 41.05
-------------------------------------------------------------------
Outstanding at December 31, 2000
(101 exercisable at weighted-average price of $29.22) 156 $33.55
=====================================================================================
| |
Information related to options and SARs outstanding at December 31, 2000: |
--------------------------------------------------------------------------------------------------
Exercise Price Range $10.90 - $17.39 $17.40 - $29.99 $30.00 - $35.49 $35.50 - $59.00
--------------------------------------------------------------------------------------------------
Number of options and SARs
(in millions):
Outstanding 8 61 8 79
Exercisable 8 61 8 24
Weighted-average exercise price:
Outstanding $15.26 $24.08 $34.17 $42.64
Exercisable $15.26 $24.08 $34.17 $45.65
Weighted-average remaining
contractual life 3.25 years 5.38 years 7.30 years 8.52 years
==================================================================================================
| |
The weighted-average, grant-date fair value of each option granted during 2000, 1999 and 1998 was $8.31,
$9.31 and $8.71. |
| |
As
of December 31, additional shares available under stock options with dividend
equivalents were approximately 1 million in 2000, 2 million in 1999 and 2
million in 1998. |
| |
Options
and SARs held by the continuing employees of PAC at the time of the AirTouch
Communications, Inc. (AirTouch) spinoff were supplemented with an equal number
of options and SARs for common shares of spunoff operations. The exercise prices
for outstanding options and SARs held by continuing employees of PAC were
adjusted downward to reflect the value of the supplemental spunoff
operations’ options and SARs. The balance sheet reflects a related
liability equal to the difference between the current market price of the
spunoff operations’ stock and the exercise prices of the supplemental
options outstanding. The spunoff operations’ options and SARs have been
adjusted for Vodafone’s acquisition of AirTouch and for Vodafone’s
five-for-one stock split in 1999. As of December 31, 2000, 227,025
supplemental spunoff operations’ options and SARs were outstanding with
expiration dates ranging from 2001 to 2003. Outstanding options and SARs that
were held by employees of the wireless operations at the spinoff date were
replaced by options and SARs for common shares of the spunoff operations. The
spunoff operations assumed liability for these replacement options and SARs. |
Note 15. Acquisitions and Dispositions
| |
Acquisitions
- In August 2000, we acquired wireless properties in Seattle and Spokane,
Washington and Austin, Texas from GTE Corporation for approximately $1,349. This
acquisition also included rural service areas across Texas and Washington. In
total, these properties cover a population of more than 7.4 million people and
include approximately 318,000 customers. These acquisitions were included in the
contribution to Cingular (see Note 6). |
| |
In
March 2000, we acquired Sterling, a provider of electronic business integration
solutions, in an all cash tender offer valued at approximately $3,576. We
accounted for the transaction under the purchase method of accounting. The
assets acquired include certain intangible assets such as developed technology,
tradename, assembled workforce, customer relationships and goodwill, which will
be amortized over their remaining useful lives of between 3 and 20 years. We
expensed the acquired in-process research and development of approximately $132
in March 2000. |
| |
In
July 1999, we completed the acquisition of Comcast, the wireless subsidiary of
Comcast Corporation, in a transaction valued at $1.8 billion including
assumption of $1.4 billion in debt. With the acquisition, we added approximately
862,000 wireless subscribers in Pennsylvania, Delaware, New Jersey and Illinois.
This acquisition was included in the contribution to Cingular (see Note 6). |
| |
In
June 1999, we acquired 20% of Bell Canada, a subsidiary of BCE Inc., a publicly
traded Canadian communications company, for approximately $3,447. |
| |
In
January 1998, we purchased a 34% interest in Tele Danmark, the national
communications provider in Denmark, from the Kingdom of Denmark for
approximately $3.1 billion. As part of the investment agreement, Tele Danmark
repurchased and retired all remaining shares owned by the Danish government,
effectively increasing our equity ownership to 41.6% of Tele Danmark (see
Note 7). |
| |
These
acquisitions were primarily accounted for under the purchase method of
accounting. The purchase prices in excess of the underlying fair value of
identifiable net assets acquired are being amortized over periods not to exceed
40 years. Results of operations of the properties acquired have been included in
the consolidated financial statements from their respective dates of
acquisition. |
| |
Dispositions
- Due to our wireless property contribution to Cingular in October 2000, we were
required to sell our overlapping properties, which included selected Radiofone
properties in New Orleans and Baton Rouge, Louisiana, and Indianapolis, Indiana,
which resulted in a pre-tax gain of $357 (see Note 6). |
| |
In August 2000, Tele Danmark and SBC sold their interests in Netcom GSM, a wireless telecommunications
provider in Norway, to a third party and we recorded a direct and indirect pre-tax gain of approximately
$546. |
| |
In
July 2000, we exercised our right to sell our interest in MATÁV to Deutsche
Telekom, our partner in the investment, for approximately $2,199. The
transaction closed in August 2000 with a pre-tax gain of approximately $1,153. |
| |
In
October 1999, we completed the required disposition, as a condition of the
merger with Ameritech, of 20 Midwestern cellular properties consisting of the
competing cellular licenses in several markets, including, but not limited to,
Chicago, Illinois, and St. Louis, Missouri. We recognized an extraordinary gain
from these sales of approximately $1,379, or $0.40 per share. |
| |
During
the third quarter of 1998, we sold our interest in MTN, a cellular company in
South Africa, to the remaining shareholders of MTN for $337. The sale fulfilled
our obligation to divest MTN as a requirement of the acquisition of Telkom. As a
result of the sale, we realized a pre-tax gain of $250. |
| |
In
April 1998, we sold substantially all of our remaining interest in TCNZ in a
global stock offering. Net proceeds received in two installment payments in
April 1998 and March 1999 were approximately $2.1 billion resulting in a pre-tax
gain of approximately $1,543. |
| |
The
above developments did not have a significant impact on consolidated results of
operations for 2000, 1999 or 1998, nor would they had they occurred on
January 1 of the respective periods. |
Note 16.
Valuation Adjustments
| |
SecurityLink
- In December 2000, we entered into a definitive agreement to sell
SecurityLink, our electronic security services operations, for $100 in cash and
$379 in notes. The sale closed in January 2001. As a result of the sale, as well
as a general decline in the market value of companies in the security industry,
we reviewed the carrying value of our investment in SecurityLink. This review
included estimating remaining useful lives and cash flows. As this review
indicated impairment, fair market values, including in some cases discounted
cash flows as an estimate of fair value, related to those assets were analyzed,
as well as compared to market values of comparable publicly traded companies, to
determine the amount of the impairment. As a result of this review, we
recognized impairments to the carrying value of SecurityLink of approximately
$614 ($454 net of tax) in the fourth quarter of 2000. Approximately $430 of that
charge was a write-off of goodwill. |
| |
Prodigy
- In December 2000, we restructured our agreements with Prodigy. As part of the
restructuring, we agreed to provide a $110 credit facility to Prodigy, as well
as forgive a portion of the amounts that Prodigy owed us at December 31, 2000.
SBC recognized a combined charge of $143 ($89 net of tax) in the fourth quarter
of 2000, comprised of $110 in equity in net income of affiliates reflecting
previously unrecognized equity losses from our investment in Prodigy, and the
remainder as either a reduction of revenue or increase in operating expense. |
| |
Cost
Investments - We have cost investments in alternative providers of digital
subscriber line services accounted for under FAS 115. We periodically review the
investments to determine whether an investment’s decline in value is other
than temporary. If so, the cost basis of the investment is written down to fair
value which is the new cost basis. We concluded that the precipitous decline of
the market values of those companies, as well as difficulties experienced by
many companies in that industry, indicated the decline in value of our
investments was other than temporary. As a result of these reviews, we
recognized a combined charge of $214 ($134 net of tax) in the fourth quarter of
2000 in other income (expense) - net. |
Note 17.
Shareowners’ Equity
| |
Share
Repurchase - From time to time, we repurchase shares of common stock for
distribution, to offset shares distributed through our employee benefit plans or
in connection with certain acquisitions. In January 2000, the Board of Directors
approved the repurchase of up to 100 million shares of SBC common stock. As of
January 31, 2001, we have repurchased a total of approximately 59 million shares
of our common stock of the 100 million authorized to be repurchased. |
Note 18.
Additional Financial Information
----------------------------------------------------------------------------------------
December 31,
--------------------------
Balance Sheets 2000 1999
----------------------------------------------------------------------------------------
Intangible assets:
Licenses $ 530 $ 4,178
Goodwill 3,947 2,269
Customer lists 485 740
Other 1,259 934
----------------------------------------------------------------------------------------
6,221 8,121
Less: accumulated amortization 746 1,325
----------------------------------------------------------------------------------------
Intangible assets - net $ 5,475 $ 6,796
========================================================================================
Accounts payable and accrued liabilities:
Accounts payable $ 5,018 $ 4,834
Accounts payable - Cingular 2,514 -
Advance billing and customer deposits 1,322 1,481
Compensated future absences 837 711
Accrued interest 440 427
Accrued payroll 986 800
Other 4,315 3,464
----------------------------------------------------------------------------------------
Total $ 15,432 $ 11,717
========================================================================================
----------------------------------------------------------------------------------------
Statements of Income 2000 1999 1998
----------------------------------------------------------------------------------------
Advertising expense $ 774 $ 812 $ 814
========================================================================================
Interest expense incurred $ 1,693 $ 1,511 $ 1,691
Capitalized interest (101) (81) (86)
----------------------------------------------------------------------------------------
Total interest expense $ 1,592 $ 1,430 $ 1,605
========================================================================================
----------------------------------------------------------------------------------------
Statements of Cash Flows 2000 1999 1998
----------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 1,681 $ 1,516 $ 1,713
Income taxes, net of refunds 3,120 2,638 2,676
========================================================================================
| |
No customer accounted for more than 10% of consolidated revenues in 2000, 1999 or 1998. |
| |
Approximately
two-thirds of our employees are represented by the Communications Workers of
America (CWA) and the International Brotherhood of Electrical Workers (IBEW). On
February 5, 2001, our telephone subsidiaries reached four tentative agreements
with the CWA covering employees in 13 states. The tentative agreements are labor
contracts for three years and will replace the existing contracts that expire on
March 31 and April 1, 2001. The agreements include a wage increase of
approximately 12.25% over the life of the contracts, in addition to other
economic provisions. The agreements must be ratified by CWA members covered by
the tentative agreements and this ratification vote is expected by mid-March,
2001. |
| |
The
IBEW represents approximately 12,370 employees pursuant to a labor agreement
expiring on June 28, 2003. However, the wages and certain other economic matters
applicable to the final two years of that agreement will be bargained prior to
the end of June 2001. |
Note 19.
Quarterly Financial Information (Unaudited)
-----------------------------------------------------------------------------------------------
Total Basic Diluted Stock Price
Calendar Operating Operating Net Earnings Earnings -----------------------------
Quarter Revenues Income Income Per Share Per Share High Low Close
-----------------------------------------------------------------------------------------------
2000
First $ 12,572 $ 3,076 $ 1,822 $ 0.54 $ 0.53 $ 49.00 $ 34.81 $ 42.13
Second 13,211 2,998 1,851 0.54 0.54 50.00 40.44 43.25
Third 13,454 2,846 2,999 0.89 0.88 50.19 38.44 49.88
Fourth 12,239 1,823 1,295 0.38 0.38 58.50 42.63 47.75
-------------------------------------------
Annual $ 51,476 $ 10,743 $ 7,967 2.35 2.32
===============================================================================================
-----------------------------------------------------------------------------------------------
1999
First $ 11,812 $ 3,051 $ 1,980 $ 0.58 $ 0.57 $ 59.94 $ 46.06 $ 47.19
Second 12,268 3,227 1,938 0.57 0.56 58.00 48.00 58.00
Third 12,545 2,462 1,135 0.33 0.33 59.88 45.38 51.06
Fourth 12,906 2,858 3,106 0.91 0.90 55.50 44.06 48.75
-------------------------------------------
Annual $ 49,531 $ 11,598 $ 8,159 2.39 2.36
===============================================================================================
| |
We
restated the first quarter of 2000 and all four quarters of 1999 to conform with
current year presentation. The first quarter of 1999 includes a cumulative
effect of accounting change of $207, or $0.06 per share from a change in
accounting for directory operations at Ameritech. The fourth quarter of 1999
includes an extraordinary gain of $1,379, or $0.04 per share on the sale of the
overlapping wireless properties. |
| |
There
were also normalizing (e.g., one-time) items which are included in the
information above, but are excluded from the information that management uses to
evaluate the performance of each segment of the business (see Note 8). |
| |
The quarterly impact of the 2000 normalizing items was as follows: |
| |
- Gains of $1,699 ($1,125 net of tax) in the third quarter related to the sale of
direct and indirect investments in MATÁV and Netcom GSM, two international
equity affiliates and $187 ($123 net of tax) in the fourth quarter from the
contribution of our investment in ATL to Telecom Americas.
|
| |
- Gains of $238 ($155 net of tax) in the third quarter on the sale of Telmex L
shares associated with our private purchase of a note receivable with
characteristics that will essentially offset future mark to market adjustments
on the DECS.
|
| |
- Pension settlement gains of $250 ($161 net of tax) in the first quarter, $124
($80 net of tax) in the second quarter, $29 ($19 net of tax) in the third
quarter and $109 ($68 net of tax) in the fourth quarter associated with pension
litigation, first quarter payments primarily related to employees who terminated
employment during 1999 and gains resulting from a voluntary retirement program
net of enhanced pension and postretirement benefits associated with that program
(see Note 12).
|
| |
- Costs of $141 ($117 net of tax) in the first quarter, $239 ($153 net of tax) in
the second quarter, $400 ($258 net of tax) in the third quarter and $425 ($272
net of tax) in the fourth quarter 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 quarter related to in-process
research and development from the March 2000 acquisition of Sterling.
|
| |
- Combined charges of $971 ($677 net of tax) related to valuation adjustments of
SecurityLink and certain cost investments accounted for under FAS 115 and the
restructure of agreements with Prodigy, including the extension of a credit
facility and recognition of previously unrecognized equity losses from our
investment.
|
| |
- Gains of $359 ($99 net of tax) in the fourth quarter primarily related to our
required disposition of overlapping wireless properties in connection with our
contribution of operations to Cingular.
|
| |
The quarterly impact of the 1999 normalizing items was as follows: |
| |
- Charges of $881 ($883 net of tax) in the third quarter and $885 ($574 net of
tax) in the fourth quarter including, recognition of impairment of long-lived
assets, adjustments to the estimate of allowance for doubtful accounts,
estimation of deferred taxes on international investments, wireless conversion
costs and other items (see Note 2).
|
| |
- Elimination of income of $66 ($39 net of tax) in the first quarter, $50 ($28 net
of tax) in the second quarter, $73 ($47 net of tax) in the third quarter and $8
($5 net of tax) in the fourth quarter from the incremental impacts of
overlapping wireless properties required sold in October 1999 relating to the
Ameritech merger.
|
| |
- Pension settlement gains of $566 ($368 net of tax) in the fourth quarter
associated with lump sum pension payments that exceeded the projected service
and interest costs.
|
| |
- Gains of $131 ($77 net of tax) in the fourth quarter recognized from the sale of
property by an international equity affiliate.
|
| |
- A reduction of $45 ($27 net of tax) in the first quarter related to a portion of
a first quarter 1998 charge to cover the cost of consolidating security
monitoring centers and company-owned wireless retail stores.
|