"tQ 'Gent) ct 0 Tel.Tel 202 955 3000 Holland 8 Knight LLP Hog,andKnight Hot[and & Knight LLP _j- -{ Fax 202 955 5564 2099 Pennsylvania Avenue, N.W. Suite 100 5564 2099 Pennsylvania Avenue. N.W. , Suite 100 Washington, D. C. 20006 www_hk[aw_comWashington,www, hklaw. cornD,C. 20006 ______lC'
Eric Fishman 202 828 1849 eric.fishman@hk[aw.comeric.fishman@hktaw. corn
December 28, 2004
Federal ExpressEx ress DeliveryDeliver South Carolina Public ServiceService Commission i ; Saluda Building • { ') 101 Executive Center Drive, Suite 100 Columbia, South Carolina 29210
Re: SBC Telecom Inc. and Southwestern Bell Communications Services Inc. d/b/a SBC Long Distance, Inc. Joint Petition and Request forfor Expedited Action and Motion for Leave to File Confidential Materials Under Seal
Dear Sir o1"or Madam:
On behalf of SBC Telecom, Inc. and Southwestern Bell Communications Services Inc.Inc. d/b/a SBC Long Distance, please find an original and fifteen (15) copies of a Petition and Request forfor Expedited Action. In a separateseparate envelope, SBC Telecom and SBC Long Distance also submit an original and fifteen (15)(IS) copies of a redacted version of thethe Petition, together with an original and fifteen (15)(LS) copies of a Motion for Leave toto File Confidential Materials Under Seal.
Extra copies of eacheach of these filings are enclosed. Please date-stamp these extra copies and returnreturtl them in thethe addressed, self-stamped envelope.
Should you have any questions about thisthis matter, please contact the undersigned.
Res ectfully submitted,
HOLLAND &k KNIGHT LLP Eric Fishman, Esq. Counsel to SBC Telecom,Telecorn, Inc. and Southwestern Bell Communications Services Inc. d/b/a SBC Long Distance — ' . 1~~~%~,, BEFOREBEFORE THETHE ..: PUBLICPUBLIC SERVICESERVICE COMMISSIONCOMMISSION OFOF SOUTHSOUTH CAROLINACAROLINA
InIn thethe Matter.Matter ofof ) SBCSBC Telecom,Telecom, Inc.Inc. ) Ji Southwestern Bell Communications Services Inc. %'J~ Southwestern Bell Communications Services Inc. ) c.Case..N.No. ¢_b'_[_'[i5ri "__-]._ 1 d/b/ad/b/a SBCSBCLongLong DistanceDistance ) '"
Joint PetitionPetition forfor Consent and Approval to )) AssignAssign CertificateCertificate of.of Convenience and Necessity )) Providing TelecommunicationsTelecommunications Services to ) Customers Throughout thethe StateState of South Carolina )
Joint Motion of SBC Telecom and SBC Long Distance For Leave to File Confidential Materials Under Seal
SBC Telecom, Inc.inc. and Southwestern Bell Communications Services Inc.
d/b/a SBC Long Distance hereby jointly file this Motion with thethe South Carolina
Public Service Commission ("Commission")("Commission" ) asking that thethe followingfollowing confidential
informationinformation in thethe attachedattached JointJoint Petition andand Request forfor Expedited Action
("Petition"),("Petition" ), bebe filedfiled underunder seal:seal:
(1)(1) ConfidentialConfidential informationinformation regardingregarding thethe numbernumber ofof subscriberssubscribers servedserved byby
SBCSBCLongLong DistanceDistance inin thethe StateState ofof SouthSouth Carolina,Carolina, containedcontained inin ParagraphParagraph 77 ofofthethe
Petition;Petition; andand
(2)(2) ConfidentialConfidential BoardBoard ofofDirectorsDirectors ConsentsConsents ofofSBCSBCLongLong Distance,Distance, Inc.Inc. andand
SBCSBCTelecom,Telecom, Inc.,Inc. ,attachedattached toto thethe PetitionPetition asas ExhibitExhibit 4.4.
TheThe aboveabove materialmaterial isis highlyhighly proprietaryproprietary andand sensitivesensitive andand. couldcould hurthurt SBCSBC
LongLong Distance'sDistance's abilityability toto competecompete inin thethe marketplacemarketplace ifif itit werewere toto becomebecome publicpublic information. Therefore, SBC Telecom and SBC Long Distance ask thatthat thethe
Commission accept the enclosed documents and file same under seal.
Simultaneously with thisthis submission, the parties have has filedfiled a redactedredacted version of the Petition, which is available for publicpubhc inspection.inspection.
Respectfully submitted,submitted. ,
SBCSBC Telecom, Inc.Inc. SBC Communications Services Inc. d/b/a SBC Long Distance oy: Eric Fishman Holland &R Knight LLP 2099 Pennsylvania Ave.,Ave. , NW Suite 100 Washington, DC 20006 (202) 82S-1849828-1849 Fax: (202) 955-5564 E-mail:K-mail: [email protected]~efiahmaa hklaw. cpm
December 28, 2004
#4 2404781_vl2404781 vl Enclosures
#0 2439056_vl2439056 vl BEFORE THETHK PUBLICPUBI.IC SERVICE COMMISSION OF SOUTH CAROLINA
JointJoint Petition for thethe Consent and Approval ) toto Assign Certificate of Convenience and ) Necessity Providing Telecommunications ) Case No. Services To Customers Throughout the State ) of South Carolina )
JOINTOINT PETITION AND REQUESTRK UKST FOR EXPEDITED ACTION
Pursuant to Section 58-9-310 of the South Carolina Code, and thethe regulations of the
Public Service Commission, SBC Telecom, Inc. ("SBCT"("SBCT" or "Assignor")"Assignor" ) and itsits affiliate
Southwestern Bell Communications Services Inc. d/b/a SBC Long Distance ("SBCLD" or
"Assignee"),"Assignee" ), joint petitioners herein, hereby respectfully and jointly request CommissionCorrumssion consent
to and approval of the assignment of SBCT's Certificate of Convenience and Necessity to
provide locallocal exchange and interexchange servicesservices fromfrom SBCT to SBCLD as part of a corporate
reorganization whereby direct ownership of SBCLD will transfertransfer fromfrom SBC Communications,
Inc. ("SBC") to SBCT, all SBCT assets will be transferred toto SBCLD,SBCI.D, and SBCT will cease
operations. SBCLD further requests approval, toto thethe extentextent such approval is required, to enable
its conversion toto a limited liability company toto be known as SBC Long Distance LLC.
FINALLY_FINALLY PURSUANT TO SECTION 103-101_103-101 103-820 AND 103-840 OFOF THE
CODE OF REGULATIONS_REGULATIONS AND FOR THE REASONS SETSKT FORTH BELOW_BELOW
PETITIONERS RKREQUESTUEST THE COMMISSION TO GRANT ITS APPROVAL ON AN
EXPEDITED BASIS_BASIS AND TO EXEMPT PETITIONERS FROM THE PUBLICATION
AND HEARING REQUIREMENTSRE UIRKMKNTS OF SECTION 103-132_103-132 AND THE APPLICATION
CONTENT REQUIRESRE UIRKS OF SECTION 103-834(A)(3)_103-834 A 3 OF THE CODE OF REGULATIONS,REGULATIONS SO AS TO ALLOW PETITIONERS TO CONSUMMATECONSUMVIATE THEIR
TRANSACTIONS ON OR ABOUT MARCH 31,31 2005.
InIn support thereof,thereof, the joint petitioners respectfully show the Commission as follows:
1-2. That the address of the jointjoint petitioners is as follows:
SBCT,C Assignor:
Carol PaulsenP. aulsen SBC Telecom, Inc. 1010 N. Saint Marys Street, Room 13K San Antonio, Texas 78215 Tel: 210-246-8750 Fax: 210-246-8759 E-mail:E-mail:[email protected]@sbc.com
SBCLD,SBCLD Assignee:Assi ee:
Norman Descoteaux Associate Director -—Regulatory SBC Long Distance 5850 W. Las Positas Blvd.,Blvd. , Room NE137 Pleasanton, CA 94588 Tel: 925-468-6209 Fax: 707-435-6640 E-mail:E-mail:ndl639nd1639 @camail.sbc.comQcamail. sbc.com
In addition,addition, all correspondence concerningconcerning this Joint Petition should be directed to the parties' legallegal counsel, who isis authorized to respond to Commission inquiries on behalf of the joint applicants:
Eric Fishman, Esq. Holland &k, Knight LLPI LP 2099 Pennsylvania Ave.,Ave. , NW, Suite 100 Washington, DC 20006 Tel: 202-955-3000 Fax: 202-955-5564 E-mail:E-mail:eric.eric.fishmanfishman@hklaw.@ hklaw.comcom
, That thethe financial condition of the jointjoint petitioners' parent company, SBC Communications, Inc. ("SBC"), is attached hereto as Exhibit 1.
, That the Assignor, SBCT, and the Assignee, SCBLD, are both wholly-owned subsidiaries of SBC, a holding company whose subsidiaries and affiliates operate predominantly in thethe communications serviceservice industryindustry and have provided telecommunications,telecommunications, services for over 100 years. SBC is publicly traded on thethe New York Stock Exchange (Symbol: SBC) with a market capitalization of approximately $84 billion.
. InformationInformation RegardingRe ardin Assignment:Assi ment: SBCT was issuedissued a Certificate of Convenience and Necessity by thethe Commission on May 23, 2000 to provide resold and facilities-based interexchangeinterexchange and locallocal exchange telecommunicationstelecommunications service.service. See Docket No. 2000- 0044-C, Order No. 2000-0446, a copy of which is attached hereto as Exhibit 2. Under thethe proposed transaction, as part of a corporate reorganization,reorganization„SBCTSBCT will assign its Certificate to SBCLD and cease operations. Neither SBCT nor SBCLD has any facilities inin the State of South Carolina. SBCLD was issued a Certificate of Convenience and Necessity by the Commission on January 26, 1998 toto provide resold interexchangeinterexchange telecommunications service, Order No. 98-45 inin Docket No. 1997-0313-C, and a Certificate of Convenience and Necessity toto provide facilities-based andand resold local exchange telecommunicationstelecommunications service on JuneJune 30, 2004, Order No. 2004-228 in Docket no. 2003-361-C. Copies of SBCLD's Certificates of Public Convenience and Necessity are attached hereto as Exhibit 3.
, Directors'* 6. Draft copies of thethe _ointjoint petitioners' "Consent of thethe Board of Directors" are attached hereto asas Exhibit 4. In support of thisthis reorganization, all of thethe operations, assets and liabilities of SBCT will be taken over by SBCLD through thethe following steps:
1. SBCLD will become a wholly-owned subsidiary of SBCT;
2. SBCLD will be converted fromfrom a corporation toto a limitedlimited liability company;
3.° SBCT will transfer all of itsits assets and liabilitiesliabilities to SBCLD, including its voice and data switches, customer contracts/service orders, real estate leases,leases, receivables and employees;
4., SBC will contribute thethe stock of SBCT toto SBC Teleholdings, Inc.,Inc., a wholly owned SBC subsidiary; 2
5., With CommissionComnussion approval, thethe local exchange and access tariffstariffs and interconnection agreement of SBCT will be transferredtransferred to SBCLD;
6.. The Commission will be requested toto determine and approve that transfer of thethe SBCT tarifftariff and interconnectioninterconnection agreement to SBCLD meets the conditions imposed upon the authority held by SBCLD;
l Exhibit 4 has been filed under sealseal with thethe Commission. 2 At present, SBCT and SBC Teleholdings are wholly owned direct subsidiariessubsidiaries of SBC. Following the proposed reorganization, SBC Long Distance LLC will remainremain a wholly ownedowned subsidiary of SBC, which will control SBC Long Distance LLC through twotwo intermediary,intermediary, wholly ownedowned subsidiaries -—i.e.,i.e., SBC Teleholdings (wholly owned byby SBC) and SBC Telecom (wholly(wholly owned by SBC Teleholdings). The direct parent of SBC Long Distance LLC following thethe reorganization will be SBC Telecom. 7.. The CommissionComrmssion will be requestedrequested to approve relinquishment andand cancellation of the current certificate of authority to SBCLD.
The proposed reorganization will result inin a consolidation of SBC owned and controlled assets through the rearrangingrearranging of thethe ownership interestsinterests of SBC in its subsidiaries.subsidiaries. The proposed reorganizationreorganization isis being done toto minimize the possibility of customer confusion, promote continuity of services,services, and offer a full range of services under the SBCLD brand. All of thethe current customers of SBCT will receive thethe services currently provided to SBCT under thethe SBCLD name, at the same rates, termsterms and conditions as currently provided.
. The telephonetelephone customers of SBCT will see virtually no change as the result of the approval of this assignment. Currently SBCT has _ residential customers, and commercial customers, inin the State of South Carolina. 3 Upon approval of this joint petition by the Commission,Comrmssion, telephonetelephone services will be provided toto residentsresidents of the State by SBCLD, and SBCLD will submit such corporate filingsfilings with thethe Secretary of State as are requiredrequired to convert to a limitedlimited liability company. No changeschanges to services or prices will occur as a result of thethe proposed assignment. The SBCT tariff currently on filefile with thethe Commission will remainremain unchanged, other thanthan those cosmetic changes required to effectuate thethe name change to SBCLD. Customer billing, customer care contacts, and company mailing addressesaddresses will remain unchanged from those currently inin effect. SBCT will be eliminated as a separate corporate entity by appropriate filings with the South Carolina Secretary of state.State.
. The proposed assignment will be financed completely by SBC, the joint petitioners' parent company.
, No other utility in thethe State of South Carolina will be affected as a result of the proposed assignment.
10. The jointjoint petitioners submitsubmit that approvalapproval of thethe proposed assignment will serve the public interest because it will permit a more efficient means of providing telecommunicationstelecommunications services toto customers inin South Carolina. SBCLD understands thatthat it isis bound toto follow all rules andand regulations of the Commission, and accepts as its own all requirementsrequirements imposedimposed upon SBCT as a result of the original Certificate of Convenience and Necessity issuedissued to SBCT. Both SBCT and SBCLD understand that the filing of thisthis joint petition, by itself, does not constitute authorization to assign or transfer certification from SBCT toto SBCLD.
11. The jointjoint petitioners proposed to provide a Customer Notice inin substantially the form attached hereto as Exhibit 5. The Notice will provide that thethe reorganizationreorganization will be completed and service will start to be provided under thethe SBCLD name on or about March 31, 2005.
Information regarding SBCT's customer base has been filedfiled under seal with the Commission.
4 12. Pursuantto Section103-101,103-820103-101, 103-820 and 103-840of thethe Codeof Regulations,thejoint petitionersherebyrequestrequest the Commissionto processthe instantinstant filing on an expedited basis,andtoto exemptthethe jointjoint petitionersfrom otherwiseapplicablepublication,notice, hearing and application contentrequirements,requirements, so as to enablethethe joint petitionersto consummatethe transactionsset forth inin this filing on or aboutMarch 31, 2005. Joint petitionersrespectfullyrespectfully submitthat such expeditedtreatmentandexemptionswould serve thethe public interestby enablingjoint petitionersto achieveandpassthroughto subscribers thethe economicbenefits which will result fromfrom thesetransactionstransactions as soon as possible. Becauseof SBC's nation-wideoperations,the subjecttransactionstransactions can be consummated only whenrequiredregulatoryregulatory approvalsareobtainedinin all stateswherejoint petitioners do business.Joint petitionersfurther submitthat suchreliefrelief is reasonablegiventhe fact thatthat thesubjecttransactionsareorganizationalin nature,andwill not affectserviceto end users,give any party undueadvantage over another,or adverselyaffect,Southaffect, South Carolina consumersor thethe public atlarge.large.
WHEREFORE,SBC Telecom,Inc.Inc. and SouthwesternBell CommunicationsServices Inc.Inc. d/b/a SBC Long Distance respectfully and jointly requestrequest Commissionconsent to and approvalof:
(a) the assignment of SBCT's Certificate of Convenience and Necessity toto provide locallocal exchange and interexchangeinterexchange servicesservices from SBCT toto SBCLD asas part of a corporate reorganization whereby direct ownership of SBCLD will transfer from SBC Communications, Inc. ("SBC") to SBCT, all SBCT assets will be transferredtransferred toto SBCLD, and SBCT will cease operations; Co) thethe assignment to SBCLD of SBCT's interconnectioninterconnection agreement with BellSouth Telecommunications; (c)(c) toto thethe extent suchsuch approval isis required, authority toto enable thethe conversion of SBCLD to a limited liability company toto be known as SBC Long Distance LLC; and (d) thethe transfer toto and adoption by SBCLD of SBCT's current filedfiled tariffs,tariffs, subject to the submission toto the Commission, of a revised SBCLD tarifftariff reflecting SBCLD's conversion to a limited liabilityliability company.
[SIGNATURE PAGE FOLLOWS].
5 [SIGNATURE[SIGNATIJRE PAGE,JOINT PETITION].PETITIONj.
Datedthis__. day of November,2004.
StevenD. Strickland GeneralCounselandSecretary SBCTelecom,Inc.
Johndi Bene Vice President,GeneralCounselandSecretary SouthwesternBell CommunicationsServicesInc.Inc. d/b/aSBCLongDistance
Of counsel:
EricFishman,Esq. Holland&8z Knight LLPLLP. 2099PennsylvaniaAve.,Ave. , NW Suite 100 Washington,DC 20006 Tel: 202-955-3000 Fax: 202-955-5564 e-mail:e-mail:eric.eric.fishmanfishman [email protected] VERIFICATION
STATE OF SOUTH CAROLINA PUBLIC SERVICE COMMISSIONCOMMSSION
State of Texas.
County of , SS.
Steven D. Strickland, thethe General Counsel and Secretary of SBC Tdecom,Telecom, Inc.Inc. ("SBCT"), a jointjoint petitioner named inin the foregoing "Joint Petition", being duly sworn, says thatthat the facts and allegations therein are true, except so far as they are thereintherein stated to be on information,information, andand that, so far as they are thereintherein stated toto be on information, he believes them to be true.
Steven D. Strickland
Taken, sworn to,to, and subscribed before me this ___ day of November, 2004.
Notary Public inin and for said County.
My commissioncomrmssion expires on:
7 VERIFICATION
STATE OF SOUTH CAROLINA PIYBLICPUBI IC SERVICE COMMISSIONCOMMSSION
State of California.
County of Alameda, ss.ss.
John di Bene, thethe Vice President, General Counsel and Secretary of Southwestern Bell Communications Services Inc. d/b/a SBC Long Distance ("SBCLD"), a joint petitioner named in the foregoingforegoing "Joint Petition", being duly sworn, says that the facts and allegations thereintherein are true, except so far as they are therein stated toto be on information, and that, so farfar as theythey are therein stated to be on information, he believes them toto be true.
JohnJohn di Bene.
Taken, sworn to, and subscribed before me this day of November, 2004.
Notary Public inin and for said County.
My commission expires on: Exhibit 5 Subscriber Notice
Billing Name Billing Address Billing City, ST Zip
Re: Service Address Service City, State
Dear Valued (Business) Customer:
As you know, SBC Telecom, Inc. ("Telecom") has been your provider for locallocal telephone service.service. Recently, Telecom announced its intention to combine business operations with itsits affiliate SBC Long Distance. Under thethe terms of the agreement, effective on or about March 31, 2005, the anticipated closing date of thethe transaction,transaction, SBC Long Distance will replacereplace Telecom as your local service provider. This transactiontransaction is subject to obtaining allall requiredrequired regulatory approvals, and thethe filingfiling of all appropriate documents with statestate agencies.
Please rest assured that the transition of your service to SBC Long Distance will not affect the services you currently receive fromfrom Telecom. As a customer of SBC LongI ong Distance, you will continue to receive locallocal services with the same rates,rates, features, termsterms and conditions as you currently enjoy. You will be transferredtransferred to SBC Long Distance, unless you have selected a different cartiercarrier before the transfer date; existing preferred carrier freezes on the services(s) involved in thethe transfertransfer will be lifted;lifted; andand you must contact your local service provider toto arrange a new freeze. Additionally, you will continue to receivereceive toptop quality with performance which meets or exceeds that of what you currently receive from Telecom. This change in providers will be beneficial and virtually seamless forfor you. Please also be assuredassured thatthat you will not incurincur charges related to the transfer of your services toto SBC Long Distance. SBC Long Distance will be responsible for handling anyany complaints filedfiled or otherwise raisedraised by you prior to or during thethe transfer to SBC Long Distance.
There is no action requiredrequired on your part. You may, of course, choose another provider for your local telephonetelephone service, subject toto any termination restrictions inin your service arrangement with Telecom. Unless you choose anotheranother serviceservice provider, you will automatically become a customer of SBC Long Distance.
We inin thethe SBC family looklook forward to serving you andand appreciate your continued business. InIn thethe meantime, if you have specificspecific questions about this notice, please contact us at 1-877-430- 7228. (Business(Business #0 isis 1-877-430-7228)
Sincerely,
SBC Telecom, Inc.Inc. SBC Long Distance
9 #I 2355582_v22355582 v2
10 SBCSBC Communications Inc.
ANNUAL REPORT
DSL Long Distance Cingular Wireless
3.5 15 —— 14.4 25 24.0
21.6 3.0 12 20
2.5 2.2 15 2.0
1.5 6.1 10 4.9 1.0
0.5—
0.0- 0 • 2001 2002 2003 2001 20022002 "20032003 20612001 2002 2003 / ] DEAR FELLOW INVESTOR:INYESTOR:
2003 WaSaYYE!5a year of significant challenge for our industry and solid achievement by our company.
Our 2003 results reaffirmedreaffirmed our business strategy.strategy. As thethe broadband through SBC Yahoo! DSL, wireless throughthrough Cingular telecom arena continually redefinesredefines how individualsindividuals and W!relessWireless and entertainment through SBC DISH Network. businessesbusinesses exchange ideasideas and information, our opportu- DSL Internet nities for growth inin new markets are encouraging.encouraging. SBC Yahoo! DSL isis the largestlargest DSL provider in the country. Our strategy is clear: Retain andand expand our customer the Last year, we addedadded 1.31.3 million lineslines forfor a total of 3.55 million. base by offeringoffering thethe mostmost complete, flexibleflexible bundle of high- of 3. ° A major sales channelchannel expansion we began inin latelate 2003 isis qualityquality'communicationscommunications solutions available anywhere in the expected to increaseincrease our DSL momentum even more in 2004. market, at a great value. Continually introduceintroduce newnew customer- momentum even more in 2004. SBC Yahoo! DSL isis now availableavailable through some 2,000 stores friendlyfriendly solutions and market them creatively. Stake out new through some 2,000 stores such as Best Buy, RadioShack and Sam's Clubs -- in addition markets, particularly inin the large-businesslarge-business sector. Maintain a Buy, —in addition to our own company channels and online from Yahoo! strong financialfinancial position. And always be on the lookout forfor Yahoo! We also expanded our DSL coverage footprint in 2003 to ways to be more efficient andand cost effective. footprint to reach 75 percent of our customer locations This strategy yielded solid resultsresults inin 2003: reach 75 percent of our customer locations at yeayearr end, and we expectexpect to reach nearly 8080 percent in the first quarter of 2004. •~ 137 percent growthgrowth inin longlong distance lines.lines. percent the quarter of 2004. SBC Yahoo!Yahooi DSL isis currently rollingrolling out a groundbreaking •~ 60 percent growth inin DSL lines. out groundbreaking Wi-Fi initiativeinitiative called FreedomLinkFreedomL!nk».sM. FreedomLinkFreedomLink'MsM will •~ Strongest net adds from Cingular Wireless during will connect SBC customers toto thethe Internetinternet from the roadroad via thethe secondsecond half of 2003 inin two years. the hot spots that are scheduled to be available in more than •~ Four consecutiveconsecutive quarters of improvingimproving consumer to available in more than retailretail access lineline trends.trends. 6,0006,000 hotels, airports, convention centers and other venues throughoutthroughout thethe i13-state3-state SBC territoryterritory by the end of 2006. As 2004 unfolds, we have good reason toto be optimistic, by of which is why thethe Board of Directors in December increased Long Distan(:eDistance 5BC's SBC's dividend by nearly 16 percent. By year end, we expect SBC more thanthan doubled its long distance lines inin 2003, revenuesrevenues toto begin growinggrowing for thethe firstfirst time in threethree years. addingadding 8.38.3 million for a total of 14.414.4 million lines. This We_lsoWe also expect operating margins throughout 2004 to be made SBC the fastest-growing long distance providerprovider inin higherhigher thanthan fourth-quarter 2003 reported margin levels,levels, the country lastlast year. Our growth was spurred byby launcheslaunches paving thethe way for increased profits in 2005. inin California, Nevada, illinois,illinois, Indiana,Indiana, Michigan, Ohio and Wisconsin during 2003. EXISTING MARKETS and Wisconsin during 2003. Winning regulatoryregulatory approvals in late 2003 to offer long Bundling was thethe centerpiece of our consumer marketing approvals to offer long distancedistance inin thethe Midwest marked a cruciaicrucial turning point for efforteffort lastlast year, and we realized significant improvements in turning point for SBC, because thethe region represents more than one-third, or bothboth' access line trendstrends and revenuerevenue per customer as aa result. region represents more than one-third, or aboutabout 20 million, of our totaltotal access lines.lines. We'reWe' re already Consumer access line retention increasedincreased 7 percent fromfrom the already seeingseeing the same kindkind of access line retention impact in the fourthfourth quarter of 2002 to the the of access line retention impact in the Midwest that we saw in the West and Southwest when we finalfinal quarter of 2003, spurred Annual Dividends that the and Southwest when we entered the long distance business inin those regions. Now, for by increased bundled offerings per Common Share long those regions. Now, for thethe first timetime in SBC's history, we can offer long distance in of longlong distance inin California (Declared)(Declared} history, we can offer long distance in all 50 states. early inin the year and inin thethe II0~ ~ . • ~ . - Midwest in thethe fall, and byby Cingular Wireless a major market!rigmarketirig push to $1.50$1.50 Wireless is a top growthgrowth areaarea for SBC, and Cingular Wireless' grow our DSL subscribersubscriber pending acquisition of AT&TATILT Wireless will make SBC the base. Product bundlingbundling majority owner of what promises to be the premier wireless increased our average $1.41$1A1 provider in America. Coming on the heels of thethe strongest monthly revenue per access $1A0$1.40 —— per — subscriber growth in twotwo years, Cingular announced inin FebruaryFebruary line by approximately $2.25$2.25 2004 thatthat itit will buy No. 3 wireless provider AT&T Wireless. over thethe same period. This combination will make Cingular a much stronger and more We'llWe' ll strengthenstrengthen our $1.30$1.30 efficient competitor in this highlyhighly, competitive market. bundle even furtherfu'rther inin March For Cingular customers, thethe combination will mean expanded with the introduction of with the introduction of coverage to 97 of the toptop 100 markets, plus improvedimproved reliability,reliability, SBC DISH Network satellite SBC DISH Network satellite enhanced call qualityquality andand a wide array of new andand innovative television throughthrough an $1.2o$1.20 —— services, including even faster wireless broadbandbroadband services. agreement with EchoStar. For our company and our stockholders,stockholders, it provides much With this launch,launch, we will be greater exposure to one of the most importantimportant growthgrowth oppor- the only major company in tunities in the telecomtelecom market today. The strong operational $1.10 — $1 00 the country toto offer customerscustomers — synergies Cingular expects to realize through this combination, synergies Cingular expects to realize through this combination, a completecomplete bundle: locallocai such as lower advertisingadvertising expense, increasedincreased back-office $1.03$1.03 and long distance calling, efficienciesefficiencies and lower capital requirements,requirements, would allow $1.00$1.00 ~— Cingular to provideprovide even better service at a lower cost. 2001 20022002 2003 PAGPAGE)E 1- 22 Cingular made somesome important stridesstrides duringduring 2003, indudingincluding There areare several important industry trendstrends driving the itsits conversion to thethe powerfulpowerful GSM network technology in allall its market, but one of thethe most significant is convergence. Talk major markets. This conversionconversion is enhancing service quality and to chief informationinformation officers of major companies today and improvingimproving customer satisfaction. GSM, or Global System for one of the firstfirst thingsthings theythey mention isis IP services andand thethe need Mobile Communications, is thethe world's most popularpopular wireless to converge voicevoice and data networks. Among thethe many network techr_ology,technology, offering the widest variety of handsets with advantages of convergence, itit allows companies toto save money featuresfeatures likelike colorcolor screens, cameracamera phones and Internet access. byby puttingputting theirtheir long distancedistarice voice on a data network. To further integrateintegrate wireless and wireline, Cingular last.last fall SBC isis ideallyideally positionedpositioned to serveserve this market by simply introduced FastForwardFastForward™,TM, a first-of-its-kindfirst-of-its-kind cradlingcradling device expanding our existingexisting relationships. We stepped forwardforw'ard in thatthat allows subscribers to forward wireless calls toto home or 20032003 with PremierSERVPremierSERVsM,si, a powerful portfolio o_of. managed officeoffice lines. FastForwardFastForward™TM gives customers the security of services thatthat includes a new hosted Voice over Internet wireline, the mobility of wireless and the convenience of Protocol service (VoIP)(VolP) asas well asas IP-VPN services ---—flexibleflexible combining both into one number. This also spells greater networknetwork connections thatthat can support a broadbroad spectrum of customercustomer savings, since calls to the wireless phone while IP applications, including VolP. cradledcradled don't count against wireless minutes. This market offers tremendous growth opportunities for The initial impact of the much-anticipated "wireless locallocal SBC, and with our early leadership position inin the VolP area, number portability" rules implementedimplemerited lastlast NovemberNovember—m we believe large-business customers will becomebecome a more allowing customers toto switch wireless carriers without changing important segment of our business over the next few years. numbers oror' toto move home numbers toto wireless phonesphones m—was Working for'for thethe Future less dramatic than many had predicted. That was certainlycertainly the With our strong broadbandbroadband customer base, we'rewe' re also well- case atat Cingular. positioned to deliver an industry-leading VolP product to The technology and spectrum enhancements under way at consumersconsumers m—as soonsoon as severalseveral key regulatoryregulatory and service- Cingular, combinedcombined with theth'e unique wireless/wireline integration key quality issuesissues are resolved. capabilitiescapabilities it offers, are two reasons we believe porting Although a number of telecom companiescompanies have announced represents a potential growth opportunity for Cingular inin 2004. plans to deploy VolPVoIP for consumers, for thethe near term,term, we NEW OPPORTUNITIESOPPORTUNITI'ES --—2004 AND BEYOND believe our currentcurrent wireline offerings still provide better callcall Our subscriber growth inin all these consumer businesses was quality, featuresfeatures and pricing. exceptional in 2003, and we expect another strongstrong year inin InIn thethe meantime, we'rewe' re working toto solve the shortcomings 2004, as big gains inin our newer offerings bring not only inherent with consumer VolP services availableavailable today, such as new revenuerevenue opportunities butbut greater stability in our 9-1-19-1-1 responders' inability to locatelocate the callercaller andand service wireline business. interruptions due to power failure. As thethe regulatoryregulatory and In long distance,distance, we expectexpect continued solid growth inin technicaltechnical uncertainties areare resolved, we'llwe' ll be readyready toto move 2004, particularly inin thethe West and Midwest. In wireless, aggressivelyaggressively toto provide consumers not only with reliable we expect toto build on the strongstrong momentum Cingular VolP service but with value-addedvalue-added features. generated last year. The conversion to GSM technology Across thethe country, we are continuing toto migrate fromfrom will not only improve voice qualityquality but also allow Cingular a circuit-switchedcircuit-switched national network toto a packet-switched IP toto offer new data services. We believe continuedcontinued deployment network --—moving fromfrom copper to fiber.fiber. This reflects the of broadbandbroadband technology will help keep the momentum ongoing shift in demanddemand fromfrom mostly voice toto mostly data, building inin our DSL business. and itit provides thethe ability toto integrate wireline and wireless. But perhaps the highest-impact opportunity for thethe futurefuture SBC has been a leader forfor 125 years inin technology isis inin the large-businesslarge-business market, where we'rewe' re now able toto development, and be assured that we will develop and provide both voice andand data services on a nationwide basis, provide solutions for the future to satisfysatisfy thethe explodingexploding providing an important new choice to businessbusiness customers. demand for bandwidth toto Debt handlehandle our customers' voice, Business Markets e9 data and video needs. SBC isis poised to tap thethe enterprise business market, which representsrepresents a sizable revenuerevenue opportunity overover the next few ENHANCING CUSTOMER opportunity the few $30 " ENHANCING CUSTOMER years. We achieved several milestones last year that positionposition SERV!CE,SERVICE, IMPROVING usus to be a strong competitor for large-business customers. to be a strong competitor for large-business customers. $26$26 EFFICIENCY, REDUCING COST First,First, we completed our nationalnational data and IPIP backbones $2S$25 Providing top-quality,top-quality, on-time covering bothboth our 13-state area and 30 additional major service isis our heritage, and $22 metropolitan areas.areas. Next, we created a nationalnational sales force we'rewe' re investing in literallyliterally more thanthan 1,0001,000 strong dedicated to developing new hundreds of initiatives that $2O$20 hundreds of initiatives that opportunities in thethe large-businesslarge-business market. $18 will not only help us serve our Finally,Finally, winning thethe rightright to sell longlong distance in our final customerscustomers better, but do soso fivefive Midwestern states gave us the critical tractiontraction we needed more efficiently and at a lower gave the $1S$15— more efficiently and at a lower in our large-business push, since those states represent suchsuch cost.cost. As a result of these aa largelarge portion of our subscriber base. projects, last year our overall Nearly half thethe Fortune 1000 companiescompanies are headquartered on-time installation rate was are $10$10— installation rate was within our traditional 13-state service area, so our existing up, repair times were down, customercustomer relationshipsrelationships uniquelyuniquely POsitionposition usus to compete for field technician productivity their enterprisewide needs. Large businesses with more than increased and customer evalu- their enterprisewide needs. Large businesses with more than SS increased and customer evalu- half their locationslocations inin our 13 states will spendspend an estimatedestimated ations of our service qualityquality $34 billion on telecom servicesservices this year,year, and they'rethey' re a showed steady improvement.improvement. natural market for us. $0 2001 2002 2003 PAGET-_PAGE 3 Theseinitiativesinitiatives alsowillfundamentallytransform our •~ 3.53.5 million high-speed Internet lines.lines. cost structure by standardizing, optimizing andand consolidating •~ 24 million wireless customers, aa wireless footprintfootprint with various functions.functions. Reducing cost isis critical,criticai, as competition for the industry's largestlargest overlap of wireline assets and a telecomtelecom customers intensifies.intensifies. Productivity improvements pending acquisitionacquisition that would make SBC aa 60-percent under way today are expected toto save an estimatedestimated owner of America's premier wireless provider. $1.3$1.3 billionbillion annually inin expense and capital costs by 2006. •~ A nationwide IPIP backbone coveringcovering thethe nation'snation's largestlargest cities.cities. FINANCIALLY STRONG, FOCUSED ON STOCKHOLDER VALUE •~ An integratedintegrated video entertainment offering. Thanks toto our disciplined financialfinancial management during one •~ One of the world's largestlargest directory advertisingadvertising of thethe most difficultdifficult periods inin our industry, SBC remains companies. financially very strongstrong and well-equipped for the longlong term •~ A broadbroad set of international telecomtelecom assets.assets. to seizeseize oppOrtunitiesopportunities inin this dynamic market. Strong cash •~ A strong financial position. flow allowed usus to cut debt from $26 billionbiilion two years ago The economy finallyfinally showedshowed somesome signssigns of turning thethe toto $18 billion at the endend of 2003, and we maintain thethe lowest corner latelate last year, improving our prospects for growth debt ratio inin our industry. both inin the consumer and business markets. Gains inin long We continued toto return value directly to stockholders, both distance, broadband and wireless --—combined with improving through dividends and shareshare repurchases.repurchases. During 2003, our accessaccess lineline trends --—areare expected toto yield positive revenue Board of Directors increased the quarterly dividend by a totaltotal growth towardtoward thethe end of this year.year. And thethe foundation of 15.715.7 percentpercent and declared threethree extra dividends totaling we'rewe' re layinglaying inin thethe large-business market should yield 25 cents a share, inin addition toto the quarterly payout. This isis the additionaladditional growth inin thethe years ahead. 19th consecutive year the Board has increased the dividend, InIn addition, we saw competition-driven pressure on margins and the increase isis the largest inin the company's history. At year flattenflatten in thethe first quarter of thisthis year, andand we expect pension end, SBC hadhad thethe largestlargest dividend yield inin itsits peer group. and post-retirement benefit costs toto decline. Inln December 2003, the Board also authorized a new share Amid thesethese encouraging signs, we'rewe' re continuing to focusfocus repurchase program of 350 million shares through 20082008— on building market share and operating more costcost effectively. abo(Jtabout 10 percent of outstanding stock. We'llWe' ll keep runningrunning our businessbusiness in a way that has won These decisionsdecisions toto reducereduce debt, buy back shares andand us thethe respect of our employees, customers, partners and increase our dividend were made in an environment in which thethe communities we serve. Last year, SBC rankedranked NO.No. 1 "on'on burdensome and uncertain regulatory rules continuedcontinued toto Fortune's listlist of the "Most Admired" telecomtelecom companies andand provide a disincentive to reinvest more of our cash intointo ourour No. 7 on Fortune's listlist of the top 50 companies for minorities. traditionaltraditional wireline business. In addition, the companycompany was rei:ognizedrecognized for having one of REGULATORY ENVIRONMENT thethe most diverse work forces, management teams and Board The FCC'sFCC's Triennial Review Order thatthat camecame out lastlast August of Directors in corporate America. provided some hope forfor regulatoryregulatory reliefrelief inin broadband, and Finally, we look forward toto the safe return of the more we are optimistic that the remaining uncertainty will be than 200200 SBC military reservists who areare currently serving clarifiedclarified shortly by thethe FCC or the Court of Appeals. We were"were around thethe world. These men andand women are trulytruly "going disappointed, however, thatthat onerous unbundling and pricing beyond thethe call"c'all" toto protect America from thethe threat of requirements thatthat were overturned twice by the courts were internationalinternational terrorism, and we salute theirtheir bravery and not removed. At this writing, thethe United States-States Court of commitment to such importantimportant work. Appeals for the DistrictDistric't of Columbia Circuit isis still weighing As we look to the rest of 2004, SBC isis more confidentconfident andand the industry'sindustry's appealappeal of thethe order on an expeditedexpedited basis. committed than ever to delivering forfor ourour stockholders.stockholders. We'reWe' re hopeful thisthis is a signal that the courtcourt intends toto reform As we returnreturn toto positive revenuerevenue growth, I'm confident our once and for a!lall thethe wholesale rules that ha_/ehave discourageddiscouraged stock price will bebe rewarded by the market. Meanwhile, new investmentinvestment byby the whole industryindustry and put locallocal phone we'llwe' ll work hardhard to build value today and in the future.future. companies at a disadvantage. In 2004,2004, we will continue toto press for raterate reform at the Sincerely, federal level.level. We will also participate inin proceedings atat thethe state levellevel to reviewreview the below-cost wholesale rates we are currently forced toto chargecharge our competitors and continue c efforts toto bring themthem more in lineline with our costs. Indiana's Edward E. Whitacre Jr. recent decision to raiseraise by approximately 30 percent the Chairman and Chief Executive Officer wholesale raterate thatthat competitor resellers paypay us to leaselease ourour February 18, 2004 network was a smallsmall step in thethe right direction, andand we'rewe' re hopeful other states will taketake notice. We will also work with federal regulators toto ensure a level playingplaying field for all compariiescompanies thatthat compete in the broadband andand VolP markets.
A LooKLOOK AHEAD Looking ahead,ahead, I'mI'm more optimistic about our futurefuture and our competitive position thanthan I'veI've been inin several years. No other telecomtelecom company has Ourour combinationcombination of assets:assets: •~ 55 million direct connections to homes ;indand businesses coveringcoveiing one-third of the United States, includingincluding the headquarters of one-half of the Fortune 1000.1000,
PAGE [ 4 SELECTED FINANCIAL ANDANO OPERATING DATA Dollars in millions except per shareshare amounts
At December 31 or for thethe year ended: 2003 2002 2001 2000 1999 Financial DataData'I Operating revenues $$40,40,843843 $$43,43,138138 $$45,45,908908 $$51,51,374374 $$49,49,531531 Operating expenses $$34,34,374374 $$34,34,515515 $$35,35,400400 $$40,40,904904 $$37,37,933933 ' Operating income $ $6,6,469469 $$8,8,623623 $$10,10,508508 $$10,10,470470 $$11,11,598598 interestInterest expense $$1,1,241241 $$1," 1,382382 $$1,1,599599 $$1,1,592592 $$1,1,430430 EquityinEquity in nethet income=ofincome of affiliates $$1,1,253253 $$1,1,921921 $$1,1,595595 $$897897 $$912912 Other incomeincome (expense) -—netnet22 $$1,1,817817 $$734734 $ (236) $$2,2,562562 $ (354) IncomeIncome taxestaxes $$2,2,930930 $$2,2,984984 $$3,3,942942 $$4,4,816816 $$4,4,280280 IncomeIncome before extraordinary item and cumulative effect of accountingaccounting changeschanges $$5,5,971971 $$7,7,473473 $$7,7,008008 $$7,7,800800 $$6,6,573573 NetincomeNet income'3 $$8,8,505505 $$5,5,653653 $$7,7,008008 $$7,7,800800 $$8,8,159159 Earnings per common share: Income before extraordinaryextraordinary item and cumulativecumulative effect of accountingaccounting changeschanges $$1.1.8080 $$2.2.2424 $2.$ 2.0808 $$2.2.3030 $$1.!.9393 ' Net incomeincome33 $$2.2.5656 $$1.1.7070 $2.$ 2.0808 • $$2.2.3030 $$2.2.3939 Earnings per common share -—assumingassuming dilution: IncomeIncome before extraordinary itemitem and cumulative effect of accounting changes $$1.1.8080 $$2.2.2323 $$2.2.0707 $$2.2.2727 $$1.1.9090 Net incomeincome33 $$2.2.5656 $$1.1.6969 $$2.2.0707 $$2.2.2727 $$2.2.3636 Total assets.assets $100,166$100,166 $$95,95,057057 $$96,96,322322 $$98,98,651651 $$83,83,215215 Long-term debt $$16,16,060060 $$18,18,536536 $$17,17,133133 $$15,15,492492 $$17,17,475475 Construction and capitalcapital expendituresexpenditures $$5,5,219219 $$6,6,808808 $$11,11,189189 $$13,13,124124 $$10,10,304304 ' Dividends declared per common shareshare44 . $$1.1.4141 $$1.1.0808 $$1.1.025025 $$1.1.015015 • $$0.0.975975 BookvalueBook value percommonper common shareshare $$11.11.5757 $$10.10.0101 $$9.9.8282 $$9.9.0909 $$7.7.8787 ...... -Ratio_of_eamings__fJxecLcharges_Rati~rnings toXixeclcharges,...... 6.5_46.54..... _6.3E&.36...... 5.9_4__5.94 ...... _&81...... 6.526.52 Debt ratioratio 31.9%31.9% 39.9%39 9% 44.3%44 3% 45.0%45.0% 42.9%42.9% Weighted average common shares outstanding (000,000)(000,000) 3,3183,318 3,3303,330 3,3663,366 3,3923,392 3,4093,409 Weighted average common sharesshares outstanding with dilution (000,000)(000,000) 3,3293,329 3,348 3,3963,396 3,4333,433 3,4583,458 End of period common sharesshares outstanding (000,000)(000,000) 3,3053,305 3,3183,318 3,3543,354 3,3863,386 3,3953,395 Operating Data Network access lineslines in service (000) 54,68354,683 57,08357,083 59,53259,532 61,25861,258 60,69760,697 Long-distance lineslines inin serviceservice (000)14,416(000) 14,416 6,0716,071 4,8774,877 3,0433,043 1,2061,206 DSL lineslines inin service (000)(000) 3,5153,515 2,1992, 199 1,3331,333 767 115 Wireless customers (000)(000) -—Cingular/SBCCingularlSBCS5 24,02724,027 - 21,92521,925 21,59621,596 19,68119,681 11,15111,151 Number of employees 168,950168,950 175,980175,980 193,420193,420 220,090220,090 204,530204,530
tAmountsiAmounts inln thethe above table have been preparedprepared inIn accordance with accounting principles generallygenerally acceptedaccepted in thethe UqitedUnited States. EffectivelJanuaryEffective January 1, 2002,2002, we adopted the fair value recognition provisions of Statement of Flr_anclalFlriancial Accounting Standards No. 123, =Accounting"Accounting for Stock-BasedStock-Based Compensation"Compensation (FAS(FAS 123)123)asas amended by StatementStatement of RnandalFinancial Accounting Standards No. 148, "Accounting forfor Stock-BasedStack-Based Cx_mpensationCompensation -Transition—Transition and Disdosure" (FAS(FAS 148). InIn 2002,2002, we restated ouraur 2001 andand 2000 results.results, We diddid not restaterestate 1999 for our adoption of FAS 148, as allowedallowed by thethe standard; however,however, had ourour results for 1999 been restatedprestated, net incomeincome forfor 1999 would havehave been reduced byby $189,II89, Oorr $0.05S0.05 per shareshare assumingassuming dilution. ZAmountzAmount forfar 2001200'I Indudesincludes a loss of $28528 whichwhich was reclassifiedreclassifled from an extraordinary lossloss to anan ordinaryordinary loss,loss, related toto thethe January 1, 20032003 adoptionadoption ofof Statement" of Financial Accounting Standards No. 145,145, "Rescission"Rescission of FASBFASB Statements No. 4, 44, andand 64, Amendment of FASB Statement No. 13, andand Technical Corrections,"Corrections, (FAS 145). FAS 145145 rescindedresdnded FASB Statement No.No. 4,4, "ReportingReporting GainsGains andand LossesLosses from Extinguishment of Debt, anan amendmentamendment of APB Opinion No. 30_.30". 3AmountsaAmounts Indudeindude thethe following extraordinary itemitem andand cumulative effect ofof accounting changes: 2003, extraordinaryextraordinary lossloss ofof $7S7 relatedrelated toto the adoption ofof Financial Accounting StandardsStandards BoardBoard Interpretationinterpretation No. 46 _Consolidation"Consolidation of Variable Interest Entities, an Interpretation ofof Accounting Research Bulletin No.Na. 51" (FIN(FIN 4G)46) andand thethe cumulativecumulative effect of accounting changeschanges of $2,541S2,541 which Indudesincludes aa $3,677S3,677 benefit relatedrelated toto thethe adoption ofof Statement of FinancialFinancial Accounting Standards No. 143,143, _Accountlng"Accounting for Asset Retirement Obligations" (FAS 143) andand aa $1,136S1,136 charge related toto thethe January 1, 20032003 changechange inin the method in which we recognizerecognize revenuesrevenues and expenses related to publishing directories from the "Issue"Issue baslsbasis"K method toto thethe "amortization""amortization method; 2002, charges related to aa January 1, 2002 adoption ofof Statement ofof RnandalFinancial Accounting Standards No. 142, "Goodwill andand OtherOthei Intangible Assets';Assets"; 1999, gain onon thethe sale of overlapping cellularcellular properties and change inin directory accountingaccounting at Ameritech. 4Dividends4Divldends declared by SBC's Board of Directors reflect the following:following; 2003, includesincludes threethree additionaladditional dividends totaling $0_25S0.25 per share above our regularregular quarterly dividend payout. 19991999 does not indudeinclude dividends declaCeddeclared and paldpa1d by AmedtechAmerltech inin 1999. sailsAII periodsperiods exclude co#comerscustomers from the overlapping Ameritech wireless propertiesproperties sold in 1999.1999.BeginningBeginning in 2000;2000, the number presented representsrepresents 100%100'lo of CingularOingular Wireless"Wireless' (CJngular)(CJngular) cellular/PC5cellular/PCS customers. CingularCingular is a joint venture inin which we own 60%60 la andand isis accountedaccounted forfor under thethe equity method.
PAGE I 5 MANAGEMENT'SMANA(sEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dollarsinin millionmillionss except pershareshare amounts
Throughout thisthis document, SBC Communications Inc.Inc. is You should readread thisthis discussiondiscussion inin conjunction with the referredreferred to as "we" or "SBC". We are a holdingholding company consolidated financialfinancial statements and the accompanying whose subsidiaries and affiliates operate in the communi=communi- notes•notes. A reference to a Note inin thisthis section refers toto thethe cations servicesservices industry.industry. Our subsidiaries and affiliates accompanying Notes to the Consolidated Financial provide wireline and wireless telecommunications services Statements_Statements; In our tables throughout thisthis section, and equipment an_and directory advertising servicesservices bothboth percentage increasesincreases and decreases that exceed 100% are domestically and worldwide. r not considered meaningful and are denoted with aa dash.
RESULTS OF OPERATIONS Consolidated Results Our financial results are summarized inin the table below.below, We then discuss factors affe_ingaffecting ourOur overall resul_results forfor the past threethree years. These factorsfactors are discussed inin more detail inin our segment results. We also discuss our expected revenuerevenue and expense trends for 2004 in the "Operating Environment and Trends of thethe Business"Business section. Percent Change 2003 vs,vs. 2002vs•2002 vs. 2003 20022002 2001 2002 2001 Operating revenuesrevenues $40,843$40„843 $43,138$43,138 $45,908$45,908 (5.3)%(5.3) (6.0)%(6.0)% Operating expensesexpenses 34,37434,374 34,51534,515 35,40035,400 (0.4)(0.4) (2.5)(2.5) Operating incomeincome 6A696369 8,6238,623 10,50810,508 (25.0)(25.0) (17.9)(17.9) IncomeIncome before incomeincome taxes 8,9018,901 10,45710,457 10,95010,950 (14.9)(14.9) (4.5)(4.5) IncomeIncome before extraordinary itemitem and cumulative effecteffect of accountingaccounting changes 5,9715,971 7,4737,473 7,0087,008 (20.1)(20.1) 6.6 Extraordinary itemitem'1 (7)P) .... Cumulative effect of accounting changes2,changes233 2,5412,541 (1,820)(1,820) ------Net income 8,5058,505 5,6535,653 7,0087,008 50.550.5 (19.3)(19.3) Diluted earnings per shareshare 2.562.56 1.691.69 2.072.07 , 51.551.5 (!8.4)(184)
12003Includesindudes anextraordinarylossloss onourour realreal estate leasesrelatedrelated to the adoptiodadoptiori of FinandalAccountingStandardsBoard(FASB)Interpretation No:No. 46 "Consolidation"Consolidation ...... o£Eada_Entitlea,.aaJnterpEetatio.nbleJntenMEnt)ties~ Jnterpretation ofLof_cmmtingAccount)ng ResearchB_ulle_t_Bulletin _No~ _~lhi _46)...... z2003z2003 Indudes cumulativeeffect of accountingchangesof $2,541:$2,541:a $3,677$3,677 benefitrelatedbenefit related toto the adoption of Statementofof FinancialAccountlngAccounting StandardsNo. 143,143, "Accounting for AssetRetirementObligations"obligations" (FAS(FAS 143);and a $1,136$1,136 chargerelatedtoto the January I,1, 2003changeinin thethe methodinin which we recognizerecognize revenu'esrevenues andand expensesrelatedrelated toto publishingdirectoriesdirectories from thethe "issuebasls"basis" method to the "amortlzatldn""amortiz'ation method. 32002indudesindudes a cumulativeeffectof accountingchangerelated toto thethe adoption of statementStatement of FlnandalFinancial AccountlngAccounting StandardsNo. 142,"Goodwill"Goodwill andand Other IntanglbleIntangible Assets"(FAS(FAS 142).
Overview Our operatingoperating incomeincome declineddeclined $2,154,$2,154, or TheThe 2003 increaseincrease in our combined net pension and 25.0%,25.0%, in 2003, and $1,885,$1,885, or 17.17.9%,9%, in 2002. The declines postretirement cost of $1,917$1,917 alsoalso contributed to the decline inin both 2003 and 2002 were due primarily to an increase inin inin operatingoperating income.income. Because of its size, thisthis expenseexpense isis our combined net pension and postretirement cost and thethe discussed inin more detail inin "Operating"Operating expenses" below.below. continued loss of revenuesrevenues fromfrom decliningdedining retailretail access lines.lines. The change in our method of accounting for publishing The continuingcontinuing decline inin retailretail accessaccess lineslines has beenbeen directories from the "issue basis" method toto the primarilyprimarily attributable toto customers moving from our retailretaii "amortization" method (see Note 1 and .ourour "Directory"Directory lineslines toto competitors using our wholesale lines provided under Segment Results" section) increased Operatingoperating incomeincome the Unbundled Network Element-Platform (UNE-P) rules. approximately $80. : UNE-P rules require us toto sell our lineslines and thethe end-to-end Our incomeincome before incomeincome taxes declined inin 2002, but services provided over those lineslines toto competitorscompetitors at belowbelow thethe decline was less thanthan the decline in operating incomeincome cost while still absorbing the costs of deploying, provisioning, due to increasedincreased gains on sales of internationalinternational investments maintaining and repairing those lines. Competitors can then in 2002.2002, In addition, aa lowerlower effective tax rate andand a decline take advantageadvantage of thesethese below-cost ratesrates to offer services in our weighted average common sharesshares outstanding at lower prices.prices. See our "Operating Environment and Trends favorablyfavorably affectedaffected ourour diluted earningsearnings per share inin 2002. of the Business" section for further discussion of UNE-P. , of the Business" section for further discussion of UNE-P. Operating revenuesrevenues Our operating revenuesrevenues decreased Additional factors contributing to the declines in retail access $2,295,$2,295, or 5.3%,5.3%, in 2003 andand $2,770,770, or 6.0%,6.0%, inin 2002.2002, • L • • $2, lines and revenues were thethe uncertain U.S.U.S.economyeconomy and The declines inin both 2003 and 2002 were primarilyprimarily due to increased competition, including customers using wireless lowerlower voice revenues resulting fromfrom thethe continuedcontinued loss of technology and cable insteadinstead of phone lineslines forfor voice andand retail access lineslines to UNE-P wholesale lines, as well asas thethe data. Although retail accessaccess lineline losseslosses havecontinued,have continued, the uncertain U.S.U.S.economyeconomy andand increased competition. UNE-P trendtrend hashas slowed recently, reflectingreflecting our abilityability toto now offer isis discussed in greater detail !nin our "Wireline Segment retail interLATAinterLATA (traditional) long-distance inin al!all of our Results" section.section. Additionally, in 2003, the changechange inin regionsr'egions as well as thethe introductionintroduction of offeringsofferings combining directory accounting mentioned above alsoalso increasedincreased multiple services for one fixed price ("bundles").("bundles" ). revenuerevenue approximately $47 (see Note 1).
PAGETPAGE 66 OperatingexpensesOur operating expenses decreased actuarial estimates of pensionpension and postretirement benefit $141, or 0.4%,0.4'/o, inin 2003 and $885, or 2.5%,2.5'/o, inin 2002. The 20032003 expense and actuarial assumptions. decrease was due to severalseveral factors. Costs were reducedreduced Retirement Offers Operating expenses also include primarily due toto thethe declinedecline inin our workforce (down more expenses for enhanced pension and postretirement benefitsbenefits than 7,0007,000 employees fromfrom 2002). Second, we recorded of approximately $44, $486 and $173 inin 2003, 2002 and 2001 charges inin 2002, which favorably affected comparisons with in connection with voluntary enhanced retirementretirement programs 2003. Specifically, thesethese 2002 charges includedincluded $813 related offered toto certain management and nonmanagement to a workforce reduction program (see Note 2)2) and employees as part of workforce reductionreduction programs. additionaladditional bad debt reservesreserves of $125 asas a result of the Inln September 2003, the InternalInternal Reven_i_Reve'nue Service (IRS) WorldCom Inc.Inc. (W0rldCom)(WorldCom) bankruptcy filing. Third, thethe increasedincreased the interestinterest raterate used to calculate pension plan impactimpact of thethe adoption of FAS 143 decreased our operating lumplump sums from 4.53%4.53 /o toto 5.31%,5.31 /o, effective for employees expensesexpenses approximately $280 (see Note 1).Fourth, our who retiredretired after September 30, 2003. The increase inin thisthis stockstock optionoption expense decreased approximately $207 (see interestinterest raterate resultedresulted inin smaller lump sum pensionspensions forfor some Note 12) primarily due to a decrease inin options granted of our employees.employees. We chose to extend thethe 4.53%4.53o/o rate to during 2003. Additionally, the change inin dire_orydirectory employees who retired before November 1, 2003.The exten- accounting mentioned above decreased operatingoperating expenses sion of this lump sum benefit raterate was accountedaccounted for as a approximately $33. special termination benefit and increasedincreased our 2003 fourth-fourth- The 20032003 decreases were partially offset by increasing quarter pension benefit expense approximatelyapproximately $28. costs related to our pension and postretirement benefit plans. Pension Settlement GainsLossesGains/Losses Under U.S.U.S. generally Our combined net pension and postretirement cost increased accepted accounting principles (GAAP),(GAAP), onon aa' plan-by-plan operating expenses approximatelyapproximately $1,917$1,917 in 2003 (see further basis, if lumplump sum benefit payments made toto employeesemployees discussion below). Also offsetting the decrease were increased upon terminationtermination or 'retirement'retirement exceed required thresholds,thresholds, expenses to enhance customer growth, includingincluding salessales andand we recognize a portion of previously unrecognized pension advertising supportsupport for digital subscriber linelirie (DSL)(DSL) and gains or losses attributable to that plan'splan's assetsassets and long-distancelong-distance marketing initiatives.initiatives, Inln particular, our liabilities. Until 2002,2002, we had an unrecognized netnet gain, advertising expense increased approximatelyapproximately $435 inin 2003,2003. primarily'primarily because our actual investment returns exceeded Operating expenses decreased in 2002 due toto the decline our expected investment returns. During 2002 and 2001, in our workforce (down over 17,00017,000 employeesemployees from 2001). we made lump sum benefit payments inin excess of thethe GAAP 2002 operating expenses also decreased due toto ourour thresholds, resultingresulting inin thethe recognition of net gains, adoption of FAS 142, whereby we stopped amortizingamortizing referredreferred to as "pension settlement gains". We recognized goodwill (see Note 1). net pension settlementsettlement gains of approximately $29 andand Combined Net Pension and Postretirement Cost (Benefit) $1,$1,363363 in 2002 and 2001. Due to U.S.U.S. securities market OperatingOperatirig expenses includeinclude our combined net pension and conditions, our plans experienced investmentinvestment losses duringduring postretirement cost (benefit) of $1,835,$1,835, $(82) and $(436) inin 2002 and 2001 resulting inin a decline in pension assets,assets, 2003, 2002 and 2001.A decrease inin our combined net causingcausing us toto have a net unrecognized loss. Net settlement pensionpension and postretirement benefit, as happened in 2003 gainsga!ns in 2002 includeinclude settlement losses during the latterlatter part and 2002, causes our operating expense to increase.increase. This of thethe year, reflectingreflecting thethe continued investment losseslosses increasedincreased expense of approximatelyapproximately $1,917$1,917 in 2003 was sustained byby the plan. Settlement gains for 2001 were primarilyprimarily due to net investmentinvestment losseslosses andand to pension settle- primarily relatedrelated to a voluntary enhanced pensionpension and ment gains recognized inin 2002 and previous years, which retirement program implemented inin October 2000. We reducedreduced the amount of unrealizedunrealized gains recognized in 2003. did not recognizerecognize any settlementsettlement gains or losses in 2003. Four other factors also contributed to our increasedincreased Medical Cost Controls As a resultresult of the continued combinedcombined net pension andand postretirement cost inin 2003. increase inin our combinedcombined net pension and postretirement First, thisthis cost increasedincreased approximately $343 due to our cost and the costs expected in 2004, discussed inin "Operating"Operating decisiondecision to lower our expected long-term rate of return on Environment and Trends of the Business", we have taken planPian assets from 9.5%9.5o/o to 8.5%8.5'/o for 2003, based on our long- steps to implementimplement additionaladditional costcost controls. To reduce thethe termterm view of future market returns.returns. Second, the reductionreduction increasedincreased medical costs mentioned above, inin January 2003, of thethe discount rate used toto calculatecalculate service and interestinterest we implementedimplemented cost-saving design changi_schanges inin' our cost fromfrom 7.5%7.5/o to 6.75%,6.75/o, inin responseresponse toto lower corporate management medical andand dental plansplans includingincluding increasedincreased bond interestinterest rates,rates, increased!ncreased this cost approximately $i63.$163. participant contributions for medical and dental coveragecoverage ' : Third, higher-than-expected medicalmediral and prescription dr_Jgdrug and increased prescription drug co-payments.co-payments. These changes claims increased expenseexpense approximatelyapproximately $152. Fourth, in reducedreduced our postretirement cost approximatelyapproximately $229 in 2003. responseresponse to rising claim costs,costs, we increased the assumed InIn early 2004,2004, nonmanagementnonmanageme'nt retirees were notified of medical cost trend raterate in 2003 from 8.0%8.0'/o to 9.0%9.0'/o for medical coveragecoverage changes that will become effectiveeffective on retireesretirees 64and64 and under andand from 9.0%9.0/o to 10.0%10.0/o forfor retirees January 1, 2005_2005. These changes includeinrlude adjustments to 65 andand over, trending toto an expected increase of 5.0%5.0/o inin co-paysco-pays and deductiblesdeductibles for prescriptioprescriptionn drugs and a choice of 2009 forfor all retirees,retirees, prior to adjustment forfor cost-sharing medical plan coveragecoverage between thethe existing plans, includingincluding provisions of the medical and dental plans forfor certaincertain retired monthly contribution provisions or a plan with higher co-paysco-pays employees. This increase inin the medical cost trend raterate and deductibles but no required monthly contribution from increasedincreased our combined net pension and postretirement cost thethe retiree during 2005. We expectexpect thesethese changes to reduce approximately $187. See Note 10 for furtherfurther detail of our 2004 expenses in the range of $300 toto $600.
PAGEPAGEI 7I MANAGEMENT'SMANAGEMENT'5 DISCUSSIONAND ANALYSISOF FINANCIALCONDITIONAND RESULTSOF OPE.RATIONSOPERATIONS (CONTINUED)IcoNTINUED) Dollarsin millionsexceptper,per share amounts
2003AccountingChanges as under thethe previousprevious method (assuming theth e cost of removal DirectoryAccountingEffectiveJanuary 1,2003,we would be thethe same under bothboth methods). changedourmethod of recognizing revenuesrevenues and expensesexpenses 2002 Accounting Change The year 2001 included relatedrelated to publishingpublishing directories from thethe "issue basis"basis" amortizatio0amortization expense related to goodwill and Federal method to thethe "amortization""amortization" method. The issue basis Communications Commission (FCC)(FCC) wireless licenseslicenses now method recognizesrecognizes revenues andand expenses at thethe time thethe owned by Cingular Wireless (Cingular). Beginning inin 2002, initialinitial deliverydelivery of the related directory titletitle isis completed.completed. goodwill and thesethese wireless licenseslicenses are no longerlonger being Consequently, quarterly incomeincome tends to vary with the amortizedamortized under FAS 142 (see Note 1). number and size of directory titlestitles publishedpublished during a Interest expense decreased $141, or 10.2%,10.2%, inin 2003 andand quarter.quarter. The amortization method recognizes revenues and $217,$217„oror 13.6%,13.6%, inin 2002. The 2003 decrease was pr!marilyprimarily expenses ratablyratably over the life of the directory title, which is related toto lower debt levels, which decreased approximately typically 12 months. Consequently, quarterly income tends to $4,102.$4,102. During 2003 we called, prior toter maturity, be more consistent overover thethe course of a year. We decided toto approximately $1,743$1,743 of long-term debt obligations.obligations. change methods because thethe amortization method has nownow The 2002 decrease was due to lowerlower compositecomposite rates, a become thethe more prevalent method used among significant lowerlower outstanding balance of commercial paper and the directory publishers. This changewillchange will allow a more meaning- elimination of interest expense associated with payables ful comparison between our directory segment and other to Cingular, which was due toto a 2001 agreement to net our publishingpublishing companiescompanies (or publishing segments of largerlarger notes payable with our notes receivable from Cingular. companies).companies). Our directory accounting change resultedresulted inin a Interest income increasedincreased $42,$42, or 7.5%,7.5%, inin 2003 and noncash chargecharge of $1,136,$1,136, net of an incomeincome tax benefit of decreased $!21,$121,or 17.7%,17.7%, in 2002. The increaseincrease for 2003 $714, recordedrecorded as a cumulative effecteffect of accounting change was primarily due to an increase inin averageaverage investment on the Consolidated Statement of Income as of January 1, 2003. balances and from early settlement of our notes receivablereceivable The effect of thisthis change was toto increaseincrease consolidatedconsolidated related to our 2002 sale of our investment inin Bell Canada pre-tax income and our directory segment income for 2003 Holdings Inc.Inc. (Bell Canada) toto BCE, Inc.Inc. (BCE),which included by $80 ($49 net of tax,tax, or $0.0i$0.01 per diluted share). a pre-payment of interest of approximately $37. These FAS 143 On January 1, 2003, we adoptedadopted FAS 143, increases were partially offset by a decrease in interest rates which setssets forth how companies must account for the costs charged to Cingular (see Note 15). The decrease inin 2002 was of removalremoval of long-livedlong-lived assets when those assets are no thethe resultresult of the reduction of interestinterest incomeincome associated Iongerusedlonger used inin a company's:business,company's business, but only ifif aa company Withwith the reduced balance of notesnotes receivablereceivable fromfrom Cingular isis legally required toto remove such assets. FAS 143 requires as a result of the 20912001 nettingnetting agreement discussed above. that companies recordrecord the fair value of the co_cscosts of removalremoval Equity inin net incomeincome of affiliates decreaseddecreased $668, or inin thethe period inin which the obligations are incurred and 34.34.8%,8%, in 2003 and increased $326, or 20.4%,20.4%, in 2002. capitalize thatthat amount as part of thethe book value of thethe The 2003 decrease was due toto lower resultsresults from our long-lived asset. InIn connection with the adoption of FAS 143 internationalinternational holdings,holdings, largelylargely attributable to gains that on JanuaryJanuary 1, 2003, we reversedreversed all existing accrued costs occurred inin 2002, and foregone equity income from the of removalremoval forfor those plant accounts where our estimatedestimated disposition of investments. The decrease was alsoalso due toto costs of removalremoval exceeded the estimated salvagesalvage value. lowerlower 2003 operating results from Cingular. Income from The noncash gain resulting from this reversal was $3,684,$3,684, our international holdings decreased approximately $546 netnet of deferred taxes of $2,249,$2,249, recorded as a cumulative inin 2003 compared to 2002. Our proportionate share of effect of accounting change on the Consolidated Statement Cingular's results decreased approximatelyapproximately $1.46$146 inin 2003. of Income as of January 1, 2003. InIn addition, TI_CTDC A/SA/5 (TDC),(TDC), The 2002 increase was due to higher income of the Danish national'national'communicationscommunications companycompany inin which we approximatelyapproximately $597 from our internationalinter'national holdings, hold an investmentinvestment accounted forfor on thethe equity method, primarily due to largerlarger gains inin 2002 thanthan in 2001. The : recordedrecorded a .lossloss uponupon adoption of FAS 143. Our shareshare of that increase was partially offset by aa decline inin Cingular's lossloss was $7, which includedinduded no taXtax effect.effect, This noncash results.results. Our proportionate shareshare of Cingular's results charge of $7 was also recordedrecorded as a cumulative effect of decreased approximately $270 inin 2002. accountingaccounting changechange on thethe Consolidated Statement of We account for our 60% economic interest inin Cingular Income as of January 1, 2003 (see(see Note 1). underunder the equity method of accounting and thereforetherefore Beginning inin 2003, forfor those typestypes of plant accounts includeinclude our proportionate share of Cingular's results inin where our estimated costscosts of removalremoval exceeded thethe our equity inin net income of affiliates lineline itemitem inin our estimated salvage value, we now expense all costs of Consolidated Statements of Income. Results fromfrom our removal as we incurincur them (previously those costs had been international holdings are discussed in deta!idetail inin recorded inin our depredationdepreciation rates).rates). As a result,result, our "international Segment Results" andand Cingular's operating depreciation expense will decrease immediatelyimmediately and our results are discussed in detail in thethe "Cingular"Cingular Segment operations and support expense will increase asas these Results"Results" section. (Our(Our accounting forfor Cingular is described assets areare removedremoved from service. The effect of thisthis changechange inin more detail in Note 6.)6.} was to increaseincrease consolidated pre-tax income and our Other incomeincome (expense) -—net We had other income of wireline segment income for 2003 byby $280 ($172 net of $1,817$1,817 inin 2003, $734 inin 2002 and other expense of $236 inin tax,tax, or $0.05$0.05 per diluteddiluted share). However, over thethe lifelife of 2001. Results for 2003 includeinclude gains of approximately $1,$1,574574 thethe assets,assets, total operating expenses recognizedrecognized under this on the salesale of our interestinterest in Cegetel S.S.A.A. (Cegetel) and gainsgains new accounting method will be approximately the samesame of $201$201 on the sales of YahoolYahoo! Inc.Inc. {Yahoo)(Yahoo} and BCE shares.shares.
PAGEI 8 Results for 2002 primarily includeinclude gains of approximatelyapproximately On January 1, 2002, we adopted FAS 142. Adoption of $603 on thethe redemptionredemption of our interest inin Bell Canada and FASFAS 142 means thatthat we stopped amortizing goodwill, and gains of $191 ontheon the salesale of shares inin equity investments, at leastleast annuallyannually we will testtest the remainingremaining book value of Consistingconsisting of thethe salesale of shares of Tel_fonosTelefonos de Mexico, S.A.S.A. goodwillgoodwill for impairment. Our total cumulativecumulative effect of de r_V.CV. {Telmex),(Telmex), America MbvilM6vil S.A.S.A. de C.V.C.V. (America(America M6vil) accountingaccounting changechange fromfrom adopting FAS 142 was aa noncash and Amdocs Limited (Amdocs).(Amdocs). These gainsgains and incomeincome were chargecharge of $1,820,$1,820, net of an incomeincome taxtax benefit of $5, partiallypartially offset by a charge of approximately $75 related toto recorded as of JanuaryJanuary 1, 2002 (see Note 1). the decrease inin value of our investmentinvestment in WilTel Segment Results Communications (WilTel)(WilTel) (formerly Williams Communications Our segmentssegments representrepresent strategic business units that Group Inc)Inc.) combined with aa loss on thethe sale of our web- offer different products and servicesservices and are managed hosting operations. accordingly. As required by GAAP, our operatingoperating segmentsegment Results for 2001 includedincluded gains on thethe full or partial sale of accordingly. required by resultsresults presentedpresented in Note 4 and discussed below for eacheach investments of approximately $476, including our investmentsinvestments segment follow our internal management reporting.reporting. in TransAsia Telecommunications, Smith Security, Amdocs segment Under GAAP segment reporting rules,rules, we analyze our shares and other investments.investments. An additional increaseincrease of $120 various operating segmentssegments based on segment income. resultedresulted from a reductionreduction of a valuation allowance on a note operating Interest expense, interest income, other incomeincome (expense)(expense)—- receivablereceivable relatedrelated toto the sale of Ameritech's security monitor- net and incomeincome taxtax expense are managed only on a totaltotal ing business. The 2001 incomeincome and gains were more than companycompany basisbasis and are, accordingly,accordingly, reflected only inin offset by chargescharges and losses,losses, includingincluding combined expenses consolidatedconsolidated results.results. Therefore, thesethese items are not of approximately $401 relatedrelated toto valuation adjustments of included in thethe calculation of eacheach segment'ssegment's percentage WilTel andand certaincertain other cost investmentsinvestments accounted forfor under of of our total segment income. We havehave five reportable FinancialFinancial Accounting StandardsStandards Board Statement No. 115, segments thatthat reflect the current management of our "Accounting forfor Certain Investments inin Debt and Equity segments business: (1) wireline; (2) Cingular; (3) directory; Securities" (FAS(FAS 115). These valuationvaluation adjustments resulted (1) (2) (3) (4) international; and (5) other. from an evaluation that thethe decline was other than (4) international; (5) The wireline segment accounted for approximately temporary.temporary. We also recognizedrecognized aa charge of $341 indicated 65% of our 2003 consolidated segment operating revenuesrevenues by a transaction pending as of December 31, 2001, to reducereduce as comparedcompared to 66% inin 2002 and 46% of our 2003 the direct book value of ourour investmentinvestment inin Telecom Americas Ltd. consolidated segment incomeincome as compared to 51% in 2002. The transactiontransaction closed inin early 2002. Additionally we We operate as both a retailretail and wholesale sellerseller of recognized a lossloss of approximately $61 on thethe sale of communications services providing landlinelandline teiecommuni°telecommuni- Ameritech's cablecable television operations. cations services,services, includinginduding local and long-distancelong-distance voice, IncomeIncome taxes decreased $54, or 1.8%,1.8%, in 2003 and $958, switched access, data and messagingmessaging services. or 24.3%,24.3%, inin 2002. The decrease in income tax in 2003 The Cingular segment accounted for approximately 27% compared toto 2002 was primarily due to lower incomeincome before The Cingularsegment accounted for approximately 27% of our 2003 consolidated segment operating revenuesrevenues as incomeincome taxes and a lower effective tax rate inin 2002. The of 2003 segment operating compared to 26% inin 2002 andand 12% of our 2003 consolidated decrease inin income taxestaxes inin 2002 compared to 2001 was segment incomeincome as compared to 11% in 2002. This segmentsegment primarilyprimarily the result of lower income and alsoalso a lower segment reflects 100% of thethe results reported by Cingular, our wireless effective tax rate. The lowerlower effective taxtax raterate primarily by joint venture and replacesreplaces our previously titled "wireless""wireless" relatedrelated to lower state taxes includingincluding reductionsreductions due to one_one- segment, which includedincluded 60% of Cingular's revenues and timetime changes inin the legal forms of various entities, increased segment, expenses. Althc_ughAlthciugh we analyze Cingular's revenues andand realization of foreign tax credits, adoption of FAS 142, and expenses under thethe Cingular segment, we eliminate thethe a tax benefit fromfrom a restructuringrestructuring of certain investments. Cingular segment in our consolidatedconsolidated financial statements. Extraordinary itemitem in 2003 includedincluded anan extraordinary lossloss InIn our consolidated financial statements, we reportreport ouourr 60% of $7, net of _xestaxes of $4, relatedrelated to consolidationconsolidation of realreal proportionate shareshare of Cingular's resultsresults as equity inin net estate leasesleases under FIN 46 (see(see Note 1). income of affiliates. Cingular offers both wireless voice and Cumulative effect of accounting changes Effective income of affiliates. Cingula_ offers both wireless voice and data communicationscommunications servicesservices across most of the U.S.,U.S. January 1,1, 2003, we changed our method of recognizingrecognizing , providing cellular and PCS services. revenuesrevenues and expensesexpenses related to publishing directories accounted from the "issue basis"basis" to the "amortization method". Our The directory segmentsegment accounted for approximately 8% of our 2003 andand 2002 consolidated segmentsegment operating directory accounting changechange resulted inin a noncash charge revenues and 26% of our 2003 consolidated segment ofof $1,136,$1,136, net of an incomeincome taxtax benefit of $714, recordedrecorded income as compared to 21% in 2002. This segment includesincludes asas a cumulativecumulative effect of accountingaccounting change on thethe all directory operations, including Yellow and White Pages Consolidated Statement of Income isas of January 1, 2003 (see advertising and electronic publishing. In the first quarter of "2003 Accounting Changes" above and Note 1). 2003 we changed our method of accounting forfor revenues On January 1, 2003, we adopted FAS 143, which changedchanged and expenses inin our directory segment. Results forfor 2003, the way we depreciate certain typestypes of our property, plant and going forward,forward, will be reported under the amortization and equipment. The noncash gain resulting from adoption going method. This means that revenues and direct expensesexpenses areare was $3,677,$3,677, net of deferred taxes of $2,249,$2,249, recorded asas a recognizedrecognized ratablyratably over the lifelife of the directory title,title, cumulative effecteffect of accountingaccounting change on the Consolidated typically 12 months. This accounting change will affect only Statement of Income as of January 1, 2003 (see(see "2003 typically the timing of the recognitionrecognition of a directory title's revenues Accounting Changes" above and Note 1).
PAGEIPAGE 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATJONS (CONTINUED)(coNTINUED) Dollars inin miliion!;million's except per share amounts and directdirect expenses. It will notnot affect the total amountsamounts The other segment includes all corporate andand other recognized forfor any directory title.title. operations asas well as thethe equityequity income fromfrom our investmentinvestment All investmentsinvestments with primarily international operations in Cingular. Although we analyze Cingular's revenuesrevenues andand areare includedincluded inin the international segment, which accounted expensesexpenses under thethe Cingular segment,segment, we recordrecord equityequity inin forfor lessless thanthan 1% of our 2003 and 2002 consolidated segment net incomeincome of affiliates (from(from non-international investments)investments) operatingoperating revenuesrevenues andand 7% of our 2003 consolidated in thethe other segment. , segmentsegment incomeincome as compared to 9% in 2002. Most of our The following tables sl_0wshow componentscompone'nts of results of international interests are accounted for under the equityequity operations by segment. We discuss significantsignificant segment method and therefore areare reflected inin segment income but results followingfollowing each table.table. We discuss capitalcapital expenditures not inin segment revenue or expense;expense. forfor each segment inin "Liquidity"Liquidity and Capital ResourcesResources".".
W/relineWireline Segment Results Percent Change 2003vs.2003 vs. 2002vs.20Q2 vs. 2003 20022002 2001 2002 20012QQ1 Segment operating revenues Voice $22,077$22,077 $24,716$24,716 $26,675$26,675 (10.7)%(107)% (7.3)%(7.3)% Data 10,15010,150 9,6399,639 9,6319,631 5.35.3 0.10.1 Long-distance voice 2,5612,561 2,2,324324 2,4362,436 10.210.2 (4.6)(4.6) OtherOther 1,6161,616 1,7131.713 1,9481,948 (5.7)(5.7) (12.1)(12.1) Total Segment Operating Revenues 36,40436,404 38,39238,392 40i69040,690 (5.2)(5.2) (5.6)(5.6) Segment operatingoperating expenses Cost of sales 15,80515,805 15,53615,536 15,15,788788 1.71.7 (1.6)(1.6) Selling, general.andgeneral, and administrative 8,7948,794 8,4458,445 8,2218,221 4.14.1 2.72.7 Depreciation and amortization 7,7637,763 8,8,442442 8,4618,461 (8.0)(8 0) (0.2)(0.2) Total Segment Operating Expenses 32,36232,362 32,42332,423 32,47032,470 (0.2)(0.2) (0.1)(0.1) Segment Income $$4,4,042042 $$5,5,969969 $$8,8,220220 (32.3)%(32.3)% (27.4)%(27A)% J
Our wireline segment operatingoperating incomeincome margin was 11.1%11.1% Environment and Trends of thethe Business".)Business". ) Additional factorsfactors inin 2003, compared toto 15.15.5%5% in 2002 andand 20.2%20.2% in 2001. contributing to the margin decrease were loss of revenues The continuedcontinued declinedecline inin our wireline segment operating from thethe uncertain U.U.S.S. economy, increasedincreased competition, incomeincome margin was due primarily toto the continued loss of increasedincreased combined net pension andand postretirement cost, revenuesrevenue's from a net decline inin retailretail access lines (as(as shown the cost of our growth initiativesinitiatives inin long-distance andand DSL, inin thethe following table)table) from 2002 to 2003 of 3,703,000,3,703,000, or and an increaseincrease inin customerscustomers using wireless technology and 7.3%,7.3%,andand from 2001 to 2002 of 4,561,000,4,561,000, or 8.2%.8.2%.This 'cable instead of phone lineslines forfor voice and data. Following declinedecline was primadlyprimarily caused by our providing below-cost is aa summary of our access lineslines at December 31, 2003, UNE-P lines to competitors. (The(The UNE-P rules and theirtheir 2002 and 2001: impact are discussed inin "Overview""Overview" and in "OperatingOperating
Access UnesLines PercentPercentChangeChange 2003 vs.vs. 200220Q2 vs.vs. (in(in 000s)OQQs) 20032003 200220Q2 2001 2002 : 20012QQ1 Retail-Retail —Consumer 28,84228,842 3i,35931,359 34,51734,517 (8.0)%(8.0)% (9.(9.1)%1) Retail -—Business 18,26418,264 19,45019,450 20,85320,853 (6.1)(6.1) (6.7)(6.7) Retail Sub-total 47,10647,106 50,80950,809 55,37055,370 (7.3)(7.3) (8.2)(8 2) Percent of total switchedswitched access lines 86.1%86.1% 89.0%89.0% 93.0%93.0% UNUNE-PE-P 6,6646,664 4,9634,963 2,2,400400 34.334.3 -- Resale 445 801801 1,2351,235 (44.4)(44.4) (35.1)(35.1)
Wholesale Sub-total 7,1097,109 5,7645,7.64 "3,635. 3 635 23.323.3 58.658.6 Percent of total switched access lineslines 13.0%13.0% 10.1%10.1% 6.1%6.1%
Payphones (retail and wholesale) 468 510 527 (8.2)(8.2) (3.2)(3.2) Percent of totaltotal switched access lineslines 0.9%0 9% 0.9%0.9% 0.9%0.9% Total Switched Access Lines 54,54,683683 57,08357,083 59,53259,532 (4.2)%(4.2)% (4.1)%(4.1)%
PAGEIPAGE 10 Totalswitched access lineslines in serviceservice at December 31, 2003, order thatthat reducedreduced UNE-P pricing. Revenue fromfrom "local plus" declined 4.2%,4.2%, from 2002 levels.levels. During thisthis same period, plans (expanded local calling area) declined $92 asas more wholesale lineslines increasedincreased 23.3%.23.3%.The decline in totaltotal access customers chose broaderbroader- Iong_istancelong-distance and other bundled lineslines reflects thethe continuing reluctance of U.S.U.S. businesses to offerings. PayphonePayphone revenues decreaseddecreased approximatelyapproximately $99 increaseincrease theirtheir workforces, the disconnection of secondary inin 2003 and $109 inin 2002 duedue to a continued decline in lineslines andand continued growth inin alternativealternative communication usage. Reduced demand for voice equipment located on technologies such as wireless, cable and other intemet-basedinternet-based customer premises decreased revenues approximately $59 systems. As our ratio of wholesale lineslines toto totaltotal access lineslines inin 2003 and $248 inin 2002. Revenues also decreased continues to grow, additionaladditional pressure will be appliedapplied toto our approximately $34 inin 2003 and $86 in 2002 due toto the wireline segmensegmentt operatingoperating margin, since thethe wholesale July 2000 Coalition forfor Affordable Local and Long Distance revenue we receive isis significantly less due to the various Service (CALLS) order which capped pricesprices for certain services. statestate UNE-P rates, but our cost toto serviceservice andand maintain Revenue was also lower inin 2002 by approximately $117 due wholesale lines isis essentially thethe same asas forfor retail lines. to the June 2001 illinoisIllinois legislation which increased 2001 Total switched access lineslines inin service atat December 31, 2002, revenues. This June 2001 legislation imposed new require-require- declineddeclined 4.1%,4.1%,fromfrom 2001 levels.levels. During thisthis same period, ments on IllinoisIllinois telecommunications companies relating wholesale lineslines increasedincreased by 58.6%.58.6%.Wholesale lineslines toto service standards, serviceservice offerings andand (:ompetitors'competitors' represented 10.1%10.1%of totaltotal access lines at December 31, 2002,2002, accessaccess to our networnetwork.k . Revenue inin 2002 was also lower byby comparedcompared to 6.1%6.1%of total lineslines a yearyear earlier. approximatelyapproximately $66 due to the reversal of an accrual related While retail access lineslines have continuedcontinued to decline, the toto anan FCC rate-relatedrate-related issue which increased 2001 revenue. trendtrend has slowed recentlyrecently inin our West and Southwest Partially offsetting thesethese revenue declines, demand for regions reflecting our abilityability toto now offer retailretail interLATAinterLATA wholesale services, primarily UNE-P lines provided to (traditional long-distance)long-distance) service in thosethose regionsregions and thethe competitors,competitors, increasedincreased revenues approximately $478 in introduction of bundled offerings inin those regionsregions (see(see 2003 andand $200 inin 2002. "Long-distanceLong-distance voice" below). In late 2003, we began Revenue also decreased approximately $37 inin 2003 andand offering retail interLATA service in our Midwest regionregion (see(see increased approximately $47 inin 2002 due to accruals relatedrelated our "Operating"Operating Environment and Trends of thethe Business"}.Business" ). toto thethe 2002 approval by thethe Texas Public Utility Commission Retail access lineslines for thethe Midwest regionregion have decreased (TPUC) that allows us toto collect higher local rates thanthan we 10.1%10.1% since December 31, 2002, compared with declines of had previously billed inin 32 telephone exchanges (retroactive 4.9%4.9% inin thethe Southwest region and 6.7%6.7% in the West region toto 1999). In 2002, we accrued revenue of $47 in connectionconnection forfor the samesame period.period. As a resultresult of our launchlaunch of interLATA with thisthis issueissue and accrued an additional $10 inin 2003. (These long-distance service inin thethe Midwest regionregion inin late 2003, we accrualsaccruals represent previously earned revenuerevenue which we expectexpect that retailretail access line losseslosses in thisthis regionregion will beginbegin began collecting inin the fourth quarter of 2003 and willwiil toto moderate somewhat inin future periods based on the continuecontinue toto prospectively collect.)collect.) In addition to these experience of our other regions.regions. However, while we accruals,accruais, beginning inin thethe fourth quarter of 2002 we beganbegan experienced a decrease inin UNE-P access line losses inin the charging thethe higherhigher locallocal ratesrates approved by "thethe TPUC on fourthfourth quarter of 2003, the expected favorablefavorable impact from a going-forward basis. As a resultresult of these higher rates,rate s, offering interLATAinterLATA long-distance service inin the Midwest may revenue increasedincreased approximately $15 inin 2003 and $3 in be somewhatsomewhat mitigated by thethe UNE-_PUNE-P rates in effect inin those 2002. The net effect of thethe TPUC's 2002 decision was to states, which are generally lower thanthan inin our other states. decrease revenue approximately $22 inin 2003 and increaseincrease See furtherfurther discussion of the details of ourour wireline segment revenuerevenue approximatelyapproximately $50 in 2002. revenuerevenue and expenseexpense fluctuations below. Data revenues increased $511, or 5.3%,5.3%, in 2003 andand $8, Voice revenues•revenues decreased $2,639,$2,639, or 10.7%,10.7%, in 2003 and or 0.1%,0.1%, inin 2002. The increasesincreases are primarily due to $1,959,$1,959, or 7.3%,73%,inin 2002 due primarily toto thethe continued lossloss continued growth inin DSL, our broadband intemet-accessinternet-access ofof retailretail access lines catJsedcaused by providing below-costbelow-cost UNE-P service, which increased approximately $484 inin 2003 and (se(seee the tabletable above}.above). The uncertain U.S.U.S. economy and $326 in 2002. The number of DSL lineslines in service grew toto increasedincreased competition, includingincluding customers using wireless approximatelyapproximately 3,5i5,0003,515,000 inin 2003 as comparedcompared to 2,199,0002,199,000 technology andand cablecabie insteadinstead of phone lineslines for voice and at the end of 2002 andand 1,333,0001,333,000 at thethe end of 2001. data, also contributedcontributed to the decline in revenues. The contin- Our high-capacity transporttransport services, which include DSlsDS1s ued access line declines decreased revenuesrevenues approximatelyapproximately andand DS3s (types of dedicateddedicated high-capacityhigh-capacity lines),lines), and SONET :$1,416$1,416 in 2003 andand $1,117$1,117 in 2002. A decline inin demand for (a dedicated high,speedhigh-. speed solutionsolution for multi-site businesses},businesses), callingcalling features (e.g.,(e.g., Caller IDID and voice mail) decreased represented about 65% of our totaltotal data revenuesrevenues in 2003 revenues approximately $329 inin 2003 and $238 in 2002 due and 69% inin 2002. Revenue from these high-capacity services in part to the access line declines and an uncertainuncertain economy. was essentiallyessentially flatflat inin both 2003 andand 2002 asas increasedincreased Pricing responsesresponses to competitors'competitors'. offerings and regulatory demand was mostly offset by price decreases andand volume changes reducedreduced revenuerevenue approximately $398 inin 2003 and discounts toto respond to competition.'competition. These price decreases $7 inin 2002. Billing adjustments with our wholesale customers also included the impactimpact of thethe continued implementationimplementation also decreased revenuesrevenues approximately $297 inin 2003. of the 2000 federalfederal CALLS order of approximately $82 inin Reduced demand forfor insideinside wire service agreements 2003 andand $78 inin 2002. decreased revenuesrevenues approximately $138 inin 20032003 and $118 inin 2003 data revenuesrevenues alsoalso increased approximately $45 as a 2002. Revenue alsoalso decreased approximately $210 inin 20032003 resultresult of aa settlement with WorldCom. This increase was andand $75 in 2002 due toto an interiminterim California regulatory partially offset by approximately $26 related toto a prior-year
PAGET11PAGE 11 r
MANAGEMENT'S DISCUSS_IONDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSRES ULTS OF OPERATIONS (CONTINUED)(coNTlttUED) Dollarsinin millionsexceptper share amounts
WorldCom settlement, which increasedincreased 2002 revenue.revenue. In Revenue fromfrom wholesale long-distance services provided 2002, our e-commerce revenues increased approximatelyapproximately to Cingular, under aa 2002 related-party agreement, $152, primarily due to our acquisition'acquisition of Prodigy increasedincreased approximatelyapproximately $24 in 2003 and $114 during 2002. Communications Corp. (Prodigy) in late 2001. The 2002 However, this did not have a material impactimpact onon our netnet increasesincreases inin data transporttransport and e-commerce were virtuallyvirtuaily incomeincome as thethe long-distance revenue was mostly offset when ()ffsetoffset by a decrease of approximately $537 in revenues from we recorded our shareshare of equity income from Cingular. data equipmente'quipment salessales and networknetwork integrationintegration services. Other operating revenues decreased $97, or 5.7%,5.7o/o, inin Long-distanceLong&istance voice revenuesrevenues increasedincreased $237, or 10.2%,10.2o/o, 2003 andand $235, or 12.1%,12.1o/o, inin 2002. Revenue fromfrom directory inin 2003 and decreased $112, or 4.6%,4.6o/o, inin 2002. The 2003 and operator assistance, billing and collection servicesservices increaseincrease was primarily driven by increasedincreased sales of combined provided to other carriers, wholesale and other miscella- long-distancelong-distance and local callingcalling fixed-feefixed-fee offerings (referred neous products and services decreased approximately to asas bundling) inin our West and Southwest5outhwest regionsregions as well $119$119inin 2003 and $127 inin 2002. Various one-time billing as strong early results inin the Midwest, where we launchedlaunched adjustments decreased revenues approximately $75 inin 2003 long-distancelong-distance service in latelate September and October 2003. and $49 inin 2002, and adjustments toto our deferred activation Retail interLATA long-distancelong-distance (traditional long-distance) revenues decreased revenuesrevenues $77 inin 2002. Partially offsetting revenuesrevenues increasedincreased approximately $385 reflecting our ability thesethese decreases, price increases,increases, primarily in directorydirectory to now offer nationwide long-distancelong-distance services.services. In additionaddition assistance, increasedincreased revenue approximately $38 in 2003 to our previous entries into the Arkansas, Kansas, Missouri, and $63 inin 2002. inIn addition, commissions paid by Cingular OkiahomaOklahoma and Texas (collectively,(collectively, our "Southwest" region)region) for wireless sales fromfrom SBC sources increasedincreased revenuerevenue and Connecticut long-distance markets, we entered thethe approximately $55 inin 2003 and $7 in 2002. Recognition of long-distancelong-distance markets inin California inin December 2002;2002," wireline deferred activation feesfees also increasedincreased revenues Nevada in April 2003 (both, our "West""West region); Michigan approximately $7 in 2003. inin I.atelate September 2003 and, most recently, Illinois,illinois, Indiana, Cost of sales expenses increased $269, or 1.7%,1.7'/o, in 2003 Ohio and Wisconsin (all(all five, our "Midwest" region) inin and decreased $252, or 1.6%,1.6/o, in 2002. Cost of sales consistsconsists latelate October 2003. Also contributingcontributing to thejncreasethe. increase was of costscosts we incur to provideprovide our products andand services, continuing growth in our internationalinternational calling bundlesbundles and our including costs of operating and maintaining our networks. business long-distance service. Our retailretail internationalinternational long-long- Costs in thisthis category include our repairrepair technicians andand distance revenue increasedincreased approximatelyapproximately $112 duedue toto higher repair services, network planning and engineering,engineering, operator callcall volumes thatthat originate or terminate internationally. services, informationinformation technology,technology, property taxestaxes relatedrelated toto Partially offsetting these increasesincreases Waswas a decline of elements of our network, andand payphone operations. approximately $286 inin retail in_raLATAinfraLATA long-distance (local Pension and postretirement costs are also includedincluded to the toll)toll) revenues. The decreasedecrease in intraLATA revenues isis due to extent that theythey are allocated toto our network laborlabor force access lineline losses,losses, a decline inin minutes of use and price and other employees who perform thethe functions listedlisted in decreases caused by increased competition and our fixed-fee thisthis paragraph. bundling packages. IntraLATA revenues declined approxi- Our combined net pension andand postretirementpostretirement cost _matelymately $106 due to accessaccess line losses. Market-driven priceprice (which includesincludes certain employee-related benefits) increased reductionsreductions decreased intraLATAintraLATA revenues approximately approximately $824 inin 2003 and $1,307$1,307 inin 20022002 due toto $53. The remainderremainder of thethe intraLATA revenuerevenue decline was enhanced terminationtermination benefits,benefits, netnet investment losses,losses, primarilyprimarily due to decreases in billed intraLATAintraLATA minutes of varying levels of net settlement gainsgains ($0 in 2003, $19 in use. The decline inin usage mainly related toto thethe increasedinrreased 2002 and $807 in 2001), thethe effect of previousprevious recognitionrecognition sales of our fixed-fee bundles, which do not separately of pension settlementsettlement gains reducing the amount of bill minutes of use. We expectexpect these declining intraLATA unrealized gainsgains recognizedrecognized inin thethe currentcurrent year, a lowerlower revenuerevenue trendstrends to continue. assumed long-termlong-term rate of return on plan assetsassets and a The 2002 decrease inin long-distance revenue was due to a reduction in thethe discount raterate (see(see Note 10). Salary and decrease of approximately $381 inin retail intraLATAintraLATA revenuesrevenues wage merit increasesincreases andand other bonus accrual adjustments primarily due to increased competition throughoutthroughout our increasedincreased expense approximately $508 inin 2003 and $175 in 13-state area. We were required toto open our markets to 2002. Wage increasesincreases inin 2002 were partially offset by competition in order to gain approval to offer interLATAinterLATA termination of most management vacationvacation carry-over long-distancelong-distance service. The decline in locallocal tolltoll revenues was policies and reduction of employee bonuses. Reciprocal onlyonly partially offset by increasesincreases in long-distancelong-distance revenuesrevenues inin compensation expense (fees(fees paid toto connect Callscalls outside the six statesstates where we were authorizedauthorized to offer interLATAinterLATA our network) forfor our long-distance lines increased long-distance services forfor virtually all of 2002.2002. IInn particular_particular, approximately $248 inin 2003 andand $134 in 2002 duedue to a intraLATA minutes of use declined approximatelyapproximately !19.9.6%,6o/o, significant increase in minutes used from additionaladditional long- which decreased revenues approximately $171. IntraLATAIntraLATA distance customerscustomers since we began service inin California, andand revenues also decreased approximately $85 resulting from to the increased sales of fixed-fee plans with unlimitedunlimited access linelin'e losses. Partially offsetting the intraLATAintraLATA revenue usage. Costs associatedassociated with equipment sales andand relatedrelated decline was anan increase in retailretail interLATAinterLATA revenues of network integration servicesservices increasedincreased approximately $77 approximately $155, resulting from our 2001 entries intointo the inin 2003, comparedcompared to a decrease of $652 inin 2002,2002, which Arkansas, Kansas, Missouri and Oklahoma long-distance was primarily due to previousprevious efforts to de-emphasize markets in addition toto our previous entries intointo the Texas low-margin equipment sales. and Connecticut markets.
PAGEIPAGE 12 \
Partially offsetting the increases, lowerlower employee levels $644 inin 2002, due to enhancedenhanced termination benefits, net decreased expenses, primarily salary and wages, investmentinvestment losses,losses, varying levelslevels of net settlementsettlement gains approximately $312 inin 2003 andand $559 inin 2002. Expenses ($0 inin 2003, $9 inin 2002 and $397 in 2001},2001), thethe effect of decreased approximately $22.1$221 inin 2003 due to lower previous recognition of pension settlementsettlement gains reducing severance accruals,accruals, after increasing approximately $114 inin the amount of unrealized gains recognizedrecognized in the current 2002. Other employee-related expenses includingincluding travel,travel, year, a lower assumed long-termlong-term raterate of return on plan trainingtraining and conferencesconferences decreased approximately $34 in assetsassets and a reductionreduction inin the discount rate (see Note 10).10), 2003 and $143 inin 2002. Advertising expense increased approximately $368 inin 2003 Nonemployee-related expenses such asas contract services,services, and $94 in 2002, primarily driven by ourour launchlaunch of long- agent commissionscommissions and materials and supplies costs distancedistance service inin newnew markets andand bundling initiatives. : decreased approximately $545 inin 2003 andand $424 in 2002. In 2004, we expect advertising to remainremain flatflat from 2003 Reciprocal compehsationcompensation expenseexpense related toto our wholesale levelslevels even as we promote thethe launch of interLATA long-long- lineslines decreased approximatelyapproximately $212 inin 2003 as the lowerlower distance service in allall fivefive Midwest states, which beganbegan ratesrates that we have negotiated with other carriers have more inin latelate 2003. than offset the growth inin minutes that our customers have Our provision forfor uncollectible accounts decreased used outside of our network. In 2002, reciprocal compensacompensa- _ approximately $479 inin 2003 as we experienced fewerfewer losseslosses tion expense on our wholesale lineslines increased approximatelyapproximately from our retailretail customers and a decrease in b_nkruptcybankruptcy $44 primarilyprimarily due to growthgrowth in wireless and competitors' filings by our wholesale customers. Contributing toto this local exchange carrier minutes of use on our network. decrease inin 2003 was thethe 2003 reversalreversal of WorldCom badbad Expenses decreased approximately $48 inin 2002 due debt reservesreserves of $86 as a resultresult of aa settlementsettlement reached with primarily to one-time expenses incurred in 2001 to WorldC0mWorldCom (see(see "Other Business Matters").Matters" ).Year-over-year implement thethe IllinoisIllinois legislationlegislation discusseddiscussed in "Voice" comparisons were also affectedaffected by our recording in 2002 revenues above. Expenses also decreased approximately of an additional bad debt reservereserve of $125 as a result of the $200 inin 2002 due toto costscosts recordedrecorded in 2001 fromfrom a WorldCom bankruptcybankruptcy filing.filing. settlementsettlement with thethe Illinoisillinois Commerce Commission relatedrelated Lower severance accrualsaccruals decreased expenses approxi- toto a provision of thethe Ameritech merger. The amount mately $148 in 2003 and higher accruals increased expenses represents an estimate of all future cost savings to be by approximately $49 inin 2002. Additionally, lower employee shared with our IllinoisIllinois customers. levelslevels decreased expenses, primarily salarysalary and wages, Selling, general andand administrativeadministrative expenses increased approximately $121 in 2003 and $165 in 2002. Other $349, or 4.1%,4.1%, in 2003 andand $224, or 2.7%,2.7%, in 2002. Selling, employee-related expenses includingincluding travel,travel, trainingtraining and general and administrative expenses consistconsist of our provlsionprovision conferences decreased approximately $23 inin 2003 and $127 forfor uncollectible accounts,accounts, advertisingadvertising costs, sales and inin 2002. Other nonemployee-related expensesexpenses such as marketing functions,functions, including our retail and wholesale contract services, agentagent commissionscommissions and materials and customer serviceservice centers, centrallycentrally managed realreal estate costs, suppliessupplies costs alsoalso decreaseddecreased approximately $120 in 2003 includingincluding maintenance and utilitiesutilities on all owned and leased andand $177 inin 2002. buildings, credit and collectioncollection functions and corporate Expenses decreased approximately $86 in 2002 due overhead costs,costs, such as finance,finance, legal,legal, human resourcesresources and primarily toto one-time expenses incurredincurred inin 2001 toto external affairs. Pension and postretirement costs are also implement the Illinoisillinois legislationlegislation discussed in "Voice"'*Voice" included toto the extent they relaterelate toto employees who revenues above. perform thethe functionsfunctions listedlisted inin this paragraph. Depreciation and amortization expenses decreased $679, Salary and wage merit increases andand other bonus accrual or 8.0%,8.0%, inin 2003 and $19, or 0.2%,0.2%, in 2002. The changechange in adjustments increased expensesexpenses approximatelyapproximately $470 in 2003 our depreciation rates when we adopted FAS i43143 decreased and decreased expenses byby approximately $6 inin 2002. expenses approximately $340 inin 2003. Reduced capital _ Wage increasesincreases in 2002 were more than offset by termina- expenditures accounted forfor the remainder ofOf thethe decrease. tion of most management vacation carry-over policies and In 2002, amortization decreased approximately $161 as reduction of employee bonuses. Our combinedcombined net pension goodwillgoodwill was no longerlonger' amortized inin accordanceaccordance with FAS andand postretirement cost (which includes certain employee-employee- 142 (see(see Note 1) which more than offset increasedincreased expense related benefits) increasedincreased approximately $404 iniri 20032003 and primarily relatedrelated to amortizationamortization of software.
PAGETPAGEt 13 MANAGEMENT'SDISCUSSIONAND ANALYSISOF FINANCIALF IN AN C IAL CONDITIONCOND IT ION ANDAN'D RESULTSRES ULTS OF0 F OPERATIONS(CONTINUED) Dollarsin millionsexceptpershareamounts
Cingular Segment Results Percent Change 2003 vs.vs. 2002 vs. 2003 2002 2001 2002 2001 Segment operating revenues Serv_'ceService $14,223$14,223 $13,922$13,922 $13,229$13,229 2.2%2.2% 5.2%5.2ojo Equipment . 1,2601,260 981 1,0391,039 28.428.4 (5.6)(5.6) Total Segment Operating Revenues 15,48315,483 14,90314,903 14,26814,268 3.93.9 4,54.5 Segment operat!ngoperating expenses Cost of services and equipment salessales 5,6835,683 5,5,106106 4,5644,564 11.311.3 11.911.9 Selling,Selling, generalgeneral andand administrativeadministrative 5,4225,422 5,4265,426 5,2355,235 (0.1)(0.1) 3.6 Depreciation andand amortizationamortization 2,0892,089 1,8501,850 1,9211,921 12.912.9 (3.7)(3 /) Total Segment Operating Expenses 13,19413,194 12,38212,382 11,72011,720 6.66.6 5.65.6 Segment Operating IncomeIncome 2,2892,289 2,5212,521 2,5482,548 (9.2)(9.2) (1.1)(1 1) InterestInterest Expense 856 911 822 (6.0)(6.0) 10.810.8 Equity inin Net IncomeIncome (Loss)(Loss) of Affiliates (323)(323) (265) (68)(68) (21.9)(2'I.9) m Other, net (60) (94)(94) 42 36.236.2 Segment Income $1,$ 1,050050 $$1,1,251251 $$1,1,700700 (16.1)%(16.1)% (26.4)%(26.4)%
We account for our 60% economic interestinterest inih Cingular customer care centers, toto continuecontinue to increase during 2004. under the equity method of accounting inin our consolidatedconsolidated To the extent wireless industry churn remainsremains higher thanthan inin financialfinancial statements sincesince we share control equallyequally (i.e.(i.e. the past,past; Cingular expects those costs toto increase.increase. 50/50) with our 40% economiceconomic partner inin thethe joint venture. Cingular's wireless networks use equipment with digital We havehave equal votingvoting rightsrights and representationrepresentation on thethe transmissiontransmission technologiestechnologies knownknown as Global System forfor board of directors that controlscontrols Cingular. This means that Mobile Communication (GSM) technologytechnology andand Time Division our consolidated reported resultsresults includeinclude Cingular's resultsresults Multiple Access (TDMP0(TDMA) technology.technology. Cingular substantiallysubstantially inin thethe "Equity in Net Income of Affiliates" line. However, completed upgrading its existing TDMA markets toto use GSM when analyzing our segment results, we evaluateevaluate Cingular's technologytechnology inin order toto provide a common voice standard.standard. results on a stand-alone basis. Accordingly, inin the segment Cingular's GSM networknetwork nownow covers approximatelyapproximately 93% of tabletable above, we present 100% of Cingular's revenues andand Cingular's population of potential customers (referred(referred to inin expenses under "Segment"Segment operating revenues" andand the media as "POPs")"POPs") in areas Cingular providesprovides wireless "Segment operating expenses". (Beginning with 2003, thethe service. Also, Cingular isis addingadding high-speedhigh-speed technologiestechnologies for Cingular segment replaces our previouslypreviously titledtitled ,wireless""wireless" data services known as General Packet Radio Services (GPRS) segment, which includedincluded 60% of Cingular's revenuesrevenues and and Enhanced Data Rates forfor GSM Evolution (EDGE). expenses.)expenses. ) Including 100% of Cingular's results in our In August 2003, Cingular agreed to purchase fromfrom segment operations (rather than 60% inin equity inin net income NextWave Telecom, Inc.Inc. (NextWave)(NextWave) FCC licenses forfor wireless of affiliates)affiliates) affects thethe presentation of thisthis segment'ssegment's spectrum in 34 markets forfor $1,400.$1,400. See "Expected Growth revenues,revenues, expenses,expenses, operatingoperating income,income, n0noperatingnonoperating itemsitems Areas" for more detail. and segment income, but does not affect our consolidated Our Cingular segment operating incomeincome margin was reportedreported net income. We are currently evaluating howhow the 14.8%14.8% in 2003,16:9%2003, 16.9% in 2002 andtT.9%and-17. 9% inin 2001-;2001; The lower provisions of FIN 4646 will affect ourour accounting for Cingular. 2003 margin was caused byby a number of factors.factors. Cingular's FIN 46 will apply tOto our investment inin Cingular starting with Operatingoperating expenses increasedincreased primarily due to acquisitionacquisition itsits 2004 first-quarter results (see Note 1). costs related to higher customer additions, and extensive On February 17, 2004, Cingular announced an agreementagreement customer retentionretention and customer service initiatives inin to acquire AT&T Wireless Services IncInc. (AT&T(AT&T Wireless). See anticipationanticipation of number portability. Network operating costs "Other Business Matters" forfor more details.details. alsoalso increasedincreased due to ongoing growth in Customercustomer usage The FCC adopted rulesrules allowing customers to keep theitheirr andand incrementalincremental costscosts related to Cingu!ar'sCingular's GSM network Wirelesswireless number when switching toto another company upgrade. Only partially offsetting thesethese expense increasesincreases (generally referred toto asas "number"number portability").portability" ).The FCC rules were modest revenue growth and slightly decreased costscosts requiring numbernumber portability were effective onon November 24, inin other areas, includingincluding prior and ongoingongoing system and 2003. For 2003 thesethese rulesrules had a minor impact on Cingular's process consolidations. AtAt December 31, 2003, Cingular had customer turnoverturnover ("chum")("churn") rate.rate. During 2003 Cingular's approximately 24 million wireless customers, as compared cellular/PCS (wireless) churnchurn was 2.7%,2.7%, a slight improvementimprovement toto 21.921.9 million at December 31, 2002 and 21.621.6 million at from the 2.8%2.8% churn fromfrom 2002. Cingular has incurredincurred costscosts December 31, 2001. directed towardtoward implementingimplementing thesethese rules and minimizing Cingular's 2002 slightslight decline inin segmentsegment operating Customercustomer chum and expects these costs, consisting primarily incomeincome margin of 1.0%,1.0%, as compared to 2001, was primarily of handset subsidies,subsidies, selling costs and greater staffing of due toto the higher network costs due to increased network
PAGEI:14PAGE 14 minutesof use partiallypartially offset by increasedincreased revenues.revenues. The Cost of servicesservices and equipment sales expenses increased continued decline inin Cingular's operating margin alsoalso $577, or 11.3%,113%,inin 2003 andand $542, or 11.9%,11.9%, in 2002. The reflectsreflects continuedcontinued customer shifts to all inclusiveinclusive raterate plans 2003 increase was primarily due to increasedincreased equipment that include roaming, long-distance and "Rollover" minutes, costs of $496$496 as well as higher networknetwork costs.costs. The increased which allow customers to carry over unused minutes fromfrom equipment costs were driven primarilyprimarily by higher handset month toto month forfor upup to one year.year. See further discussiondiscussion unit salessales associatedassociated with the significantsignificant increaseincrease in of thethe details of our Cingular segment revenues andand customer additions and existing customers upgrading expenses below. their units.units. Increased equipment costscosts also resulted from InIn the fourth quarter of 2003, toto be consistent with : higher per-unit handset costs due to aa shiftshift to higher-end emerging industry practices, Cingular changed its incomeincome handsets such as the dual-system TDMA/GSMTDMAIGSM handsets inin statement presentation forfor the current and prior-yearprior-year use during Cingular's GSM system conversion and newly periods toto record billings toto customers forfor thethe Universal introducedintroduced GSM-only handsets. In addition, Cingular sold Service Fund and other regulatoryregulatory fees asas "ServiceService revenues" handsets below cost, through direct salessales sources, to andand thethe payments by Cingular of thesethese fees into the customers who committedcommitted toto one-year or two-yeartwo-year contracts regulatory fundsfunds as "Cost of servicesservices and equipment sales". or in connectionconnection with other promotions. Network costscosts This amount totaled $337 inin 2003, $176 inin 2002 and $160 increased due to a 19.1%19.1% increaseincrease in minutes of use forfor in 2001. Operating incomeincome andand net incomeincome for all periods 2003. Local network costs also increased due to system were notnot affected. expansionexpansion and increased costs of redundantredundant TDMA networks Service revenuesrevenues increased $301, or 2.2%,2.2%, inin 20032003 and during thethe currentcurrent GSM system upgrade. $693, or 5.2%,5.2%, inin 2002. Cingular's locallocal service revenues The 2002 increase was primarily due toto significantsignificant increased approximately $487 in 2003 due to the significantlysignificantly increases inin minutes of use on the network and increasedincreased higher customer net additions andand greater locallocal minutes of roaming and long-distance costs, which were driven by use. Data services also increased, primarily inin short messaging customer migrations to rate plans thatthat include thesethese services; however,however, data services are n_otriot yet a significant services forfor no additional charge. Minutes of use increased component of revenues.revenues, These increases were partially offset approximately 36% over 2001, which was primarily causedcaused by decreases of approximately $i72$172 inin roaming and long-long- by demand for digital plans with more includedincluded minutes distance revenues, of which $57 were attributable to and off-peak promotions, which allowallow for a large number Cingular customers continuingcontinuing to migrate toto all-inclusive of freefree minutes. regionaregional ! and national raterate plansplans that includeinclude roaming andand Selling, general and administrativeadministrative expensesexpenses decreased long-distance. Roaming revenuesrevenues from other wireless carrierscarriers $4, or 0.1%,0.1%,inin 2003 andand increased $191, or 3.6%,3.6%, in 2002. forfor use of Cingular's network decreased approximately $115 Cingular's 2003 expense was basically flat compared to 2002 in 2003, primarily due to lower negotiatednegotiated roaming rates, due to lower billing, administrative andand bad debt expenses which offset the impact of increasing volumes.volumes. In addition, partially offset by increasedincreased sellingselling expenses. The lowerlower approximately $35 of activation revenues from Cingular's billing expensesexpenses reflect efficiencies gained from 2002 system own sales sources were reclassified from local service conversions and related consolidations. The decreased revenuesrevenues to equipment salessales as aa resultresult of thethe July 2003 administrative costs were due to reduced employee_relatedemployee-related adoption of Emerging Issues Task Force InterpretationInterpretation costs andand decreased informationinformation technology andand develop- No. 00-2100-21 (EITF 00-21) (see(see Note 1). ment expenses resulting from a 2002 workforce reorgani-reorgani- TheThe 2002 increaseincrease was primarily driven by customer zation. The decline inin bad debt expenseexpense includes a $20 growth comparedcompared to 2001 and an increase inin handset recoveryrecovery of 2002 WorldCom write-offs. Partially offsetting guarantyguaranty premiums.pr'emiums, Partially offsetting the 2002 increaseiricrease these declines were increased selling expenses of were decreased long-distance andand incollect roamingroaming approximately $103 driven primarily by higher advertisingadvertising revenues, as customers shifted toto rate plans thatthat included costs and commissions expense. The commissions expense thesethese featuresfeatures forfor no additional charge. 2002 revenuesrevenues also increase reflects the nearly 14% increase inin total postpaid decreased due toto a 45.i%45.1% decrease in customers served and prepaid grossgross customercustomer additions comparedcompared with 2002. throughthrough resellerreseller agreements. Reseller customers comprisedccimprised Cingular's higher 2002 costscosts were driven by increases of approximately 3% of Cingular's 2002 customer base. $135 relatedrelated to maintaining and supporting itsits customer Equipment revenues increasedincreased $279, or 28.4%,28.4%, inin 2003 base, $41 inin administrativeadministrative costs and $15 inin selling expenses. and decreased $58, or 5.6%,5.6%, inin 2002. For 2003, equipment The $135 expenseexpense increaseincrease for maintenance and support of sales were driven by increased handset revenues primarily as Cingular's customer base included higher residuals and a result Ofof significantly higher customer additions and upgrade commissions, increased customercustomer retention costs increasesincreases in existingexisting customers upgrading theirtheir _Jnits,units, partially and bad debt expense.expense. Bad debt expense increased $70, offset by lowerlower accessory revenues.revenues. Upgrade unitunit salessales with over half of thethe increaseincrease attributable to WorldCom reflectreflect the GSM upgrade andand Cingular's efforts to increase write-offs inin 2002. Partially offsetting thesethese costcost increases the number of customers under contractcontract. In addition, 2003 were savingssavings related to lower billingbilling and customer serviceservice equipment revenues alsoalso increased $35 due toto thethe July 2003 expenses, reflecting Cingular's consolidation of call centers adoptionadoption of EITF 00-21 mentioned aboveabove (see(see Note 1). and billing systems.systems. Cingular 2002 equipment revenues declineddeclined from 2001 Depreciation and amortization expenses increased $239, primarily as a result of a 5.0%5.0% decline inin non-reseller gross or 12.9%,12.9%, in 2003 and decreaseddecreased $71, or 3.7%,3.7%, inin 2002. customercustomer additions from 2001. The 2003 increaseincrease was primarily relatedrelated to higher capital
PAGEI15PAGE 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)(coNTINttED) Dollarsinin millionsexceptperper shareamounts expenditures forfor network upgrades, includingincluding thethe GSM end of 2008. As a resultresult of the change inin estimate, overlay, and increasedincreased depredaliiondepreciation on certain network depreciation expense increasedincreased $91 in 2003. assets resulting fromfrom Cingular's 2003 decisiondecision to shorten the The 2002 decline of $71 was primarilyprimarily related to a $219 estimated remaining useful life of TDMA assets. Cingular decrease in amortizationamortization of goodwill andand FCC licenses inin determined that a reduction in the useful liveslives of TDMA accordanceaccordance with FAS 142 (see Note 1), which no longer allows assets was warranted based on thethe projected transitiontransition amortization of goodwill and other intangible assets. This was of network traffictraffic toto GSM technology.technology. Useful lives were partially offset byby increasesincreases inin depredation expense of $148 shortened to fully depreciate allall TDMA equipment by the related to higher plant levels and Cingular's GSM conversion.
Directory Segment Results Percent changeChange 2003 vs.vs. 2002 vs. 2003 2002 20012001 2002ZOOZ 20012001 Total Segment.Segment Operating Revenues $4,254$4,254 $4,451$4,451 $4,468$4,468 (4.4)%(4 4) (0.4)%(0.4)% SegmentSegment operating expenses Cost of salessales 896 920 895 (2.6)(2.6) 2.82.8 Selling, general and administrative 1,0361,036 1,0111,011 1,0071,007 2.52.5 0.40.4 • DepredationDepreciation and amortizationamortization 21 30 36 (30.0)(30.0) (16.7)(16.7) Total Segment Operating Expenses 1,9531,953 1,9611,961 1,9381,938 (0.4)(0.4) 1.21.2 Segment' Segment Income $2,301$2,301 $2,490$2,490 $2,530$2,530 P.(7.6)%6)% (1.6)%(1.6)%o
As previouslydiscussed,previously. discussed, effective JanuaryJanuary 1, 2003, we published in 2003, our directory segmentsegment incomeincome would changedchanged our method of recognizingrecognizing revenues and expenses have been $2,205$2,205 and the operating margin would have related to publishing directories from the "issue basis" been 52.7%52.7% inin 2003, compared toto $2,323,$2,323, with anan operating method to thethe "amortization" method. As allowed by GAAEGAAP, margin of 54.5%,54.5%, in 2002. The relative decrease inin segment we made this changechange prospectively; therefore, inin the tabletable incomeinrorne of $118 asas well as the decreased operating margin above, results in 2003 are shownshown on thethe amortizationamortization basis, was due primarily toto increased eml_loyee-relatedemployee-related costs while resultsresults from 2002 and 2001 are shownshown on the issueissue combined with pressure onon revenues from increased basis method. This corresponds toto the manner in which competitioncompetition andand lower demand fromfrom advertisers. directory results are includedincluded in our consolidated results.results. The tabletable below shows the estimated directory segment Our directorydirectory segment income was $2,301$2,301 with an results forfor all years as ifif we had adopted the amortization operatingoperating •marginmargin of 54.1%54.1% in 2003. In 2002, our directory method on JanuaryJanuary 1, 2001. This presentation allows us toto segmentsegment income was $2,490$2,490 with an operating margin of isolateisolate thethe underlyingunderlying business changes over the lastlast 55.9%.55.9%. If we were toto eliminate thethe effects of the accounting three years. change and shifts inin the schedule of directory titlestitles
Estimated Directory Results on Amortized Basis Percent Change 2003 vs.vs. 2002 vs.t5. • 2003 2002 2001 2002 2001 Total Segment Operating Revenues $4,254$4,254 $4,313$4,313 $4,309$4,309 (1.4)%(1A)% 0.1%0.1oi SegmenSegmentt operatingoperating expenses Cost of sales '896'896 942 887 (4.9)(4.9) : 6.26.2 Selling, general and administrative 1,0361,036 1,0251,025 1,1,001001 1.11.1 2.42.4 DepreciationDe'preciation and amortization 21 30 36 (30.0)(30.0) (16.7)(16.7) Total Segment Operating Expenses 1,9531,953 1,9971,997 1,9241,924 (2.2)(2.2) 3.83.8 Segment IncomeIncome $2,301$2,301 $2,316$2,316 $2,385$2,385 (0.6)%(0 6)'/ (2.9)%(2.9)%
PAGET16PAGE ts Our directory segment income was $2,301$2,301 with aann operating Cost of sales decreased $46, or 4.9%,4.9%, inin 2003 and margin of 54.54.1%1% inin 2003. IfIf we had been using the increasedincreased $55, or 6.2%,6.2%, inin 2002. InIn 2003, costcost of sales amortization method, our directory segment incomeincome would decreaseddecreased due to lower product relatedrelated costs. Higher have been approximatelyapproximately $2,316$2,316 inin 2002, with an operating employee benefit relatedrelated costs increasedincreased cost of sales margin of 53.7%53.7% and $2,385$2,385 in 2001, with an operating in 2002. margin of 55.355,3%.%. Selling, general and administrative expensesexpenses increasedincreased Operating revenues decreased $59, or 1.4%,1.4%, in 2003 and $11, or 1.1%,1.1%, in 2003 and $24, or 2.4%,2.4%, inin 2002. Increased increased $4, or 0.1%,0.1%, in 2002. Revenues inin 2003 decreasedde'creased expenses inin 2003 are primarily due toto increased employee- primarily as aa result of competition from other publishers,publishers, relatedrelated costs. The increaseincrease inin expenses in 2002 isis thethe result employee-r'elated \ other advertisingadvertising media and continuing economic pressures of increasedincreased costs for advert!sing,advertising, employee-related on advertising customers. Revenues inin 2002 were essentially expenses andand increasedincreased bad debt expense. flat compared to 2001.
International
Segment5egment Results Percent Change 2003vs'.2003 vs. 2002w.2002 vs. 2003 2002 2001 2002 2001 Total Segment Operating Revenues $$3030 $$3535 $185 (1¢3)%(14 3)% (81.1)%(81.1)% Total Segment Operating Expenses ' 47 85 241 (44.7)(44.7) (64.7)(64.7) Segment Operating IncomeIncome (Loss)(Loss) (17) (50) .(56)(56) 66.066.0 10.710.7 Equity inin Net Income of Affiliates 606 1,1521,152 555 (47.4)(47.4) Segment IncomeIncome $589 $1,102$1,102 $499 (46.6)%(46.6)%
Our international segment consists almostalmost entirely of equity Segment operating expenses decreased $38, or 44.7%,44.7%, investmentsinvestments inin internationalinternational companies, the incomeincome from inin 2003 and $156, or 64.7%,64.7%, inin 2002. The decrease inin 2003 which we report as equity in net income of affiliates. was primarily due toto lowerlower corporate-allocated charges. Revenues from direct international operations areare less than The decrease in 2002 was primarily due to the disposition 1% of our consolidatedconsolidated revenues. of AGGS. Our earnings from foreign affiliates are sensitive toto Our equity inin net income of affiliates by major investment exchange-rateexchange-rate changes in thethe value of the respective locallocal at December 31, are listedlisted below: currencies. See Notes 11 and 8 for discussions of foreign currencies. See 2003 2002 2001 currency translationtranslation and how we manage foreign-exchange AmdricaAm6rica M6vil $ 76 $ 60 $ (39) risk.risk. Our foreign investmentsinvestments are recordedrecorded under GAAP, $76 $60 28 218 85 which include adjustments for the purchase method of Belgacom 28 218 85 Bell CanadaCanada' 1 -- 53 176 accounting andand excludeexclude certain adjustments required for Bell CegetellCegetel' -- 88 94 locallocal reporting in specific countries. InIn discussingdiscussing "Equity in TDC 182 481 (157)(157) Net IncomeIncome of Affiliates", all dollar arnoun_samounts referrefer to the Telkom South Africa 121 31 54 effecteffect on our income.inco'me. Telkom South Africa 121 Telmex 196 219 325 Segment operating revenuesrevenues decreased $5, or 14.3%,143%, Other 3 2 1717 : ,in 20032003 and $150, or 81.1%,81.1%, in 2002. RevenuesRevenues declined inin 2003 primarilyprimarily due to lower management-fee revenues.revenues. International Equity inin Net The decrease in 2002 was due to the September 2001 IncomeIncome of Affiliates $$606606 $1,152$1,152 $$555555 disposition of Ameritech Global Gateway Services (AGGS), 1investment' Investment sold our internationalinternational long-distance subsidiary, and lower
, management-fee revenues.revenues.
PAGEIPAGE 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Dollarsinin millions exceptpershare amounts
Equity inin net income of affiliates decreased $546, or 47.4%,47A%, a favorable exchangeexchange raterate impact, improvedimproved operating in 2003 and increasedincreased $597 in 2002. The decrease inin 2003 results and aa gain resulting fromfrom the significant reduction was primarilyprimarily due to transactionstransactions at Belgacom S_.SA, of an arbitration accrual. (Belgacom), including a settlement lossloss on thethe transfer of The 2002 increaseincrease includesincludes approximately $220 resulting pension liabilitiesliabilities in 2003 andand gains on a salesale by Belgacom from the January 1, 2002 adoption of FAS 142,142, which and TDC which occurred inin 2002 andand affected year-over-year eliminated the amortization of goodwill embedded in our comparisons. The settlementsettlement lossloss in 2003 resulted from a investmentsinvestments inin equity affiliates. ExclUdingExcluding the effects of transfertransfer of pension liabilities by Belgacom toto thethe Belgian adoptingadopting FASFAS 142, our equity in net income of affiliates government and included a lossloss of approximately $115 fromfrom would havehave increased $377, or 67.9%,67.9%, in 2002. BeigacomBelgacom and TDC's loss of $45 associated with the same The 2002 increase also includedincluded gains of approximately transaction (see "Other Business Matters" forfor a discussion $180 from Belgacom, relatedrelated to a salesale of a portionportio~ of itsits of the related Belgacom agreement and our equity interests Netherlands wireless operations and TDC's gaingain of inin Belgacom and TDC). The 2002 gains includedincluded approxi- approximately $336 associated with thatthat same sale. These mately $180 from Belgacom, related toto a sale of a portion 2002 gainsgains were higher thanthan similar gains inin 2001, which of its Netherlands wireless operations and TDC's gain were approximately $46 and $17 fromfrom Belgacom and of approximately $336 associated with that same sale.sale. TDC respectively. Also contributing toto the 2002 increase was Additionally, comparisonscomparisons forfor 2003 were affected by 2002 the prior-year charge of approximately $197 related to gains of $17 fromfrom Belgacom, relatedrelated to aa merger involvinginvolving TDC's decision to discontinuediscontinue nonwireless operationsopera'tions of its one of its subsidiaries and TDC's gain of approximatelyapproximately TalklineTaikline subsidiary and our impairmentimpairment of goodwi!lgoodwill we $7 associal_edassociated with that samesame transaction.transaction. allocated to Talkline at thethe timetime of our initial investmentinvestment Equity incomeincome for 2003 alsoalso decreased duedue to restruc-restruc- inin TDC. A gain of approximately $28 from Bell Canada's turingturing charges of $39 at TDC and foregoneforegone equity incomeincome 2002 partial sale of an investment and the 2001 loss of of approximately $88 and $53$53 from the salessales of Cegetel •approximately $32 on Belgacom's sale of its French internet and Bell Canada, respectively.lespectiveiy. Equity income fromfrom Telmex business also affected year-over-year comparisons. decreased approximately $23 for 2003 duedue primarily to 2002 The 2002 increase was partially offset by the following deferred taxtax adjustments and unfavorable exchange rates,rates, three charges: approximately $101 and $58 forfor restructuringrestructuring partially offset by lower financingfinancing costs. costs at Belgacom andand Bell Canada, respectively, andand The decrease forfor 2003 was partially offset by thethe year.-year- approximately $58 related to impairmentsimpairments of TDC's over-year comparison of $101 fromfrom a 2002 restructuringrestructuring investmentsinvestments inin Poland, Norway and thethe Czech Republic. charge at Belgacom, as well asas a favorablefavorable exchange rate 2001 gains of approximately $53 on Cegetel's salesale of impact at TDC of $28. Also offsetting the 2003 decrease AOL France and $49 on Bell Canada's salesale of Sympatico-Lycos were improvedimproved operating results from Belgacom of $58 also affected year-over-year comparisons. Our 2002 equity primarily'primarily driven by wireline and wireless operations andand income from Bell Canada declined approximately $101 as $32 at TDC primarily due to improvedimproved TDC Switzerland a resultresult of our May 2002 change from thethe equity method operations. Additionally, equityequity incomeincome fromfrom America M6vilMovil to the cost method of accounting for that investment.investment. for 20032003 increased approximately $15 resuitingresulting fromfrom Our removal from day-to-day management and thethe improvedimproved operatingoperating results and lower financing,financing, partially progression of negotiations to sell our interest in Bell offset by tax adjustments. Equity income from Telkom for Canada resulted inin this accountingaccounting change (see Note 2). .2003, 2003 increased approximately $89 resulting primarily fromfrom
Other Segment Results PercentPercent Change 2003 vs. 2002 vs. 2003 2002 2001 2002 2001 Total Segment Operating Revenues $ 263 $$ 389 $ 768 (32.4)%(32.4) (49.3)%(49.3)% Total Segment Operating Expenses 120 175 954 (31.4)(31A) (81.7)(81.7) Segment Operating IncomeIncome (Loss) 143 214 (186)(186) (33.2)(33.2) -- Equity:inEquity_in Net IncomeIncome ofof Affiliates 647 769 1,0_,01,0'40 (15.9)(15.9) (26.1)(26.1) SegmentlncomeSegment Income $ 790 $ 983 $.$854854 (19.6)%(19.6)% 15.i%15.1%
Our other segment resultsresults in 2003 andand 2002 primarily revenue from aa capital leasing subsidiary. Revenue in 2002 consist of corporate and other operations. Results for decreaseddecreased approximately $379 primarily duedue tOto thethe sale of 2001 includeindude the Ameritech cable televisiontelevision operations, assetsassets inin 2001 thatthat contributed approximately $362 of Ameritech security monitoring business, and wireless revenue in 2001. Expenses also decreased as a result of the properties thatthat were not contributed to Cingular. All disposition of operating companiescompanies in 2001. of thesethese assets were soldsold inin 2001. . Substantially all of thethe Equity inin Net Income of Affiliates 2003 revenuesrevenues decreased as a result of lowerlower operating representsrepresents the equity incomeincome from our investmentinvestment in Cingular.
~PAGEPAGE 1"18t8 OPERATIN6 ENVIRONMENTENYIRONMENT AND TRENDS OF THETHE BUSINESS Therefore, inin accordanceaccordance with thethe substantive plan provisions requiredrequired in accountingaccounting for postretirement benefits under 2004 Revenue Trends We expect our revenuerevenue loss trends toto GAAP, throughthrough 2003, we did not account for thethe cap in thethe stabilize and, by the end of 2004, we expect year-over-yearyear-over-year by of expect value of our accumulated postretirement benefit obligation growth in revenues (after(after includingincluding our shareshare of Cingular's (i.e.,(i.e., we assumedassumed the cap would be waived for all future revenues)revenues) for the following reasons.reasons. 2004 marks the firstfirst contract periods). IfIf we hadhad accounted forfor thethe capcap as written year inin which we cancan offer interLATA long-distancelong-distance in thethe contracts, our postretirement benefit cost would have nationwidenationwide (see(see %ong-Distance""Long-Distance" in our "Regulatory"Regulatory been reduced by $884,$884, $606 andand $476 in 2003, 2002 and =Developments" section).section). As a result,result, we expect both 2001. InIn early 2004, nonmanagement retirees were informedinformed continuedcontinued growth inin long-distancelong-distance and DSL and growth in of changeschanges in their medical coverage beginning inin 2005. We \ thelargethe large business and national data market. We now have anticipateanticipate the changes could reducereduce postretirement benefit /theE' the ability to effectively compete forfor nationalnational customers due cost asas much $300 to $600 during 2004. InIn addition, we also toto thethe removal of restrictionsrestrictions on our providingproviding themthem withwith expect to reduce our annual costscosts approximately $250 toto $350 nationwide long-distance.long-distance. Increasing competition in thethe due toto recentlyrecently passed Medicare legislation that partially communicationscommunications industryindustry may pressure revenue as we subsidizessubsidizes thethe cost toto employersemployers of providing prescriptionprescription respond to competitors' pricing strategies.strategies. As discussed drug coverage forfor their retirees:retirees. For a comprehensive below, many of our competitors are subject to lessless or no discussion of our pension and postretirement cost (benefit), regulation,regulation, have subsidized costs due to UNE-P or have including a discussiondiscussion of the actuarial assumptions, seesee Note 10. emergedemerged from bankruptcy with minimal debt and therefore have significant costcost advantages. However, we expect con-con- Cingular tinuedtinued success with our bundlingbundling strategy to offset anyany such On February 17, 2004, Cingular announced anan agreement pressure by improvingimproving customer retentionretention and slowing our toto acquire AT&T Wireless. The transactiontransaction is subjectsubject toto access lineline losses.losses. approval by shareholders of AT&T Wireless and federalfederal 2004 Expense Trends We expectexpect continued pressure on regulators.regulators. At this timetime we do not know ifif thethe acquisition our operatingoperating margins during much of thethe year, driven by Willwill Closeclose inin 2004 and cannot therefore predict thethe impact investment inin growth areas suchsuch asas tl_e large business growth the large on Cingular's 2004 subscriber, revenue or expense trends. market. However, we expect thesethese margins toto stabilize by by Even if the acquisition does not close in 2004, we expect the end of 2004, due primarily toto changing revenuerevenue trendstrends continued customer subscriber growth at Cingular sincesinre we as discussed above andand continuedcontinued cost control measures, expect continued success fromfrom our bundling strategy and includingincluding pension andand postretirement benefit costs, as thethe overall U.S.U.S, wireless market to continue to expand. noted below. We also assumeassume no change inin historical We also expect thatthat Cingular will continuecontinue toto investinvest in expense trendstrends resulting fromfrom our negotiating new improving its network performance and customer serviceservice collective bargaining agreements during 2004. with thethe goal of stabilizing to improving itsits customercustomer 2004 PensionPension and Retiree Medical Cost Expense Trends goal to improving While medical andand prescriptionprescription drug costscosts continue to turnoverturnover rate. Assuming Cingular obtains thethe necessarynecessary rise, we expect that 2003's improvedimproved investmentinvestment returns approvals andand the acquisition is completed, we expect combined with voluntary pre-funding of plan obligations Cingular will incur additional integrationintegration costs toto achieve in 2003 will lowerlower our pension andand postretirement costs in operating synergiessynergies andand increasedincreased amortization expense 20042004 (see(see Note 10). We expectexpect combined net pension and from intangibles for severalseveral years. Cingular expects to postretirement cost of between $1,000$1,000 andand $1,400$1,400 in 2004,2004, achieve significant operating synergiessynergies throughthrough thisthis compared to our combined net pension and postretirement acquisition byby consolidatingconsolidating networks, distribution, billing, ' expenseexpense of $1,835$1,835 inin 2003. Approximately 10% of these procurement, marketing, advertising and other functions. annual costs are capitalizedcapitalized as part of construction labor;labor, ASAs such, we expect initiallyinitially a decrease in our net income ' I_rovidingproviding aa reductionreduction in the net expenseexpense recorded.recorded. CertainCertain as a result of thethe acquisitionacquisition until the positive impactsimpacts of , factors,factors, suchsuch as investmentinvestment returns,returns, depend largelylargely on trends the synergies are realized.realized. We also expectexpect an increase inin in the U.S.U.S.securitiessecurities market andand the general U.S.U.S.economy, financing costs to the extent additionaladditional debt isis incurred and we cannot control those factors. InIn particular,particular, while to fundfund thethe acquis!tion.acquisition. we expect positive investment returns in 2004, uncertainty inin the securities markets and U.S.U.S.economy could resultresult inin Operating Environment Overview investmentinvestment volatility and significantsignificant changes in plan assets, The Telecommunications Act of 1996 (Telecom Act) was whichwhich under GAAP we will recognize over the next several intended toto promote competition and reduce regulation inin years. Additional!y,Additionally, should actual experience differ from U.S.U.S. telecommunications markets. Despite passage of thethe actuarial assumptions, combinedrombined net pension and postretire- Telecom Act, the'the telecommunicationstelecommunications industry,industry, particularlyparticularly ment cost would bebe affected in futurefuture years. incumbent localloral exchange carriers such asas ourwirelineour wireline For the majority of our laborlabor contracts thatthat contain an subsidiaries, continuecontinue to be subject to significantsignificant regulation.regulation. annual dollar value caprap for thethe purpose of determining The expected evolutionevolution from an industry extensively contributions required from nonmanagement retirees, we regulated bYby multiple regulatory bodiesbodies to a market-driven have waived thethe cap during the relevantrelevant contract periods industryindustry monitored by Statestate and federal agencies has not and thus not collectedcollected contributions fromfrom thosethose retirees. occurred as quickly or as thoroughly as anticipated.anticipated.
PAGEI19~PAGE 19 MANAGEMEN_'SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)ICONTINUEDI Dollarsinmillionsexceptexcept pershareshare amounts
Our wireline subsidiariessubsidiaries remain subject toto extensive federalfederal and state levelfevel thatthat will help define the appropriate regulation by state regulatoryregulatory commissionscommissions for intrastate regulatory environment for broadband services.services. servicesservices and by thethe ECCFCC for interstate services. We continuecontinue Once this difficult and uncertain regulatory environment toto faceface a number of state regulatory challenges. For example, stabilizes, we expect thatthat additional business opportunities, Certaincertain statestate commissions,commissions, includingincluding thosethose inin California, especially in the broadband area, would be created. At the Illinois,Illinois, Michigan,Michigan, Wisconsin, and Ohio have significantly same time,time, thethe continued uncertainty in the U.S.U.S. economy lowerlower wholesale rates,rates, which areare thethe rates we are allowed and increasing locallocal competition from multiple wireline andand toto charge competitors,competitors, includingincluding AT&TAT8T and MClMCI (formerly wireless providers in various markets presents significant known as WorldCom) for leasing parts of our network challenges for our business.business. (unbundled(unbundled network elements, or UNEs) in aa combined formform Expected Growth Areas known as the UNE platform, or UNE-RUNE-P. These mandated We expec-texpect our primary wireline products and wireless services rates,rates, which range from 30% toto 55% below ourour economic to remain the most significant portion of our business and cost, are contributing toto continued declinesdeclines in our access lineline have alsoalso discussed trends affectingaffecting the segment's inin which revenuesrevenues and profitability. As of December 31, 2003, we we report results for these products (see(see _ireline"Wireline Segment have lostlost 6.76.7 million customer lines toto competitors throughthrough report Results" and Cingular Segment Results Over the next few UNE-P, approximately 1.71.7 million of which were lost during Results" and uCingular Segment Results"). ).Over the next few years we expect an increasingincreasing percentage of our revenuesrevenues to 2003, asas compared toto 2.62.6 million lostlost in 2002. come from data, long-distancelong-distance and Cingular's wireless service. However, changeschanges inin the regulatory environment toward come data, Whether, ortheor the extent to which, growth in thesethese areas will the end of 2003 raiseraise the possibility thatthat thethe availabilityavailability of offset declinesdeclines inin other areas of ourour business is not known. mandated below-cost priced UNE-P may be lessened.lessened. DataBroadbandDataCroadband InIn October 1999,we announcedannounced plans Following the FCC's Triennial Review Order {TRO),(TRO), issued inin to upgrade our network to make broadband services August 2003, we tooktook immediate legal actionaction at the United to upgrade our to available to approximatelyapproximately 80% of our U.S.U.S.wireline States Court of Appeals for the District of Columbia Circuit to customers over thethe four years through 2003 (Project Pronto). (D.C.(D.C. Circuit) toto correctcorrect the flaws that thethe FCC'sFCC's order main- Due to the weakening U.S.U.S. economyeconomy and anan uncertain and tained.tained. (The TRO isis discussed inin detail inin the "Regulatory adverse regulatory environment, in October 2001 we Developments" sectionsection of thisthis document.)document. ) This is one of two announced a scale-back in our broadband deployment courtscourts that havehave alreadyalready rejectedrejected thethe FCC's earlier plans. As discussed in greater detail below, inin August 2003 unbundling order. The court consolidatedconsolidated all pending law- thethe FCC released its TRO, which appears toto provide some sui_suits into one proceeding and heard oral arguments in relief fromfrom unbundling requirements for broadband and January)anuary 2004. The D.C.D.C. Circuit isis expected toto issueissue a decision new fiber facilities and equipment used to provide data Onon thethe TRO in thethe first half of 2004. equipment to and high-speed internet access services. However, because We continue to work toward UNE-P reform throughthrough high-speed the new broadband rules contain some ambiguities and proceedings inin most of our states.states. Those states are now in the have been appealed to the D.C.D.C. Circuit, and are subject to thethe process of determining whether or not we must offer petitions for reconsideration or clarificationclarification before the FCC, access to our centralcentral office switches, a key component of we continuecontinue to face uncertainty regarding thethe regulatory UNE-P, toto competitorscompetitors in a given market at a government- treatment of our broadband investments.investments. Nevertheless, due mandated price. In addition,addition, therethere are parallel proceedings to the increasingincreasing growth opportunities and competition,competition, inin severalseveral states inin our 13-state areaarea toto reevaluate current to we have resumedresumed Project Pronto related limitedlimited build-out UNE-P pricing and bring it more inin lineline with Ourour costs. State and expect toto have DSL availableavailable to nearlynearly 80% of our proceedings could be significantly altered,altered, or even vacated wireline customer locations inin early 2004,2004, up fromfrom 75% at by aa D.C.D.C. Circuit rulingruling on UNE-RUNE-P. December 31, 2003. Our DSL lines continue toto growgrow and Despite a slightly more positive regulatory outlook,outlook, the 31, were approximately 3,515,000515,000 at December 31, 2003, current environment continues toto exert pressure onon our 3, comparedcompared to 2,199,000199,000 at thethe end of 2002. operations. InIn 2003, we continued to eliminate fullfull time to 2, The FCC has begun review!ngreviewing the rulesrules governinggoverning employeeemployee positions and in 2004, we expect to continue toto ' broadband services offered by cable, satellite and wireless maintain our lowerlower capital expenditure budget, targetingtargeting by operators inin addition to traditionaltraditional wireline offerings. The between $5,000$5,000 and $5,500.$5,500. However, unfavorable FCC tentatively concluded thatthat wireline broadband internet regulations imposedimposed by the FCC or state commissions may access services are "information""information" services rather thanthan cause us to experience additional declines in access linefine "telecommunications"telecommunications" services,services, which would resultresult inin lessless revenues, which, inin turn,turn, couldcould reduce our investedinvested capital regulation. In October 2003, the United States Court of and result inin further reductions inin capital expenditures 2003, Appeals for thethe Ninth CircUitCircuit (gth(9th Circuit) ruled that and employment levels. Similarly, growth at higher-than_higher-than- broadband intemetinternet access services provided by cable anticipatedanticipated levels couldcould increase these expenditures. operators involve both an "information""information service and a At the national level,level, the debate isis gradually shiftingshifting operators "telecommunications" service. IfIf this decision isis upheld (the from regulating voice toto regulating broadband. But while FCCFCC hashas aa request forfor rehearing pending before thethe 9th the FCC's TRO created a potentially more positive regulatoryregulatory Circuit), the FCC may change itsits tentative conclusion that environment for broadband services,services, several questions the may change wireline broadband internet access services are informationinformation remainremain unanswered as toto whether or toto what extent our wireline broadband internet access services services,services, not telecommunicationstelecommunications services.services. It is likelylikely that the subsidiaries will be requiredrequired toto unbundle their broadband not FCC will not act inin thesethese proceedings until the 9th Circuit networks oror' offer these services toto competitors. We are not act rulesrules on itsits request forfor rehearing.rehearing. We are not certaincertain of the actively participating in proceedings underway at both thethe
PAGE I 20 .effecteffect the 9th9th Circuit's decisiondecision will have on our operations Even with this acquisition, we expect thatthat intense indus-indus- or financialfinancial statements. try competition and market saturation will likely cause thethe Cable operators have no general obligation toto provide wireless industry's customer growth raterate toto moderate inin third-partythird-party InternetInternet Service Providers (ISPs) accessaccess toto theirtheir comparison with historical growth rates.rates. While the wireless broadband networksnetworks at this time, although the FCC hashas telecommunications industryindustry does continue toto grow,grow, a high begun a proceeding toto considerconsider the issue.issue. The 9th Circuit's degree of competition existsexists among si_six national carriers, decisiondecision (discussed(discussed above) couldcould support the impositionimposition on their affiliatesaffiliates and smaller regionalregional carriers. This competition cable Operatorsoperators ofof some of thethe same regulationsregulations applicable and other factors,factors, suchsuch as the implementationimpiementation of wireless to wireline companies,companies, but it isis unclear at thisthis timetime whether locallocal number portability, will continue to putp0t pressure ) the decisiondecision willwiil have aa significant impact on providers of upon pricing, margins and customer turnoverturnover as thethe carriers cable modem services. compete for potential customers. Future carrier revenue In December 2002, thethe FCC ruled thatthat advanced services, growth isis highly dependentdependent upon thethe. number of net such as DSL,DSI when provided throughthrough one of our separate customer additions aa carrier can achieve andand the average Subsidiaries,subsidiaries, are not subjectsubject to tariff regulations and cost revenue per customer. The effective management of study requirements.requirements. However, we are still requiredrequired toto retain customercustomer turnover isis also importantimportant in minimizing customer costcost data and offer our retailretail advanced services for resale acquisition costs andand maintaining and improvingimproving margins. at a discount.discount This ruling should allow usus to respond more Cingular faces many challenges and opportunities in thethe quickly toto offerings by unregulated competitors. The FCC isis futurefuture and is focused on thethe followingfollowing key initiatives: expected toto complete its broadband reviewreview during 2004. •~ growing customer basebase profitably by offering wireless The effect of the reviewreview on our resultsresults of operations and voice and data products and rate plans that customers financialfinancial position cannotcannot be determined atat this time. desire; Long-Distance We offer landline interLATAinterLATA (traditional)(traditional) •~ increasingincreasing thethe capacity,capacity, speedspeed and functionality of thethe long-distancelong-distance services toto customers inin our 13-state area network through thethe completion of the GSM/GPRS/GSMI GPRS/ and toto customerscustomers in selectedselected areas outside our wireline EDGE network overlay and improvingimproving overalloverall network subsidiaries' operating areas. We began offering interLATA coveragecoverage and performance; .long-distancelong-distance to our customers inin Nevada in April 2003, •~ increasingincreasing wireless data penetration and usage throughthrough Michigan inin September 2003 and Illinois,Illinois, Ohio, Wisconsin thethe development andand promotion of advanced wireless and Indiana in October 2003. All long-distance state data applications and interfaces;interfaces; entrances were approved by thethe FCC. We now have approvalapproval •~ improving thethe Cingular reputationreputation inin the industry byby toto offer interLATAinterLATA Iong_distancelong-. distance nationwide. focusing on all customer-facingcustomer-facing aspects of the business We expe_expect increased competitioncompetition for our wireline including network performance, sales, billing and subsidiaries in ourour Midwest region, inin particular, as wewe beginbegin customercustomer service; offering interLATAinterLATA long-distancelong-distance service.service. However, ultimately •~ continuingcontinuing thethe expansion of Cingular's existingexisting footprintfootprint we expect thatthat providing long-distance service in thesethese five and network capacity by obtaining accessacress toto additional states will help to mitigate the access lineline losses that we spectrum, primarily through spectrumspectrum exchanges, have experienced asas a result of the UNE-P ratesrates for thosethose purchases, mergers, acquisitions and jointjoint ventures;ventures; and slates,states, which are typically lower than our other eighteight states. •~ maintaining effective cost controlscontrols by continually We expect thatthat ourour entry into thethe long-distance markets in evaluating the cost structure of Cingular's businessbusiness and our Midwest regionregion will helphelp toto slowslow trends inin access line leveragingleveraging its largelarge sizesize and national scope. losseslosses and may improveimprove trendstrends in customer winback and In September 2003, the U.S.U.S. Bankruptcy Court forfor thethe retention, similar to those experienced in other states in Southern District of New York approved thethe sale of certain our 13-state area where we previously obtained approval celiularcellular licenseslicenses held by NextWave to Cingular forS1,400.for $1,400. to offer interLATAinterLATA long-distance. Cingular receivedreceived FCC approval in February 2003, clearingclearing Wireless At December 31, 2003, Cingular served the way forfor Cingular to completecomplete thethe licenselicense transfers.transfers. The , approximately 24.824.8 million customers and was the secondsecond--_ licenseslicenses cover approximately 83 million potential customerscustomers largestlargest provider of mobile wireless voicevoice and data inin 34 markets, primarily those markets where Cingular communications services in thethe U.S.,U.S., basedbased on the numbernumber currentlycurrently has voice and data operations. Cingular may of wireless customers. Cingular has access to licenses to finance the purchase of these licenseslicenses with 'aa combination provide wireless communications servicesservices covering an of cash and debt. Cingular expects thisthis transaction to closeclose aggregate population of potential customers, referred toto during thethe first half of 2004. as "POPs", of approximatelyapproximately 236 million, or approximately InIn March 2003, Cingular and AT&T Wireless formed a 81% of the U.S.U.S. population, includingincluding 45 of the 50 largestlargest jointjoint venture to build out an EDGE network along a number U.S.U.S. metropolitan areas. IncludingIncluding roaming agreements of major highways i0 order toto reducereduce incollectincollect roaming with other carriers,carriers, Cingular provides GSM coverage to expenses paid to other carriers when customers traveltravel on approximately 90% of the U.S.U.S. As discussed inin "Other those,highways.those. highways. InIn March 2003, Cingular contributed licenses BusinessBusiness Matters", on February 17, 2004, Cingu!arCingular andand assets having a value equal toto the cash or assets announced an agreement toto acquireacquire AT&TATBT Wireless,Wireless. At contributed by AT&T Wireless. At December 31, 2003, December,31,December 31, 2003, AT&TAT8T Wireless servedserved approximately Cingular had anan investment inin thethe venture totalingtotaling $21. 22 million customers. We expect thatthat thisthis acquisitionacquisition will Cingular expects to spend lessless than $10 inin 2004 for capital enhance Cingular's ability to compete by strengthening expenditures associated with the venture. its network coverage and quality.
PAGETPAGE 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS (CONTINUED)(cONTINUED) DollarsDollars in millions except per share amountsamounts
InIn JuneJune 2003, Cingular completedcompleted the transfertransfer of itsits charges. As discussed below, numerous legallegal challenges toto licenselicense and operations in Kauai, Hawaii and wireless licenseslicenses the TRO have been filed by SBC and others with the D.C.D.C. inin Alabama, Idaho, Oklahoma, Mississippi andand Washington Circuit, which isis expected to rulerule on thesethese challenges inin thethe for AT&T Wireless' licenses in Alabama, Arkansas, Georgia, first half of 2004. Kentucky, Louisiana, Mississippi, Tennessee and Texas. Set forthforth below isis a summary of the most significant Inln February 2004, Cingular acquired an operational aspects of thethe newnew rules. While these rules apply onlyonly to our .cellular.cellular system in Louisiana andand other FCC licenses in wireline subsidiaries, the words "we""we or Uour""our" are used to Louisiana and Texas fromfrom Unwired Telecom Corporation simplify thethe discussion. In addition,addition, the following discussion for approximately $28. Also in February 2004, Cingular is intended as a summarysummary of issues in the TRO ratherrather thanthan a completedcompleted an exchange transaction with Dobson Cellular precise legal description of all of those specificspecific issues. Systems, Inc. (Dobson).(Dobson). Cingular transferred approximately •~ UNE-P UNE-P isis a combination of all of the networknetwork $22 inin cash andand wireless property in Michigan toto Dobson elements necessary to provide completecomplete local serviceservice toto in exchange for wireless property inin Maryland. a customer. The new rules state thatthat if we are notnot By the end of 2003, Cingular had launched GSM/GPRS requiredrequired to provideprovide anyany one of those network elements technologytechnology in areas covering approximately 93% of its POPsPOPs then we will not be requiredrequired to provide the below-cost thatth'at carry service. Cingular is inin the process of upgrading itsits UNE-P itself.itself. From aa practical perspective, the "switch- networktonetwork to thirdthird generation (3G)(3G) wireless data technologytechnology ing"ing" network elementelement is the most relevantrelevant component by usingusing EDGE. EDGE technology is Cingular's choice for of the UNE-P, i.e.,i.e., the element thatthat routes a telephonetelephone a 3G wireless communications standardstandard that will allow call or data to itsits destination,destination. inIn its TRO, thethe FCC customers toto access thethe InternetInternet from theirtheir wireless devices declineddeclined toto rulerule whether we must provide the switch- at higher speeds than even GPRS. At December 31, 2003, inging element to competitors atat regulatedregulated rates, insteadinstead Cingular's EDGE technology covered approximately 20% leaving th!sthis issueissue to each state commissioncommission to decide. of its POPs. CinguiarCingular expects thethe GSM/GPRS/EDGE network Although thethe state commissions must decide thisthis overlay toto be fullyfully complete byby the end of 2004. switchingswitching issue, thethe FCC did establish twotwo presumptionspresumptions and a timetable forfor states to use in reaching theirtheir REGULATORY DEVELOPMENTS REGULATORY decision.decision. Specifically, thethe FCC presumed that unlessunless Wireline we provide unbundledunbundled locallocal switching, competitorscompetitors in a particular market (1) would faceface economic or FederalRegulationFederal Regulation A summarysummary of significant 2003 federalfederal (1) operationaloperational barrier(s) toto providing service toto consumers regulatoryregulatory developments follows.follows. and all but the larger business customers that are Long-Distance Under the Telecom Act, before being but the larger served by high-capacity facilities but (2) would not permitted toto offer interLATA wireline long-distance serviceservice by (2) faceface suchsuch barriers in theirtheir ability to serve thesethese larger inin any statestate within the 12-state region encompassed by thethe to business customers. The TRO leaves the states broad regulated operating areasareas of Southwestern Bell Texas discretion in defining the relevantrelevant markets. Holdings Inc.,Inc., Pacific Bell Telephone Company, Ameritech and Nevada Bell (these areas with the addition of Southern The statestate commissions had 90 days from October 2, FCC's barriers New England Telecommunications Corp.'sCorp. 's areaarea are referred 2003 to challengechallenge thethe FCC's presumption that barriers do not exist for providing service toto largerlarger business toto asas our 13-state area), we were requiredrequired to apply for and customers,customers, but no state commissions in our 13-state obtain state-specific approval from thethe FCC. At the end area have done so=so. For allall other customers, the states of 2002, we offered long-distance serviceservice inin seven of our area done the have nine months to completecomplete theirtheir analysis.analysis. If a statestate 13 states.states. InIn 2003, we received approvalapproval fromfrom the FCC toto to commission concludescondudes that operational or economic offer long-distancelong-distance service in our remaining sixsix states. barriers do not exist inin a market, we can stop See above under "Expected Growth Areas"Areas for additional barriers do not a we stop UNE-P detail on thethestatusstatus of our approvals. providing below-cost UNE-P toto competitors in thatthat Triennial Review Order On August 21, 2003, the FCC market afterafter a three-year transitiontransition period. •~ Enhanced Extended UnksLinks We must provideprovide releasedreleased itsits TRO establishingestablishing new rules, which became Enhanced Extended We combinations of unbundleunbundled d high capacity loops and effectiveeffective October 2, 2003, concerning thethe obligations of of capacity loops transport elements (often(often referred to asas "enhanced"enhanced incumbent locallocal exchange carriers, such as our wireline transport to extended links" or EELs) to competitors in certain subsidiaries,subsidiaries, to make UNEs available. These rulesrules areare extended or to circumstances. EELs are used to provide switched and intended to replace the FCC's previous UNE rules, which to provide dedicated services. The TRO revisesrevises the test for were vacated by the D.C.D.C. Circuit. With limited exceptions, EELs available. As thethe new rules are consistent with the FCC's February 2003 determining when EELs must be made available. As - a result of this change, long-distance carriers and press releaserelease summarizing its review. of change, The TRO, rather than establishing a uniform national wireless companies may be able toto purchase EELs at below PAGE I z222 Dedicated Transport The TRO redefines dedicateddedicated Although the TRO's broadband and line sharing transporttransport (interoffice(interoffice lineslines used by Onlyonly a single provisionsprovisions apparently provide some regulatory relief, customer) to include only those transmissiontransmission facilitiesfacilities we ateare currently inin the process of evaluatingevaluating them; connecting our switches or central offices, thusthus therefore, the effects on our financialfinancial position and eliminating unbundling of connectionsconnections between our resultsresults of operations cannot bebe quantified at this time.time. network and competitor networks. The TRO concludesconcludes •~ UNE PridngPrikding Rules In September 2003, the FCC opened \ = • • that we must continue toto provide access to dark fiber aa proceeding to review how the cost structure under- (unused fiber thatthat must be equipped with electronics lying the UNE-pricing rules isis determined. These rulesrules before itit can transmittransmit a communications signal) and determine the amounts we can charge_forcharge-for providingproviding DS3 and DS1 (line classifications) capacity transport as UNEs and have been based on hypothetical "forward- UNEs, except where alternative wholesale facilities are looking costs". The FCC tentatively concludedconcluded that available. State commissions are toto performperform mute-route- thesethese forward-looking costscosts need to "moremore closely specific analysesanalyses to determine if such alternative account for the real world attributes of the routing wholesale facilities existexist forfor each of these services. and topography of thethe incumbentsincumbent's network" ratherrather Dark fiberfiber and DS3 transporttransport services are alsoalso eacheach: thanthan using hypothetical networks that may be more subject toto review by thethe state commissions to identifyidentify cost-efficient. The FCCFCC will also reviewreview certain whether competitors are ableable to provide their own assumptions used inin determining thesethese costs, includingincluding facilities. If state analysisanalysis determines that there are network utilization factors.factors. no barriers, we will not be required to continue to •~ Notice of Proposed Rulemaking (NPRM)(NPRM) The TRO provide below-cost transport services.services. opened aa NPRM to seek comment on whether thethe FCC ~ Broadband The TRO eliminates unbundling of Certaincertain should modify its "pick-and-choose" rulerule that permits telecommunicationstelecommunications technology that isis primarily used requestingrequesting competitorscompetitors to opt intointo individualindividual portions for transmitting data and higho-speedhigh-speed iriternet access of interconnectioninterconnection agreements without accepting all across telephone lines. For example, it eliminates the termsterms and conditions of the agreements. unbundling of thethe packet-switching capabilities (a high- As thethe TRO is quite complexcomplex and its implementation may ly efficient method of transmittingtransmitting data) of our locallocal be affected by FCC rulings on petitions for reconsideration,reconsideration, loops and eliminates unbundling of certain fiber-to- state commission proceedings or court decisions, we cannot the-homethe-home (FTTH)(FTTH) loops.loops. FTI"HFITH loopsloops areare fiber-optic loops fully quantify the effects on our financialfinancial position or results that connectconnect directly from our network tOto customers'customers' of operations at this time.time. However, thethe new unbundlingunbundling premises. Traditional telephone lineslines are copper; fiber- rulesrules will most likely create an even more uncertain and optic lines are made of glass andand can carry more more complex regulatory environment for our wireline information over farfar longer distances thanthan copper. subsidiaries, possibly resulting inin further reductions in Under thethe new rules,rules, packet-switching and FTTHF|TH loops revenues,revenues, capital expendituresexpenditures and employment levels. are not subject toto unbundling requirements;requirements; therefore, Because the new rules,rules, inin many cases, givegive each statestate we will not be required to sell themthem to competitors at commission the authority toto determine whichwhirh networkrietwork below-cost UNE prices. However, we must continue to elements areare toto be unbundled, the rulesrules will likelylikely vary by provide unbundled access toto copper-!oocopper-loopp and sub-loopsub-loop state. The resulting state determinations will also be subject lines.lines. In areas where fiber-opticfiber-optic lineslines are installedinstalled inin toto implementation andand federal appeal on a state-by-state place of copper-loopcopper-loop lines,lines, we will be required to basis ratherrather thanthan having uniformuniform implementation require- provide our competitors access either to the existing ment3ments or reviewreview at thethe federal level.level. Although some relief copper looploop or a non-packetized transmission path appears to have been provided by thethe broadband provisions capable of providing voice-grade service Overover the of the TRO, we continue toto faceface uncertainty regarding thethe fiber-optic lines.lines. regulatory treatmenttreatment of our broadband investmentsinvestments Under a previous FCCFCC order, we were required toto because some of thosethose provisions areare ambiguous and theythey sh_ire,share, on an unbundled basis, the high-frequency are under reviewreview by thethe courts and the FCC,FCC. portion,portion, which containscontains DSL, among otherother things,things, of We have filed twotwo legallegal challenges to these new rules local telephone lineslines with competitors. Under thethe TRO, with the D.C.D.C. Circuit. In August 2003,2003, we, along with thethe thisthis high-frequency portion of thethe telephonetelephone line is no United States Telecom Association (USTA), Qwest longer considered a UNE. Current lineline sharing arrange-arrange- Communications Inc. (Qwest), and BellSouth Corporation mentsments:are:are to be maintained until thethe FCC's next biennial (BellSouth),(BellSouth), filed aa lawsuit asking thethe court toto vacate those review,,review, which will commence inin 2004. Competitors may rulesrules governing the unbundlingunbundling of both high-.capacityhigh-capacity purchase new lineline Sharingsharing arrangementsarrangements until October 2, facilitiesfacilities and switchingswitching serving non-large businesses. InIn 2004, and will be required to pay increasingincreasing amountsamounts September 2003, we, along with thethe USTA, Qwest, forfor such new lineline sharing arrangementsarrangements over thethe next BellSouth, and Verizon Communications Inc. (Verizon), threethree years, at thethe end of which customers must bebe filedfiled a lawsuit asking thethe same courtcourt to reject portions transitioned to newnew arrangements.arrangements. The California State of the new rules, includingincluding those concerning UNE-P and Regulatory Commission has stated in aa decision thatthat it EELs. Other parties have challenged other aspects of thethe hashas independentindependent authority to decide whether thethe high- order, including the FCC's decision toto limit unbundling of frequency portion of the local telephonetelephone line isis a UNE broadband facilities. The court consolidated all pending inin disregard of thethe TRO, and we are challengingchallenging thatthat lawsuitslawsuits into one proceeding and heard oraloral arguments decisiondecision inin federalfederal courtcourt. inin January 2004. PAGE'[PA 6 E 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)(cONTINUED) DollarsOollars inin millionsexcept per shareamounts Voice over Internet Protocol Voice over Internetinternet Protocol Number Portability The FCC has adopted rules allowing (VolP)(VoIP) isis generally used to describe the transmissiontransmission of voice customers toto keep their wireline or wireless number when andand data using internet-based technology.technology. A companycompany using switching toto anotheranother companycompany (generally(generally referred to as thisthis technology cancan provide services,services, although not necessarily _number"number portabilityu).portability ).While customers have been able forfor of the samesame quality, often at aa lower cost because a several years toto retainretain their numbersnumbers when switchingswitching theirtheir traditionaltraditional network need not be constructed and maintained locallocal service between wireline companies, the rulesrules now and becausebecause thisthis technology has notnot been subject to require wireless companies toto offer numbernumber portabilityportability • traditionaltraditional telephone industry regulation,regulation. inIn 2003, the FCC to their customers. announcedannounced its intentionintention to open a rulemakingrulemaking proceeding In October 2003, the FCC released anan order addressing : on VolP inin early 2004. The rulemakingrulemaking isis expected toto address many of thethe issues relatedrelated toto thethe movingmovirig of customercustomer - whether and how a wide range of regulationsregulations shouldshouid be numbers between wireless carriers.carriers. This order states that applied to VolP, including issuesissues relatedreiated toto federal and state wireless companies cannot delay switchingswitching a customercustomer to jurisdiction,jurisdiction, intercarrierintercarrier compensation,compensation, universal service, collect early terminationtermination feesfees or other amounts owed by public safety,safety, consumer protection andand other matters. that customer. During 2003, aa number of state commissions also began InIn November 2003, thethe FCCFCC issued an order thatthat enabledenabled proceedings toto examine the regulatoryregulatory treatment of VolP. customers to move wireline telephonetelephone numbers to wireless Notwithstanding thethe unresolved regulatoryregulatory questions providers where coverage areas were overlapping. The FCC before the FCC and the state commissions, numerous has begun a proceeding to resolveresolve issues regarding moving communications providersproviders began providing various forms wireless numbers to wireline providers. The FCCisFCC is alsoalso of VolPVoIP inin 2003, or announced theirtheir intentions to do so in considering whether to allow wireline companies to recover the near future. These providers includeinclude bothboth established their costs to implement wireless number portability (we companies as well as new entrants. While the deployment estimateestimate our totaltotal costs to be $55). Accordingly, we cannot of VolP will result in increased competition for our core currentlycurrently determine the financial effects of all of thesethese wireline voice services,services, itit also presents growth opportunities issues.issues. InIn addition, there are legal challenges toto thesethese for us toto develop new products forfor our customers, both decisions pending in federal court. within and outside of our 13-state area. Coalition for Affordable Local and Long Distance Service •~ Access Charges In October 2002;2002, AT&T filedfiled a petition (CALLS)(CALLS) In September 2001, the United States Court of with thethe FCC asking for a declaratory ruling that accessaccess Appeals for thethe Fifth Circuit (5th Circuit) ruled on appeal charges (which(which are paid toto telephone companies providing of the FCC'sFCCs May 20002000 CALLS orderorder restructuring federal locallocal service, includingincluding our wireline subsidiaries) do not price cap regulation.regulation. Although thethe 5th5th Circuit upheld thethe apply to long-distancelongMistance service that AT&T transports order inin most key respects,respects, it reversed and remandedremanded to for some distance using internet-basedinternet-based technology.technology. the FCC twotwo specific aspects of thethe order. Although thisthis service originates and terminatesterminates on thethe •~ The 5th Circuit held thatthat the FCC failed toto sufficientlysufficiently traditional telephonetelephone network, suchsuch as those operated justifyjustify an incrementalincremental $650 in universal service funding by our wire!inewireline subsidiaries, and provides no new and remandedremanded to the FCC for furtherfurther explanation of features or functionality relative to AT&T's traditional thethe amount; andand long-distance service, AT&TATBT claims thatthat this service shouldshould •~ held that thethe FCC failed to showshow a rational basis forfor be exempt fromfrom access charges. We havehave vigorously how itit derived thethe 6.5%6.5o/o transitional mechanism, i.e.,i.e., opposed AT&T's petition. Should thethe FCC rule inin AT&T's the productivity factor used toto reducereduce access rates favor,favor, we would face a significant decrease inin our access until a targetedtargeted averageaverage raterate is achieved, and charge revenues, not only from AT&T but from other remandedremanded to the FCCFCC forfor anan explanation of howhow carriers that would likelylikely begin to offer similar services. the percentage was derived. At thisthis time,time, however, we are not able toto quantify the In response ttoo thethe court's remand,remand, inin July 2003 the FCC potential access chargecharge revenuerevenue decline that could result issuedissued anan order upholding its original determinationsdeterminations andand from anan adverse FCC ruling. We areare not certain asas toto thethe providing furtherfurther justification for thethe..$650$650 inin universal timing of anan FCC response on AT&T's petition. service fundingfunding and thethe transitional mechanism. SpecialSpedal Access PricingPricing Flexibility In October 2002, AT&T Ameritech Merger In association with its approval of requestedrequested the FCC revoke current pricing rules for special the October 1999 Ameritech merger, thethe FCC set specificspecific access services, a component of our wireline revenues. We performance andand reportingreporting requirementsrequirements and enforcement and other parties have challenged AT&T's petition, which provisions that mandate approxirnatelyapproximately $2,000$2,000 in potential remainsremains pending before thethe FCC.FCC. InIn November 2003, AT&TATBT payments through May 2004, ifif certaincertain goalsgoals were not met. andand other competitors filed aa petition with the D.C.D.C. Circuit, Associated with these conditions, we incurred approximately askingasking the court to compel the FCC, within 45 days, to issue $14, $20 and $94 inin 2003, 2002 and 2001 in additional aa notice of proposed rulemaking vacating thesethese special expenses, includingincluding payments for failing to meet certaincertain accessaccess pricing rules.rules. InIn January 2004, the FCC filed its performance measurements. Approximately $8 inin potentialpotential opposition to AT&T's petition, and SBC andand other carrierscarriers payments could stillstill be triggeredtriggered _roughthrough May 2004. filedfiled a requestrequest to interveneintervene inin support of the FCC with the The effects of thethe FCC decisions on the above topics areare D.C.D.C. Circuit.Circuit The court has not yet ruled on AT&T's petition. dependent on many factors including,inciuding, but not limitedlimited to,to, IfIf AT&T's petition is granted, itit likelylikely would have aa significant the ultimate resolution of the pendingpending appeals;appeals; the numbernumber adverse impactimpact on our special access revenues. and nature of competitors requestingrequesting interconnection,interconnection, unbundling or resale; and thethe results of the state regulatory PAGE I 2424 commissions'commissions' reviewreview and handling of related matters within alternative technologies (e.g.,(e.g., VolP}VolP) has lowered costs forfor theirtheir jurisdi.ctions.jurisdictions. Accordingly, we are not ableable to assessassess alternative providers. As a result,result, we face heightened thethe totaltotal potential impact of the FCC orders andand proposedproposed competition asas well asas some new opportunities inin significant rulemakings. portions of our business. State Regulation A summary of significant 2003 statestate Wireline regulatory developments follows.follows. Our wireline subsidiaries expect increased competitive California Audit In August 2003, two alternatealternate sets of pressure in 2004 and beyond fromfrom multiple providers inin proposed findingsfindings on the 1997-1999 auditaudit of our California various markets, including facilities-based local competitors, wireline subsidiary were presented toto the California Public interexchangeinterexchange carriers and resellers. In some markets, we Utility Commission (CPUC).(CPUC). The two proposed sets of Competecompete with largelarge cablecable companies such as Comcast findingsfindings differed inin many respects but both concluded thatthat Corporation, Cox Communications, IncInc. and Time Warner Inc.Inc. our subsidiary should issueissue refunds,refunds, i.e.,i.e., service credits,credits, in for local andand high-speed internet servicesservices customers and amounts rangingranging fromfrom $162 to $661. Subsequent revisionsrevisions 10ng-distancelong-distance companies such as AT&T and MCI for both toto those proposed findings have changed thethe rangerange toto $0 long-distance and locallocal services customers._Substitutioncustomers. Substitution of : toto $466. While thethe subsequent revisionsrevisions have decreased thethe wireless and internet-basedinternet-based services forfor traditional locallocal range, we believebelieve thatthat both sets of findings still contain service lines also continues toto increase. At this time,time, we are errors and that the refundsrefunds should be eliniinated.eliniinated. These unable to assessassess the effect of competition on thethe industryindustry twotwo alternative findings are presently before thethe CPUC for as a whole, or finariciallyfinar'icially on us, butbut we expect both losses consideration. The CPUCPUCc may completely or partially accept of market share inin local service andand gains resulting from or rejectreject anyany of thesethese proposed findings. We do not knowknow new business,initiatives,business initiatives, bundling of products and services, when thethe CPUC will make a finalfinal decision or what itsits our new long-distanceIong-distance service areas and broadband. decision will be. decision will be. Our wireline subsidiaries remainremain subject toto extensive o-IllinoisIllinois UNE Legislation In May 2003, the Illinois legis- regulationregulation by state regulatory commissions forfor intrastateintrastate laturelature passed legislation concerning wholesale prices our services andand by the FCC for interstate services. In contrast,contrast, IllinoisIllinois wireline subsidiarysubsidiary cancan charge locallocal serviceservice competitors, our competitorscompetitors are often subject toto less or no regulation suchsuch asas AT&T and MCl,MCI, for leasing its locallocal telephone network inin providingproviding comparable voice and data services. State (UNE rates). The new lawlaw directed the IllinoisIllinois Commerce legislativelegislative andand regulatory developments over the lastlast severalseveral Commission (ICC) toto set wholesale ra_cesrates based on a_ualactual years allow increased competition for locallocal exchange .... data, includingincluding our subsidiary's actual network capacity and services. Under the Telecom Act, companies seeking to actualactual depreciation ratesrates shown on our financialfinancial statements. interconnectinterconnect toto our wireline subsidiaries' networksnetworks and In June 2003, the United States District Court for thethe Northern exchange local calls must enter into interconnection District of Illinoisillinois Eastern Division issued a temporary order agreements with us. These agreements are then subject toto blockingblocking implementation of thisthis law.law. The order was made approval by the appropriateappropriate statestate commission. As noted inin finalfinal inin JulyJuly 2003. InIn November 2003, the United States Court the "Operating Environment Overview" section above, thethe of Appeals for thethe Seventh Circuit (7th Circuit) affirmed that mandated rates setset by certain state commissions, includingincluding thethe lawlaw was invalidinvalid as it on!yonly addressed twotwo of the factors those in California, Illinois, Michigan, Ohio and Indiana,indiana, areare requiredrequired by thethe federal standards that instructinstruct the states significantly below our cost andand contribute substantially ' how toto setset thethe UNE rates. However, thethe 7th Circuit also stated to our continued decline in access line revenues and profit- thatthat thethe currentcurrent UNE ratesrates in effect must be updated toto ability.ability. As of December 31, 2003 andand 2002, we had approxi- comply with federalfederal law as of 2003. The 7th Circuit instructedinstructed mately 445,000445,000 and 801,000801,000 accessaccess lines (approximately 0.8%0.8% the ICC toto quicklyquickly address thesethese out-of-date ratesrates and to , and 1.4%1A% of our total access lines)lines) supporting services of reinstatereinstate the UNE raterate proceeding that had been previouslypreviously resale competitors throughoutthroughout our 13-state area, primarily terminated by the lawslaw's passage.passage:The'The ICC UNE raterate proceedings in Texas, California andahd Illinois.illinois. If current UNE-P regulations are currentlycurrently underway. remain in place, we would expect our resale access lines toto IndianaIndiana UNE-P InIn January 2004, the IndianaIndiana Utility continue to decrease as UNE-P lines replacereplace resale lines, Regulatory Commission (IURC}(IURC) increased some of thethe whole- mitigated by thethe opportunitiesopportunities provided us by bundling.bundling. sale prices our IndianaIndiana wireline subsidiary can chargecharge locallocal InIn additionaddition toto thesethese wholesale rate and service regulations service competitors,competitors, such asas AT&T and MCl,MCI, for leasingleasing itsits noted above, all of our wireline subsidiariessubsidiaries operate under local telephone networknetwork (UNE rates).rates). Although the IURC state-specific elective "price capcap regulation" for retail services increasedincreased UNE-P ratesrates approximately 30%, they remain (also referred toto as "alternative"alternative regulation")regulation" ) that was either below our cost of providing service. AT&T and MClMCI have legislativelylegislatively enacted or authorized by thethe appropriate statestate both indicatedindicated that they plan toto appealappeal thisthis decision. regulatory commission. Prior toto price cap regulation,regulation, our wireline subsidiaries were under "rate of return regulation,.regulation COMPETITION . Under raterate of return regulation, thethe statestate regulatory Competition continuescontinues toto increase for telecommunicationstelecommunications commissions determined an allowable rate of returnreturn we and informationinformation services, and regulations,regulations, suchsuch as thethe UNE-P could earn on plant in serviceservice and set tarifftariff rates to recover rules, have increased thethe opportunitiesopportunities forfor alternative the associated revenuesrevenues required toto earnearn that return. Under communications service providers. Technological advances price cap regulation, price caps are set for regulatedregulated services have expanded the typestypes and uses of services and products and are not tiedtied toto the cost of providing thethe servicesservices or toto available. InIn addition, lack of regulation of comparable rate of returnreturn requirements. Price cap ratesrates may be subject PAGEIPAGE 2S25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)IcoNTiNuED& Dollars inin millions except perper share amounts toto or eligible for annual decreases or increasesincreases and also may occurredoccurred inin the threethree years ended December 31, 2003. be eligible for deregulationderegulation oror greater pricing flexibilityflexibility if However, ffif all other factors were to remainremain unchanged, thethe associated service isis deemed competitive under some we expect a one-year increaseincrease in thethe useful liveslives of state regulatory commission rules. Minimum customer threethree of the largest categories of our plant in service service standards may alsoalso be imposedimposed andand payments (which accounts for approximately 60% of ourour total required if we fail to meet the standards. plant in service) would result in a decrease of between One of our responses toto thethe multiplmultiplee competitivecompetitive $340 and $370 in our 2004 depreciation expense and pressures discusseddiscussed .aboveabove was our fourth-quarterfourth-quarter 2002 a one-year decrease would result in an increaseincrease of launchlaunch of a single-brand packaging strategy thatthat rewardsrewards between $420 and $450 inin our 2004 depreciation customers who consolidate theirtheir services (e.g.,(e.g., local and expense. Effective January I,1, 2003, as required by long-distance telephone,telephone, DSL and wireless) with us. CalledCalle'd FAS 143, we decreased our depreciation ratesrates to "SBC Connections", the new initiativeinitiative delivers integratedintegrated exclude costs of removal inin certain circumstances. bundles using a single bill. During 2004, we expect toto This change is discussed furtherfurther under "New continue focusing onon bundling wireline and wireless Account!ngAccounting Standards" below. services, includingincluding combined packages of minutes. In •~ Our bad debt allowanceallowance isis estimatedestimated primarilyprimarily based on addition, we also plan to addadd toto our bundled offerings analysis of history and future expectationsexpectations of our retail a videovideo service throughthrough an agreement with EchoStar and our wholesale customers in each of ourour operating Communications Corporation (EchoStar)(EchoStar) (see "Other companies. For retailretail customers, our estimates are based BuslneSsBusiness Matters" below).below). on our actualactual historical write-offs, net of recoveries, andand the aging of accountsaccounts receivable balances. Our Cingular assumptionsassumptions are reviewedreviewed at least quarterly and Cingular faces substantial and increasing compeUtion in all Cingular faces increasing competition adjustments are made to our bad debt allowance as aspects of the wireless communications industry.industry. Under aspects appropriate. For our wholesale customers, we use aa current FCC rules,rules, sixsix or more PCS licensees,licensees, two cellular statistical model based on our agingaging of accounts licenseeslicensees and one or more enhanced specialized mobile receivable balances. Our risk categories, riskrisk percentages radio licenseeslicensees may operate ih each of Cingular's markets, may operate each of and reservereserve balance assumptions built intointo thethe model which has resulted inin the presence of multiple competitors. areare reviewed monthly andand the badbad debt allowanceallowance isis Cingular's competitorscompetitors are principally five national (Verizon principally adjustedadjusted accordingly.accordingly. If uncollectibility Ofof our billed Wireless, AT&T Wireless, Sprint PCS, Nextel Communications revenue changes by 1%, we would expectexpect aa change and T-Mobile) and a larger number of regional providers of a larger of regional of in uncollectible expense of between $200 and $250. cellular, PCS and other wireless communicationscommunications services. •~ Our actuarial estimates of retireeretiree benefit expense See "Other Business Matters" for details on Cingular's See andand the associated significant weighted-average pending acqu!sitionacquisition of AT&T Wireless. pending of assumptions are discussed inin Note 10. One of the most Cingular may experience significant competitioncompetition fromfrom significant of thesethese isis the returnreturn on assetsassets assumption, companies that provide similar servicesservices using other that provide which was 8.5%8.5% for the year ending December 31, 2003. communications technologies and services. While some of of This assumption will remain unchanged forfor 2004. these technologies and services are now operational, others these technologies and services are now operational, others IfIf all other factorsfactors were to remain unchanged, we are being developed or may be developed in the future. are being may developed expect a 1% decrease in the expected long-termlong-term raterate Cingular competes for customers based principally on price, price, of return would cause 2004 combined pension andand service offerings, callcali quality, coveragecoverage _ireaarea and customer postretirement cost to increase approximately $408 •. service. See discussion of EDGE technologytechnology in "Wireless" over 2003 (analogous(analogous change would resultresult fromfrom a I%1% underunder "Expected Growth Areas" above. increase). The 10-year returnsreturns on our pension plan were Directory 9.8%9.8% through 2003, includinginduding thethe adverseadverse effects of Our directory Subsidiariessubsidiaries face competitioncompetitiori from over 2000 throughthrough 2002. Under GAAP, the expected long-long- term rate of return is calculated on the market-related 100 publishers ofprintedof printed directories inin theirtheir operating areas. term rate of return is calculated on the market-related Direct addai)d indirect competition alsoalso existsexists from other value of assets (MRVA).(MRVA). GAAP requiresrequires that actual gains advertising media, including newspapers, radio, television and losses on pension and postret.irementpostretirement planplan assetsassets and direct-mail providers, asas well as from directories offered , be recognized inin the MRVA equallyequally over a period of up Overover thethe Intemet_Internet toto fivefive years. We useuse a methodology, allowed under GAAP, under which we hold thethe MRVA to within 20% ACCOUNTING POLICIES AND STANDARDS :_ ACCOUNTING POLICIES AND STANDARDS of thethe actualactual fair value of plan assets,assets, which can have the effect of acceleratingaccelerating the recognition of excess Significant Accounting Policies andand Estimates Because of actualactuai gainsgains and losseslosses into the MRVA inin lessless than the size of thethe financial statement lineline itemsitems theythey relate to, five years. Due toto investmentinvestment losses on planplan assets someofsome of our accountingaccounting policies and estimatesestimates have a more experiencedexperienced through 2002, thisthis methodology significant impactimpact on our financial statementsstatements thanthan others:others: contributedcontributed approximately $605 toto our combined net •~ Our depreciationdepreciation of assets, includingincluding use of composite Pensionpension and postretirement cost in 2003 as compared group depreciation andand estimates of useful lives, is with thethe methodology that recognizes gainsgains and losses described inin Notes 11 and 5. We assign useful lives based over a fullfull five years. This methodology did not have a on periodic studies of actual asset lives.lives. Changes in Significantsignificant effecteffect on our 2002 or 2001 combined net thosethose lives with significant impa_impact on the financialfinancial pension andand postretirement benefit asas the MRVA was statements must be disclosed, but no such changes have PAGE I z026 almost equal to the fairfair value of plan assets.We do not Medicare Act. InIn order for us to receive the subsidypayment expect thisthis methodology to have aa significantsignificant impact inin under the Medicare Act, thethe value of our offered prescrip- our combined net pension and postretirement costs inin tion drug plan must be at leastleast equal to thethe value of thethe : 2004. Note 10 also discusses the effects of certaincertain standard prescription drug coverage provided under changes in assumptions related to medical trendtrend rates Medicare Part D, referred to asas actuarially equivalent. Due on retiree health care costs. to our lowerlower deductibles an_and better coverage of drugdrug costs, •~ Our estimates of incomeincome taxes and the significant itemsitems we believe thatthat our planplan is of greater value than Medicare giving dserise toto thethe deferred assets and liabilitiesliabilities are Part D. Accordingly, we adopted FSPFAS 106-1 and account- shown inin Note 9 and reflect our assessment of actual ed for the Medicare Act as a plan amendment and recorded ' future taxestaxes to be paid on items reflectedreflected inin thethe financial thethe adjustment in the amortization of our liability,liability, fromfrom the statements, giving consideration to both timing andand date of enactment of thethe Medicare Act,Act, December 2003. probability Ofof these estimates. Actual incomeincome taxestaxes could Upon adoption, this decreased our accumulated post- vary from thesethese estimates due toto future changes inin retirement benefit obligation by $1,$1,629,629, which, because itit income tax lawlaw or resultsresults from finalfinal IRSIRS review of our was enacted during 2003, was calculated using our year end, tax returns. We have consideredconsidered thesethese potential changeschanges 2002 assumed discount rate of 6.75%.6.75o/o. Had, at the timetim'e of and have PrOvidedprovided amounts within ourour deferred tax adoption, we used our year end 2003 assumedassumed discount assets and liabilitiesliabilities that reflectreflect our judgmentjudgment of the rate of 6.25%,6.25/o, we would have decreased our accumulatedaccumulated pml_ableprobable outcome of tax contingencies. We continue postretirement benefit obligation by $1,888.$1,888.We expect to believe thatthat our tax returnreturn positionspositions are fully future annual decreases inin prescription drugdrug expense Ofof Supportable.supportable. Unfavorable settlement of any particular $250 toto $350. Our accounting assumesthatthat we are actuadallyactuarially issueissue couldcould requirerequire use of our cash. Favorable resolution equivalentequivalerit toto Medicare Part D, thatthat our plan will continue to could be recognized as a reductionreduction to our tax expense. be thethe pdmaryprimary plan forfor our retireesretirees and that we will receive We periodically reviewreview the amounts provided and adjust thethe subsidy. We do not expect that thethe Medicare Act will them inin light of changes inin facts and circumstances, such have a significant effect on our retirees"retirees' participation inin our as thethe progress of a tax audit.audit. postretirement benefit plan. Specificauthoritative guidance •~ Our policy on valuation of intangibleintangible assets isis described on the accounting for federal subsidy isis still pending before inin Note 1. In addition, for cost investments,investments, we evalu- thethe FASBand thatthat guidance,guidance, when issued,could require us ate whether mark-to-market declinesdeclines are temporary to change our estimates. and reflected inin other comprehensive income, or other FAS 132 In December 2003, the FASB revised Statement than temporarytemporary and recorded as an expense in the of Financial Accounting Standards No. 132, "Employers' incomeincome statement; this evaluation isis based on the Disclosures about Pensions and Other PostretirementPostretirement' _ lengthlength of time and the severity of decline in thethe invest- Benefits"Benefits (FAS(FAS 132). I_ASFAS 132, as revised,revised, retainsretains thethe ment's value. Significant asset and investment valuation disclosure requirements provided by ththee original FAS 132 adjustments we have made are discussed in Note 2. and adds disclosuredisclosure requirementsrequirements forfor informationinformation describing •~ We use the fair value recognition provisions of thethe typestypes of planplan assets, investmentinvestment strategies, measurement Statement of Financial Accounting Standards No. 123, dates, plan obligations, cash flowsflows and components of net "Accounting for Stock-Based Compensation" (FAS(FAS 123) periodic benefit costs recognized during interiminterim periods, for to account forfor our stockstock option grants. The estimated statements with fiscalfiscal years ending after December 15, 2003. fair value of the options granted isis amortized toto FAS 132 addresses disclosure only; it does not address other expense over thethe options' vestingvesting period. The fair value accounting issuesissues such asas measurement and recognitionrecognition of for thesethese options was estimated at thethe date of grant,grant, amounts (see(see Note 10). Usingusing a Black-Scholesoption pricing model. Two of thethe FIN 46 Inln January 2003, the FASB issued FASB more significant assumptions used inin thisthis estimate are InterpretationInterpretation No. 46 "Consolidation of Variable InterestInterest thethe expected option lifelife and the expected volatility, Entities, an InterpretationInterpretation of Accounting Research Bulletin which we estimate based on histodcalhistorical information. (ARB)(ARB) No. 51" (FIN(FIN 46). FIN 46 provides guidance for HadHad we not adopted the fairfair value recognition determining whether an entity isis a variable interestinterest entity provisions of FAS 123 andand chosechose toto continue using thethe (VIE),(VIE), and which equityequity investor of thatthat VIE, ifif any, should intrinsicvalue-basedvalue-based method of accounting,accounting, we would includeinclude thethe VIE inin itsits consolidated financial statements. InIn not have recorded any stock optionoption expense in all December 2003, the FASB staff revised FiNFIN 46 to clarifyclarify some years presented. With thethe recentrecent trend of reducing of the provisions. For certaincertain-VIEs,-VIEs,FIN 46 became effective • thethe number of options granted, we expect thisthis policy for periods ending after December 15, 2003. In 2003, we will become less significant inin thethe future. recordedrecorded an extraordinary lossloss of $7, net .ofof taxestaxes of $4, related toto consolidation of realreal estate leasesleases under FIN 46. New Accounting Standards In addition, the revisionrevision delayed the effective date forfor appli- FSPFAS 106-1 InIn January 2004, in response to the recently cation of FIN 46 by large public companies,companies, such as us, until passed federa!federal Medicare Prescription Drug, Improvement and periods ending after March 15, 2004 for all types of VIEs :: Modernization Act of 2003 (Medicare ACt), thethe FASBissuedissued Act), other than special-purpose entities, includingincluding our investmentinvestment preliminary guidance on accounting for thethe Medicare Act in Cingular. We are currently evaluating how thethe provisions (FSPFAS 106-t).106-1).In accordance with FSP FAS 106-1, a sponsor of FIN 46 will affect our accountingaccounting for Cingular. of a postretirement health care plan thatthat provides a FAS 143 On January 1, 2003, we adopted Statement prescription drug benefit, such asas us, may make a one-time of Financial Accounting Standards No. 143, "Accounting"Accounting forfor election to deferdefer accounting forfor the subsidy provided by thethe PAGEPAGE[ 27 MANAGEMENT'S DISCUSSIONDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)(coNTIsIUED) DollarsinIn millionsexceptperper shareamounts Asset Retirement Obligations"Obligations (FAS(FAS 143). FAS 143 sets fOrthforth The standard, amongamong other changes, rescindedrescinded FASB how companies must account forfor the costs of removal of Statement No. 4, "Reporting Gains and Losses fromfrom long-lived assets when those assetsassets are no longer used in a Extinguishment of Debt, anan amendment of APB Opinion company's business, but only ifif a company isis legallylegally requiredrequired No. 30". As a result,result, thethe criteria inin APB Opinion No. 30, toto removeremove suchsuch assets. FAS 143 requiresrequires thatthat companies _Reporting"Reporting thethe Results of Operations --—Reporting thethe Effects record the fairfair value of the costs of removal in thethe period of Disposal of a Segment of a Business, anandd Extraordinary, in which the obligations are incurred and capitalizecapitalize thai_that Unusual and InfrequentlyInfrequently Occurring Events and Trans- amountamount as partpart of the book value of thethe long-lived asset.asset. actions,"actions, "now will be used toto classify gains and losseslosses from TOTo determine whether we havehave a legal obligation to removeremove extinguishment of debt. InIn accordance with thethe provisions our 10ng_livedlong-lived assets, we reviewed state and federalfederal law and of FAS 145, we have reclassified ourour 2001 lossloss of $18 (net of regulatory decisions applicable tOto our subsidiaries, primarily taxestaxes of $10) related to thethe early redemption of $1,000$1,000 of our wirelinwirelinee subsidiaries,subsidiaries, which have long-lived assets_assets, Based our corpora_on-obligatedcorporation-obligated mandatorily redeemableredeemable preferred on this review, we concluded thatthat we are not legallylegally securities of subsidiary truststrusts from an extraordinary loss to an required to remove our long-lived assets, except inin a fewfew ordinary loss.loss. The effect of thisthis reclassification was tOto decrease mirior instances.instances. : our previously reportedreported 2001 incomeincome before extraordinary However, inin November 2002 we were informedinformed thatthat the itemitem andand cumulative effecteffect of accounting change by $18,$18, oror Securities and Exchange Commission (SEC) staff concluded $0.01$0.01 per share, with no impactimpact on our net income.income. thatthat certain provisions of FAS 143 requirrequiree that we exclude OTHER BUSINESS MATTERS costscosts of removalremoval from depreciation ratesrates and accumulated OTHER BUSINESS depreciation balances inin certaincertain circumstancescircumstances upon WorldCom Bankruptcy In July 2002, WorldCom and more adoption, even where no legal •removal obligations exist. adoption, even where no legal removal obligations exist. than 170 relatedrelated entities filed petitions forfor reorganization In our case, thisthis means thatthat for plant accounts where our Underunder ChaptErChapter 1111 of thethe United States Bankruptcy Code estimated costs of removalremoval exceed the estimated salvage (Bankruptcy(Bankruptcy Code). Our claimsclaims against WorldCom total value, we are prohibited fromfrom accruingaccruing removalremoval costs inin approximately $661. Our claims includeinclude receivables, claimsclaims thosethose depreciation rates and accumulated depreciation for refundsrefunds that areare thethe subject of litigation,litigation, and aa varietyvariety balances in excessexcess of the salvage value. For our other of contingent and unliquidated items, includingincluding unbilled Iong-I!vedlong-lived assets, where our estimated costs of removalremoval are chargecharges.s. At December 31, 2003, we had approximately less thanthan the estimated salvagesalvage value, we will continuecontinue to $320 inin receivablesreceivables and reserves of approximately $56 accrueaccrue thethe costs of removalremoval inin those depreciation rates related to the WorldCom bankruptcy filing. and accumulated depreciation balances. and accumulated depreciation balances. Inin addition to thethe reserves,reserves, we are withholding payments Therefore, inin connectionconnection with the adoption of FASFA5 143 onon on amountsamounts we owed WorldCom as of itsits bankruptcybankruptcy filingfiling January 1, 2003, we reversed all existing accrued costs of datedate that equal or exceedexceed our remaining net receivable. removalremoval for those plant accounts where our estimated costs for those plant accounts where our estimated costs These withholdings relate primarily toto amounts collectedcollected of removal exceeded thethe estimated salvagesalvage value. The non- fromfrom WorldCom's long-distancelong-distance customers inin our role as cashcash gain resultingresulting fromfrom this reversalreversal was $3,684,$3,684, net of billing agent and other general payables. We estimate our deferred taxes of $2,249, recorded as a cumulative effect of deferred taxes of $2,249, recorded as a cumulative effect of post-petition billingbilling toto WorldCom to be approximately accounting change on the Consolidated Statement of $160 per month. To date, WorldCom generally has paid itsits Income as of JanuaryJanuary 1, 2003. During thethe fourth quarterquarter post-petition obligations to us on a timely basis. of 2003, TDC recorded a lossloss upon adoption of FAS 143. of 2003, upon adoption of 143. On JulyJuly 25, 2003, WoridCom agreed toto pay us Our share of thatthat loss was $7, which includedincluded nono tax effecteffect, approximately $107 to settle many, but not all, of thethe This noncash charge of $7 was also recorded as a cumulative This noncash charge of $7 was also recorded as a cumulative issuesissues that arosearose priorprior to WorldCom's bankruptcy. ASAs of effect of accounting change on the Consolidated Statement December 31, 2003, worldcomWorldCom had paid us $39 and of IncomeIncome as of January 1, 2003. escrowed thethe remainingremaining $68 of our $107 settlement sum. in Beginning in 2003, forfor those plant accounts where our This settlement was approved byby the bankruptcy court on estimatedestimated costs of removal previously, exceeded the estimated of previously exceeded the estimated August 5, 2003; however, most of the provisions are also Salvage value, we expense all costs of removal aswe incur salvage value, we expense all costs of removal as we incur contingent upon worldComWorldCom implementingimplementing itsits approved Plan them (previously those costs had been recorded in our them (previously those costs had been recorded in our of Reorganization (POR)(POR) and emerging from bankruptcy. ItIt depreciation As depreciation rates). As a result, our 2003 depreciation expense isis anticipatedanticipated that WorldCom will emerge fromfrom bankruptcybankruptcy decreased andand our operationsoperations and supportsupport expense increasedincreased during the firstfirst half of 2004. This settlement does not as these assets were removed from service. The effect of this as these assets were removed from service. The effect of this includeinclude issuesissues related primarily to reciprocal compensation was change was toto increaseincrease consolidated pre-tax income and our we paid toto WorldCom for ISPISP traffictraffic andand certain pre- wirelinewireiine segment income for 2003 by $280 ($172 net of tax,tax, bankruptcy switched access charges not billed toto WorldCom or $0.05$0.05 per diluteddilute d share). However, over the life of thethe based on usage information provided by WorldCom. assets, total operating expenses recognizedrecognized under thisthis new On July 26, 2003, thethe United States Attorney for thethe accounting method will be approximately thethe same asas udderuJIder Southern District of New York announced anan investigation the previous method (assuming(assuming the cost of removalremoval would with respect toto recently disclosed informationinformation alleging be thethe same under both methods). thatthat worldComWorldCom isis committing access fraud inin thethe manner FAS i45145 On JanuaryJanuary 1, 2003, we adopted Statement in which it routes and classifies long-distanceIong-distance calls. The of Financial Accounting Standards No. 145, "Rescission of of Financial Accounting Standards No. 145, "Rescission of impact of thisthis investigation on WorldCom's proposed FASB Statements No. 4, 44, and 64, Amendment of FASB 4, 44, 64, Amendment of reorganization isis not yet clear. Statement No. 13, and Technical Corrections,"Corrections, " (FAS(FAS 145),145). PAGETPAGE 28 H Belgacom Agreement Both our investmentinvestment andand violation of federal and state law,law, maintained monopoly TDC's investmentinvestment in Belgacom are held through ADSB power over locallocal telephonetelephone service in all 13 statesstates in which Telecommunications B.V.B.V. (ADSB),(ADSB), of which we directly our subsidiaries are incumbent locallocal exchange companies. c}wnedowned 35%; ADSB owned one share less thanthan 50% of These cases have beenbeen consolidated under the first filedfiled Belgacom and is a consortiumconsortium of SBC, TDC, Singapore case Twombly v. SBC Communications Inc.inc. and were stayedstayed Telecommunications and a group of Belgian financial by agreement of the parties pending the United States investors._Throughinvestors. Through our 35% ownership of ADSB and our Supreme Court's (Supreme(Supreme Court) decision in a similar case 41.6%41.6% ownership of TDC,TDC„wewe had aa 24.4%24A% economic against another incumbent local exchange company. In thatthat ownership of BelgacomBelgacorn (subsequently reduced to 23.5%,23.5%, case, the Supreme Court held that violati0risviolatioris of the Telecom asas discussed below). Act do not support an antitrust claim and that the plaintiff InIn October 2003, ADSB announced that itit had entered had not stated an antitrustantitrust claim and affirmed dismissal of into an agreement with thethe Belgian government and the plaintiff's antitrust claims.claims. Verizon Communications Inc.inc. BelgacomtoBelgacom to proceed with the preparations forfor a potential v. Law O#icesOffices of CurtisCurds V. TrinkoTiinko LLP, No. 02-682 (Jan. 13, 2004). initial public offering (IPO)(IPO) of Belgacom. As part of thethe InIn light of the Trinko outcome, we expectexpect to move forfor agreement, ADSB will have thethe exclusive right from dismissal or summary dispositiondisposition of the complaints and to JanuaryJanuary 1, 2004 until July 31, 2005, subject toto certain oppose class certification if thethe plaintiffs do not voluntarily restrictions, toto sellsell shares inin an IPO of Belgacom. In thethe dismiss these cases. fourthfourth quarter of 2003, as a condition toto thethe IPO and InIn addition toto the Connecticut class actionsactions described related transactions,transactions, Belgacom transferred to thethe Belgian above, two consumer antitrust classclass actions were filed inin government certain pension liabilitiesliabilities related toto certain the United States District Court for thethe Southern District of employees, proceeds fromfrom the sale of pension assets and New York against SBC, Verizon, BellSouth andand Qwest alleging cash sufficientsufficient to fully fund theth e obligations. This transfer that theythey have violated federal andand state antitrust lawslaws by resulted inin a one-time chargecharge toto our equity incomeinrome from agreeing not toto compete with one another and acting Belgacom, which including our direct and indirect owner- togethertogether to impedeimpede competition for local telephone services ship, reduced our fourth-quarterfourth-quarter 2003 diluted earnings (Twombly(Twombly v. Bell At/an6cAtlantic Corp.,Corp., eLet, al).ai). In October 2003, the perper share byby $0.03,$0.03, determined on a GAAP basis. court granted the joint defendants' motion toto dismiss these InIn the fourthfourth quarterquarter of 2003, also pursuantpursuant toto thethe suits onon the ground thatthat thethe plaintiffs' complaints failedfailed to agreement, Belgacom repurchased approximately 6% of state aa claim under the antitrustantitrust laws.laws. Plaintiffs have thethe Belgacom shares held by ADSB. This fourth-quarter appealed. repurchase decreased our economic ownershipownership of BelgacomBeigacom We continue to believe thatthat an adverse outcomeoutcome having fromfrom 24.4%24.4% toto 23.5%.23.5%.Since thethe share price isis subject to a material effect on our financialfinancial statements inin any of thesethese adjustmentadjustment asas explained below, GAAP prohibi_prohibits us from cases isis unlikely but will c:ontinuecontinue to evaluate the potential recording a gain (in(in 2003) on the 2003 sale of our sharesshares back impactimpact of these suitssuits on our financialfinancial results as theythey progress. toto Belgacom. Based on our ADSB ownership percentage, our Subsequent Event-Event —Cingular Acquisition On portion of thethe proceeds, using thethe tentativetentative shareshare price, February 17, 2004, Cingular announcedannounced anan agreement would bebe approximatelyapproximately $148 and we have estimatedestimated thatthat to acquireacquire AT&T Wireless. Under the terms of the agreement_agreement, our portion of thethe proceeds received would exceed our carry- shareholders of AT&TATBT Wireless will receive cash of $15.00$15.00 per ing value by approximately $59. ASAs part of thethe October 20032003 common share or approximately $41,000.$41,000. The acquisition is agreement, Belgacom had previously agreed to make a subject to approvalapproval by AT&TATILT Wireless shareholders andand second buyback offer inin thethe event of anan IPO. Should thethe IPO federal regulators. Based on our 60% equity ownershiownershipp of Occur,occur, the priceprice. per shareshare of both buybacks will be adjusted Cingular, we expect to provide approximately $25,000$25,000 of to thethe IPO I_rice,price, which will resultresult in ourour recognitionrecognition of a gain the purchase price. ASAs a result, equity ownership and or lossloss associatedassociated with the fourth-quarterfourth-quarter 2003 sale and thethe management controlcontrol of Cingular will not be impactedimpacted sale associatedassociated with the IPO.IPO. IfIf no IPO occurs beforebefore July 31, after the acquisition.acquisition. Due to the deadline for printing this 2005, theretheie will bebe no adjustmentadjustment to thethe proceeds from the Annual Report, additional informationinformation related toto the first buybadcbuyback. We cannot predict whether an IPOIPO will occur. acquisition will be includedincluded in our 2003 ForrrlForni IO-K.10-K. EchoStar Agreement In July 2003, we announced an LIQUIDITY AND CAPITAL RESOURCES agreement with EchoStar thatthat will allow us to provide multi- channel satellite television service as part of our bundled satellite television as part of our bundled We had $4,806$4,806 inin cash and cash equivalents available at services (local services (local phone sen/ice,seivice, long-distancelong-distance, , broadband, December 31, 2003. Cash and cashcash equivalentsequivalents included wireless and video together) throughout our 13-state area. together) throughout our area. cash of approximately $309, municipal securities of $356, As part of "_hethe multi-year agreement, we will help fund part agreement, help fund variable-rate securities of $1,705,$1,705, money market funds of development of the co-branded bundled video services.services. ' $2,399$2,399 and other cash equivalents of $37. "SBC We expect to launchlaunch thethe new "SBC DISH Network"Network enter- In addition, at December 31, 2003 we had other short-short- tainment service in early 2004. In a separate transaction, tainment in early 2004. In a separate transaction, term held-to-maturity securities of $378 and long-term we also made a $500 investment in EchoStar in the form also made a $500 in EchoStar in the form held-to-maturity securities of $84$84.. of debt convertible intointo EchoStarEchoSta r shares. InIn October 2003, we renewedrenewed our 364-day36+day credit Antitrust Litigation Antitrust Utigation Eight consumerconsumer antitrust class agreement totalingtotaling $4,250$4,250 with a syndicate of banksbanks actions were filed in 2003 against usus inin the United States against the States replacingreplacing our credit agreement of $4,250$4,250 thatthat expired on District Court for the District of Connecticut. The primary October 21, 2003. The expirationexpiration date of the current credit claim inin these suitssuits is that our wireline subsidiariessubsidiaries have,have, in PAGE 1 2s29 MANAGEMENT.'SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) D011arsDollais inin millionsexcept per share amounts agreement is October 19, 2004. Advances under thisthis lowerlower revenuerevenue expectations, we expect total capital agreement may be used for general corporate purposes, spendingspending to be approximatelyapproximately $5,000$5,000 to $5,$5,500,500, excluding includingincluding supportsupport of commercial paper borrowings andand Cingular, in 2004. We expect thesethese expenditures to relate Otherother short-termshort-term borrowings.borrowings. Under thethe terms of the primarily to our wireline subsidiaries' networks, our agreement,agreement, repaymentrepayment of advances up to $1,000$1,000 may be broadband initiative (DSL){DSL)and support systems for our extendedextended twotwo yearsyears fromfrom the terminationtermination date of the long-distance service. agreement. Repayment of advances up to $3,250$3,250 may be InIn 2003, 2002 and 2001,2001, our cash receipts fromfrom disposi- extended toto one year from the termination date of the tionstions exceeded cash expended on acquisitions {see(see Note 2). agreement. There is no material adverseadverse change provision InvestingInvesting activities duringduring 2003 also include proce,edsproceeds of governing the drawdown of advances under this credit approximately $2,270$2,270 relatingrelating toto thethe salesale of our interestinterest agreement,agreement. We had no borrowings outstandingoutstanding under inin Cegetel, $341 from thethe sale of a portion of our interestinterest committed lineslines of credit as of December 31, 2003. inin Yahoo and $364 fromfrom the sale of the remaining portion Our consolidatedconsolidated commercialcommercial paper borrowings of our investmentinvestment inin BCE. At December 31, 2003 we held decreased $149 during 2003, and atat December 31, 2003, approximately 7 million shares of Yahoo. totaled $999, all of which was due within 90 daysdays and issuedissued Also ini'n July 2003, we entered intointo a co-branded service under aa program initiated by aa wholly owned subsidiary, agreement with EchoStar toto offer satellite televisiontelevision service SBC International, Inc.,Inc., inin the first quarter of 2002. This to our wireline customers. InIn JulyJuly 2003, we invested $500 in program was initiated in order toto simplify intercompany debt, with aa fair value of $441,$441, which is convertible into borrowing arrangements. EchoStar shares at an appreciated price at our option. During 2003 our primary sourcesource of funds was cashcash from 2003 investing activitiesactivities includedincluded, _thethe purchase of other operating activitiesactivities supplemented by cash fromfrom our held-to-maturity securities, with maturities greater thanthan disposition of Cegetel. 90 days,days, of $710. Cash fromfrom Operating Activities Cash from Financing Activities During 2003 our cash flow fromfrom operations remained Dividends declared by thethe Board of Directors of SBC totaled relatively stablestable compared to 2002 as a largelarge portion of thethe $1.41$1.41 perper share inin 2003, $1.08$1.08 I_erper share inin. 2002 and $1.025$1.025 decrease inin net income in 2003 was caused by the noncashnoncash per shareshare inin 2001. The $0.33$0.33 increaseincrease inin dividends declared increase inin pension and postretirementpostretirement expenses. Our during 2003 was due to twotwo increasesincreases in thethe regular quarterly primary source of funds for 2002 and 200.12001 was cash dividend andand three additional dividendsdividends aboveabove our regularregular generated fromfrom operating activities, as shownshown in the quarterly payout. There was nono additionaladditional dividend inin the Consolidated Statemen_Statements of Cash Flows. fourth quarter of 2003. InIn March 2003, our Board of Directors In December of 2003 we receivedreceived proceeds of approxi- approved a 4.6%4.6% increaseincrease inin tl_ethe regularreguiar quarterly dividend mately $240, which included interest of $37, related to and in December 2003 our Board of Directors approved a thethe redemption of notes by BCE. 10.6%10.6% increase inin thethe regular quarterlyquarterly dividend toto $0.3125$0.3125 per share. Our additionaladditional dividends declareddeclared during 2003, Activities Cash from Investing Activities aboveabove our regularregular quarterly dividend, totaled $0.25$0.25 perper share.share. communications services our To provide high-quality communications services to our The totaltotal dividends declared were $4,674$4,674 in 2003, $3,591$3,591 - customers we must make significant investments in property, customers we property, in 2()02,2002, and $3,448$3,448 inin 200i.2001.Total cash paid for dividends plant and equipment. The amountamount of capital investment isis plant equipment. of were $4,539$4,539 inin 2003, $3,557$3,557 inin 2002, and $3,$3,456456 in 2001. influencedinfluenced by demand forfor services and products, continued by Our dividend policypolicy considers both thethe expectations and commitments. growth and regulatory commitments. requirements of shareowners, internal requirements of Our capital expenditures totaled $5,219219 for 2003, $6,808 Our capital expenditures $5, 2003, $6,808 SBC and long-term growthgrowth opportunities and all dividends for 2002 andS11,189and 189for 2001. Capital expenditures in thethe $11, remainremain subject to approva[byapproval by our Board of Directors. Wireline segment, which represented substantially all of wireline segment, In July 2003, we announced ourintentionour'intention to resume our total capital expenditures, decreased by 23.6%23. in 2003 our total capital expenditures, by 6% 2003 our previouslypreviousiy announced stock repurchase program. InIn compared to 2002, due to continued pressure from the December 2003, our Board of Directors authorized thethe uncertain U.S.U.S. economy, continued pressure fromfrom the repurchaserepurchase of up toto 350 million shares of SBC commoncommon stock. regulatory environment and our resultingresulting lower revenuerevenue regulatory The new authorization, which expires at thethe end of 2008, expectations. The wireline segment capita! expenditures expectations. The segment capital replaced our twotwo previous authorizationsauthorizations approvedapproved inin decreased by 38.9% inin 2002 compared toto 2001. decreased by 38.9% November 2001 and January 2000 toto repurchase up toto Substantially all of our capital expenditures are made in Substantially of our capital are 200 million shares. During 20032003 we had repurchasedrepurchased We fund these expenditures the w!relinewireline segment. We expect to fund these expenditures approximately 21 million shares at a cost of $490 andand as Ofof using cash fromfrom operations, depending on interestinterest raterate using operations, December 31, 20032003 we repurchased 161 million shares of levelslevels and overaloverall ! market conditions, andand incrementalincremental thethe 200200 million shares authorizedauthorized by our Board of Directors Our international segment operations should borrowings,borrowings. Our international segment operations should in November 2001 and January 2000. At December 31, 2003 be self-funding as it isis substantially equity investments andand be self-funding as it equity we have not repurchasedrepurchased any shares of the 350 million sharesshares not direct SBC operations. We expectexpect toto fundfund any directory not authorizedauthorized by our Board of Directors inin December 2003. expenditures using cash from operations. segmentsegment capital expenditures using cash from operations. During 2003 we called, prior to maturity, approximately We discuss our Cingular segment below. We discuss our Cingular segment $1,743$1,743 of debt obligations with maturities rangingranging between uncertain U.S. and continued In response to thethe uncertain U.S. economy and continued February 2007 and March 2048, and interest ratesrates ranging pressure from regulatory environments andand our resulting pressure from regulatory resulting between 6.5%6.5% and 7.9%.7.9%.Of the $1,743$1,743 called debt, PAGE I 30 approximately$264, with an average yieldyield of 7.2%7.2/0 was expects to complete the purchase of FCC licenseslicenses forfor called inin July; $1,462,$1,462, with an average yield of 7.4%7A/o was wireless spectrum from NextWave for $1,400,$1,400, which theythey called in June; and $17, with an average yield of 6.9%6.9/0 was may financefinance with a combination of cash and debt called inin March. Funds from operations andand dispositionsdispositions As discussed in "Other Business Matters",Matters, Cingular has were used to pay off thesethese notes. agreed to acquire AT&T Wireless forfor approximatelyapproximately $41,000$41,000 During 2003,2003, approximatelyapproximately $1,259$1,259 of long-termlong-term debt inin cash. Cingular expects to fundfund the acquisition with obligations, and $1,000$1,000 of one-year floating rate securities contributions from us and BeilSouth.BeliSouth. Based on our 60%600/0 matured. The long-term obligations carried interest ratesrates equity ownership,ownership, we expect toto contribute approximately rangingranging from 5.8%5.8/0 to 9.5%,9.5/0, with an average yield of 6.1%.6.1 /0. $25,000.$25,000.We expectexpect to pay'this amount primarily with The short-term notes paid quarterly interestinterest based on the proceedsproceeds from debt, as well as cash on hand, Cashcash to be London Interbank Offer Rate (LIBOR).(LIBOR). Funds fromfrom operations generated from operations and asset sales. andand dispositions were usedused toto pay off these notes. CONTRACTUAL OBLIGATIONS, Among thethe debt paid off dudngduring 2003 was all subsidiary COMMITMENTS AND CONTINGENCIES debt listed on public exchanges. Our subsidiaries currently ' have no debt outstanding which would require them to Current accounting standards requirerequire us toto disclose our make periodic filings under thethe Exchange Act of 1934. material obligations and commitments to make future We have approximately $880 of long-term debt that is We have approximately $880 of long-term debt that is payments underunder contracts, such asas debt and lease scheduled to mature in 2004. We expect to use funds from scheduled to mature in 2004. We expect to use funds from agreements, and under contingentcontingent commitments,commitments, suchsuch as operationsoperations to repay these obligations. debt guarantees. We occasionally enter into third-partythird-party Other debt guarantees, butbut theythey are not, nor are theythey reasonablyreasonably likely to become, material. We disclosedisclose our contractualcontractuai Our total capital consistsconsists of debt (long-term debt and debt long-term debt in Note and maturing within one year)year) anandd shareowners' equity. OurOu'r long-term debt repayment obligations in Note 7 and our operating lease paymentspayments in Note 5. InIn the ordinaryordinary course capitalcapital structure does not includeinclude debt issuedissued by our business commit- international equityequity investees or Cingular. Total capital of business we routinely enter into commercial commit- ments for variousvarious aspects of our operations, such asas plant increased $947 inin 2003 andand decreased $3,845$3,845 inin 2002. for aspects of our operations, plant additions and office supplies. However, we do not believe The 2003 total capitalcapital increase was primarilyprimariiy due to ou[ou ( that the commitmentscommitments will havehave a material effect on our net income andand Cumulativecumulative effect of accounting changes,changes, that effect financial condition, resultsresults of operations or cash flows.flows. which was partially offset by lower borrowings, the of or Below is aa tabletable of our contractual obligations as of increasedincreased dividend paY0utspayouts previously mentioned, and the December 31, 2003. The purchase obligations listedlisted below repurchaserepurchase Ofof commoncommon sharesshares through our stock 31, 2003. purchase obligations guaran'teed repurchaserepurchase programs. These 2003 accounting changes are those for which we have guaranteed fundsfunds and will bebe ! funded with cash provided by operations or through increasedincreased equity $2,541,$2,541, which decreased our debt ratio by or through approximatelyapproximately 150 basis points (1.5%).(1.5/a). Our debt ratio incrementalincremental borrowings. Approximately 42%420/0 of our purchasepurchase obligations relate to our directory segment for paper and was 31.9%,31.90/0, 39.9%39.90/0 and 44.3%44.3/0 at December 31, 2003, 2002 to directory segment for paper printing services and the remainder of our obligations are andand 2001. The debt ratio isis affectedaffected by the same factors the of obligations are in thatthat affect total capital.capital. primarily in our wireline segment. Due to thethe immaterial value of ourour capital lease obligations, they have been includedincluded We are currently considering a possible voluntary capital lease obligations, they been with long-termlong-term debt Our total capital lease obligations are contribution of assets, which may includeindude cash andlor otherother debt. total lease are investments, toto our pension andand postretirement benefit $65, with approximately $32 to be paid in lessless thanthan one year. The tabletable does not include the fair value of our interest rate plans totalingtotaling $2,$2,000000 or more in 2004 (see Note 10). not the fair of our interest rate swapsswaps of $90 and our otherother long-termlong-term liabilities because itit is Cingular not certaincertain Whenwhen our other long-term liabilities will become Cingular's futurefuture capital expendituresexpenditures areare expected toto be due. Our other long-term liabilitiesliabilities are:are: deferred incomeincome o. self-funded by Cingular sincesince this segment isis an equity,equity taxestaxes (see(see Note 9) of $15,079;$15,079; postemploymentpostemployment benefit investmentinvestment andand not aa direct SBC operation. Cingular expectsexpects obligations (see Note 10) of $12,692;$12,692; unamortized investmentinvestment 2004 capital investmentsinvestments for completing network upgrades taxtax credits of,$220;of $220; and other noncurrentnoncur'rent liabilities of $3,607,$3,607, and funding other ongoing expenditures and equity invest-invest- consisting primarily of supplemental retirement plans (see(see ments will not rhateriallyrliaterially differdiffer fromfrom 2003 expenditures Note 10) and deferred lease revenuerevenue Promfrom Ourour agreementagreement of $3,353.$3,353. In addition, in the firstfirst half of 2004, Cingular with SpectraSite Communications, lncInc. (see Note 5). Contractual Obligations Payments Due By Period Lessthanthan 1-3 3-5 More thanthan Total 1 Year Years Years 5 Years Long-term debt obligations $17,009$17,009 $ 880 $3,735$3,735 $2,612$2,612 $$9,9,782782 Commercial paperpaper obligations 999 999 -- =-- -- Operating lease obligations 1,3651,365 321 492 314 238 Purchase obligationsobligations 2,2962,296 901 962 232 201 Total Contractual Obligations $21,669$21,669 $3,101$3,101 $5,189$5,189 $3,158$3,158 $10,221$10,221 PAGE I 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)(coNTINUED) Dollars inin millions exceptexcept perper share amounts MARKET RISK and market risk. The majOritymajority of our finandalfinancial instruments We are exposed toto market risksrisks primarily from changes in are medium-andmedium- and long-term fixedfixed rate notes and debentures. interest ratesrates and foreign currency exchange rates. InIn Fluctuations in market interest ratesrates can lead to significant managing exposureexposure to these fluctuations, we may engage in fluctuations inin the fairfair value of these notesnotes andand debentures. various hedging transactions thatthat have been authorized It is our policy toto manage our debt structure and foreign accordingaccording to documented policies andand procedures. We do exchange exposure inin order to manage capital costs, control not use derivatives forfor tradingtrading purposes, to generate income financial risks andand maintain financial flexibility overover thethe longlong or tOto engage inin speculative activity. Our capital costscosts are term.term. Where appropriate, we will taketake actions toto limitlimit thethe directly linked toto financial andand business risks. We seek to negative effecteffect of interestinterest and foreign exchange rates, manage thethe potential negative effectseffects from market volatilityvolatility liquidity and counterpartycounterparty risks on shareowner value. QUANTITATIVEQUANTITATIYE INFORMATIONINFORMATION ABOUT MARKET RISK Interest Rate Sensitivity The prindpalprincipal amounts byby expectedexpected maturity, average interest rate and fair value of our liabilitiesliabilities that are exposedexposed toto interest rate riskrisk are described in Notes 7 andand 8. Following areare our interestinterest rate derivatives subject toto interestinterest raterate risk as of December 31, 2003. The interestinterest ratesrates illustratedillustrated inin thethe interestinterest rate swaps sectionsection of the table below refer to the average expected rates we would receivereceive and thethe average expected ratesrates we would pay based onon the contra_cs.contracts. The notional amount isis thethe principal amount of thethe debt subject to thethe interestinterest rate swap contracts. The fair value representsrepresents the amount we would receivereceive if we exited the contractscontracts as of December 31, 2003. Maturity After Fair Value 2004 2005 20062006 2007 2008 2008 Total 12/31/03 InterestInterest Rate Derivatives InterestInterest Rate Swaps: Receive Fixed/Pay Variable Notional Amount -- -- $1,000$1,000 --— --— $2,500$2,500 $3,500$3,500 $90 Variable Rate PayablePayablet1 2.8%2.8% 4.2%4 2% 55.2%2% 6.1%6 1% 6.5%6 5% 7.0%7.0% Weighted Average Fixed Rate Receivable 5.9%5.9% 5.9%59% 5.9%59% 6.0%60% 6.0%60% 5.9%59 Lease Obligations Variable Rate LeasesLeases22_ $53 ...... — — — — — $ 53 $53 Average Interest RateRate22 1.4%1.4% ...... 1Interest&Interest payable basedbased on current and Impliedimplied forward rates for Three or Six Month LIBORLIBOR plus aa spread rangingranging between approximatelyapproximately 64 and 170170 basis points.points. 2Average&Average interest rate as ofof December 31,31, 2003 basedbased onon current and Impliedimplied forwardforward rates forfor One Month UBOR plusplus 30 basisbasis points.points. The leaselease obligations require interestinterest paymentspayments only untiluntil their maturity Inin March 2004. InIn August 2003 we entered into $1,000$1,000 inin variable interestinterest QUALITATIVEQUALITATIYE INFORMATION ABOUT MARKET RISK rate swap contracts on our 5.875%5.875% fixed rate debt which Foreign Exchange Risk From time to time, we make matures inin August 2012. In thethe fourth quarter of 2003 we investments in businesses inin foreign countries,countries, are paid entered intointo twotwo variable rate swap contracts on our fixed dividends,dividends, receivereceive proceeds from salessales or borrow fundsfunds in raterate debt.debt We entered into $1,000$1,000 inin variable raterate swapswap foreign currency. Before making anan investment,investment, or in contracts onon our 5.5.875%875% fixed raterate debtdebt which matures inin foreign anticipation of a foreign currency receipt,receipt, we often will February 2012 andand $500 inin variable raterate swap contractscontracts on enter into forward foreign exchange contracts. The contracts our 6.25%6.25% fixed rate debt which matures in March 2011. enter into forward foreign exchange contracts. Thecontracts amusedar'e used to provideprovide currency at aa fixedfixed rate. Our policy isis At December 31, 2003 we had interestinterest rate swapsswaps with a to policy to measure the riskrisk of adverseadverse currency fluctuations by notional value of $3,500$3,500 and aa fairfair value of approximatelyapproximately. F : to by calculating the.potentialthe, potential dollar losses resultingresulting from changes $90. All of our interestinterest raterate swaps were designeddesigned with inin exchange rates that have aa reasonablereasonable probability of exactlyexactly matching maturity dates of the underlying debt toto occurring. We cover the exposure that resultsresults from changeschanges which they are related,related, allowing forfor perfectly effective thatthat exceed acceptable amounts. We do notnot speculate inin hedges. At December 31, 2002, we had interestinterest raterate swapsswaps foreign exchange markets. with a notional value of $1,000$1,000 and _a fair value of Interest Rate Risk We issueissue debt inin fixed and floatingfloating approximately $79. raterate instruments. Interest rate swapsswaps are used forfor the inIn JanuaryJanuary 2004, we entered into $750 inin variable interest purposepurpose of controlling interest expenseexpense by managing thethe rate swap contracts Onon our 6.25%6.25% fixed rate debt that by mix of fixed and floatingfloating raterate debt. We do not seek toto make matures inin MarchMarch 2011. aa profit from changechangess inin interest rates.rates. We manage interest raterate sensitivity byby measuring potential increases inin interestinterest expenseexpense thatthat would result fromfrom a probableprobable changchangee in interest rates. When the potential increase in interest expense exceeds aann acceptable amount, we reduce risk through the issuanceissuance of fixedfixed rate (in(in lieulieu of variable rate)rate) instrumentsinstruments and purchasing derivatives. PAGEPAGE] 32 CAUTIONARY LANGUAGE CONCERNING •~ Our ability to absorbabsorb revenuerevenue losseslosses caused by UNE-P FORWARD-LOOKINGFORWARD-LOOKING STATEMENTS requirements and increasingincreasing competitioncompetition andand to Information set forth inin this reportreport contains forward-looking maintain capitalcapital expenditures. statements thatthat are subject to risks and uncertainties. We •~ The extent of competitioncompetition inin SBC's 13-state area and claim the protection of the safesafe harbor forfor forward-looking the resulting pressurepressure on access lineline totalstotals and wireline statements provided byby the Private Securities Litigation and wireless operating margins. Reform Act of 1995. •~ Our abilityability to develop attractNeattractive andand profitable product/ ThThee following factors couldcould cause our futurefuture resultsresults service offerings toto offsetoffset increasinginrreasing competition inin our to differdiffer materially from those expressed in thethe forward- wireline and wireless markets. ° lookinglooking statements: •~ The ability of our competitors to offer product/service •~ Adverse economic changeschanges inin thethe markets served by offerings at lowerlower prices due to adverse regulatory SBC or in countries inin which SBC has significant decisions,decisions, including state regulatoryregulatory proceedings investments;investments. relating to UNE-Ps and non-regulation of comparable o •~ Changes in available technologytechnology and thethe effects of alternativealternative technologies (e.g.,(e.g., VolP). such rhangeschanges including product substitutions and •~ The outcomeoutcome of Currentcurrent laborlabor negotiations andand itsits deployment costs. effect on operations andand financial results.results. •~ Uncertainty in the U.S.U.S.securitiessecurities market and adverseadverse •~ The issuance by the Financial Accounting Standards medical cost trends. Board or other accounting oversight bodies of new •~ The final outcome of Federal CommunicationsCommunirations accounting standards or changeschanges toto existing standards. C0mmissionCommission proceedings andand re-openingsre-openings of such •~ The impact of thethe wireless joint venture with BellSouth, proceedings, includingincluding the Triennial Review and other known as Cingular, including marketing and product- rulemakings,rulemakings, and judicialjudicial review, ifif any, of suchsuch development efforts, customercustomer acquisition and proceedings, includingincluding issuesissues relatingrelating to access charges, retentionretention costs, access to additional spectrum, tech- availability and pricingpriring of unbundled network elements nological advancements, industry consolidation and and platforms (UNE-Ps)(UNE-Ps) and unbundled loop and availability and cost of capital. transport elementselements (EELs). •~ Changes inin our corporate strategies, such as changing •~ The finalfinal outcome of state regulatory proceedings inin networknetwork requirementsrequirements or acquisitions and dispositions, SBC's 13-state area and re-openings of such proceedings, to respondrespond to competition and regulatory andand ' and judicialjudicial review,review, ifif any, of such proceedings, technology developments. ' includ!ngincluding proceedingsproceedings relating to interconnectioninterconnection terms, Readers are cautionedcautioned that other factor,factorss discussed in accessaccess charges, universal service,service, UNE-Ps and resale and this report, althoughalthough not enumerated here, also could wholesale rates,rates, SBC's broadband initiativeinitiative known as materially impactimpact our future earnings. Project Pronto, performance measurement plans, serviceservice standards andand reciprocal compensation. •~ Enactment of additional state,state, federalfederal and/or foreignforeign regulatory lawslaws and regulationsregulations pertaining to our subsidiaries and foreign investments. PAGEI33PAGE 33 CONSOLIDATED STATEMENTSOF INCOME Dollarsinin millionsexceptperper share amountsamounts 2003 2002 20o1"2001 Operating Revenues Voice $22,134$22,134 $24,752$24,752 $26,694$26,694 Data 10,15010,150 9,6399,639 9,6319,631 Long-distancel.ong-distance voice 2_5612+61 2,3242,324 2,5302,530 Directory advertising 4;3174,317 4,5044,504 4,5184,518 Other 1,6811581 1,9191,919 2,5352,535 Total operatingrevenuesoperating revenues 40,84340,843 43,13843,138 45,90845,908 Operating Expenses Cost of salessales (exclusive(exclusive of depreciationdepreciation andand amortization shown separately below) 16,65316,653 16,36216,362 16,94016,940 Selling, general and administrative 9,8519,851 9,5759,575 9,3839,383 Depreciation andand amortization 7,8707,870 8,5788,578 9,0779,077 Total operating expenses 34,37434,374 34,51534,515 35,40035,400 Operating IncomeIncome 6_4696W9 8,6238,623 10,50810,508 OtherOther IncomeIncome (Expense) Interest expense (1,241)(1@41) (1,382)(1,382) (1,599)(1,599) • Interest incomeincome 603 561 682 Equity inin net incomeincome of affiliates 1,2531,253 1,9211,921 1,5951,595 Other income (expense) -—net 1,8171,817 734 (236) Total other incomeincome (expense) 2_432 1,8341,834 442 Income BeforeBefore IncomeIncome Taxes 8,9018,901 10,45710,457 10,95010,950 Incomeincome taxes 2,9302,930 2,9842,984 3,942'3,942 Income Before Extraordinary Item and Cumulative Effect of Accounting Changes 5,9715,971 7,4737,473 7,0087,008 Extraordinary item, net of tax (7)(7) -- Cumulative effect of accounting changes, net of tax 2,5412,541 (1,820)(1,820) Net lncomeIncome $$8,8,505505 $$5,5,653653 $$7,7,008008 Earnings Per Common Share: IncoineIncome Before Extraordinary Itemitem and CumulativeCumulative Effect of Accounting Changes $$1.1,8080 $$2,2.2424 $$2.2.0808 Net Income $$2.2.5656 $$1.1.7070 $$2.2.0808 Earnings Per Common Share -—Assuming Dilution: Income Before Extraordinary Item andand Cumulative Effect of Accounting Changes $1.$ 1.8080 $$2.2.2323 $$2O72.07 Net Income $$2.2.5656 $$1.1.6969 $$2.2.07O7 The accompanyingnotes,areare an integralintegral partpart of the consolidatedfinancialfinancial statementslstatements. PAGEIPAGE 34 CONSOLIDATEDBALANCESHEETS Dollars inin millions exceptpershareamounts December 31, 2003 2002 Asse_Assets Current Assets Cash and cash equivalents $$4,4,8(]6806 $$3,3,567567 Accounts receivable -—net of allowances for uncollectibles of $914 and $1,427$1,427 6,1786,178 8,5408,540 Short-term investmentsinvestments 378 1 Prepaid expenses 760 687 Deferred incomeincome taxes : 712 704 Other currentcurrent assets 1,1341,134 590 Total current assets 13,96813,968 14,14,089089 Property, Plant and Equipment-Equipment —Net . 52,12852,128 48,49048,490 Goodwill 1,6111,611 1,6431,643 InvestmentsInvestments inin Equity Affiliates 6,9476,947 5,8875,887 InvestmentsInvestments inin andand Advances toto Cingular Wireless 11;00311,003 10,46810,468 Other Assets 14,50914,509 14,48014,480 Total Assets $100,166$100,166 $95,057$95,057 Liabilities and Shareowners"Shareowners' Equity '// Current Uabilities Debt maturing within one year $$1,1,879879 $$3,3,505505 Accounts payable and accrued liabilities 10,87010,870 9,4139,413 Accrued taxes 478 870 Dividends payablepayable _, 1,0331,033 895 Total current liabilities 14,26014,260 14,68314,683 Long-Term Debt 16,06016,060 18,53618,536 Deferred Credits and Other Noncurrent UabilitiesLiabilities Deferred incomeincome taxestaxes 15,07915,079 10,72610,726 Postemployment benefit obligation 12,69212,692 1_09414,094 Unamortized investment taxtax creditscredits 220 244 Other noncurrent liabilities 3,6073,607 3,5753,575 Total deferred credits and other noncurrent liabilitiesliabilities 31,59831,598 28,63928,639 Shareowners"Shareownersr Equity Preferred shares ($1 par value, 10,000,00010,000,000 authorized:authorized: none issued) Common shares ($1 par value, 7,000,000,0007,000,000,000 authorized: issuedissued 3,433,124,8363,433,124,836 at December 31, 2003 and 2002) 3A333933 3,4333,433 Capital inin excess of par valuevalue. 13,01013,010 12,99912,999 Retained earnings 27,63527,635 23,80223,802 Treasury shares (127,889,010(127,889,010 at December 31, 2003 and 115,483,544115,483,544 at December 31,2002, at cost)cost) (4,698)(4,698) (4,584)(4,584) Additional minimum pension liability adjustment (1,132)(1,132) (1,473)(1,473) Accumulated other comprehensive incomeincome (978)(978) Total shareowners"shareowners' equity 38,24838,248 33,19933,199 Total Liabilities andand Shareowners"Shareowners' Equity $100,166$100,166 $95,057$95,057 The accompanyingnotesareare anan integralintegral part of thethe consolidated financialstatements. PAGP A G ~E3E]--_ 5 CONSOLIDATEDSTATEMENTSOF CASH FLOWS - Dollars in millions,increase(decrease)inin cash andcashcash equivalentsequivalents 20032003 2002 2001 Operating Activities Net incomeincome S$8,8,505505 $$5,5,653653 $$7,7,008008 Adjustments toto reconcilereconcile net income to net cash provided by operating activities:activities: Depreciation and amortizationamortization 7,8707,870 8,5788,578 9,0779,077 Undistributed earningsearnings fromfrom investments inin equityequity affiliatesaffiliates (965)(965) (1,586)(1,586) (755) Provision for uncollectible accounts 869 1,407.1,407 1,3841,384 Amortization of investment taxtax credits (24) (30(30)) (44) Deferred incomeincome tax expense 3,4443~ 214722,472,_'_;.::" : 1,9711,971 Gain on sales of investments (1,775)(1,775) P94)(794) (498)(498) Extraordinary item, net of taxtax 7 Cumulative effecteffect of accounting changes, net of taxtax (2,541)(2,541) i,8201,820 _-- Retirement benefitbenefit funding (1,645)(1,645) (3) -- Changes in operating assets andand liabilities: Accounts receivablereceivable (154)(154) (571) (672) Other currentcurrent assets (148)(148) 486 (61) AccountsAccounts payablepayable and accruedliabilitiesaccrued'liabilities 521 (1,943)(1,943) (2,364)(2,364) Other-Other —net (447)(447) (279) (241) Total adjustmentsadjustments 5,0125,012 9,5579,557 7,7977,797 NetNet Cash Provided by Operating Activities 13,51713,517 15,21015,210 14,80514,805 Investfnginvesting Activities Construction and capital expenditures (5,219)(5,219) (6,808)(6,808) (I(11,i1,189)89) Investments inin affiliates -—net (139)(139) 1,4821,482 Purchases of marketable securities (710) Maturities of marketable securities 248 u 510 Purchases of other investments (436)(436) Dispositions 3,0203,020 4,3494,349 1,2541,254 Acquisitions (8) (731)P31) (445) Other I1 I1 Net Cash Used in InvestingInvesting ActivitiesActivities (3,105)(3,105) (3,328)(3,328) (8,387)(8,387) FinancingFin'ancing Activities Net change in short-termshort-term borrowings with original maturities of threethree months or lessless (78)(78) (1,791)(1,791) (2,733)(2,733) IssuanceIssuance of other short-term borrowings m 4,6184,618 7,4817,481 Repayment of otherother short-term borrowings (1,070)(1,070) (7,(7,718)718) (4,170)(4,170) IssuanceIssuance of long-term debt 2,2512,251 3,7323.732 Repayment of long-termlong-term debt (3,098)(3,098) (1,(1,499)499) (4,036)(4,036) Early extinguishment of corporation-obligated mandatorily redeemableredeemable preferredpreferred securities of subsidiarysubsidiary truststrusts N w (1,000)(1,000) Purchase of treasurytreasury sharesshares (490) (1,456)(1,456) (2,068)(2,068) IssuanceIssuance of treasurytreasury shares 102 147 -323323 _ Redemption of Preferredpreferred shares of subsidiaries (470) Issuanceissuance of preferred shares of subsidiaries : 43 Dividends paid (4,539)(4,539) _(3,557)'(3,557) (3,456)(3,456) Other -- (56)(56) 39 ' Net Cash Used in'Financingin Financing Activities (9,173)(9,'l73) (9,018)"(9,018) (6,358)(6,358) Net increaseincrease in cashcash and cash equivalents .1,2391,239 2,8642,864 6060 Cash and cashcash equivalents beginning of year 3,5673,567 703 643 Cash and Cash Equivalents End of Year $$4,4,806806 $$3,3,567567 $ 703 The accompanying notes areare an Integralintegral partpart ofof the consolidated financialfinancial statements. PAGE1"PAGE 36 CONSOLIDATEDCONSOI. IDATED STATEMENTSOF SHAREOWNERS' EQUITY Dollarsandsharesin millionsexcept pershare amounts 2003 2002 2001 Shares Amount Shares Amount Shares Amount Common Stock Balance at beginning of year 3,4333,433 $$3+333v433 3,3,433433 $$3,3,433433 3,4333,433 $$3,3,433433 Balance at end of year 3,4333,433 $$3+333_433 3,433 $$3;4333,:433 3,4333,433 $$3,3,433433 Capital inin Excess of ParPar Value Balance at beginning of year $12,999$12,999 $12,820$12,820 $12,611$12,611 IssuanceIssuance of sharesshares (181) (165) (281)(281) Stock option expense 183 390 380 OtherOther 9 (46) 110 Balance at end of year " ' $13,010$13,010 $12,999$12,999 $12,820$12,820 RetainedRefained Earnings Balance at beginningbeginning of year $23,802$23,802 $21,737$21,737 $18,174$18,174 Net incomeincome ($2.56,($2.56, $1.70$1,70 andand $2.08$2.08 per share) 8,5058,505 5,5,653653 7,0087,008 Dividends toto shareowners ($1.41,($1A1, $1.08$1.08 and $1.025$1.025 per share) (4,674)(4,674) (3,591)(3,591) (3,44.(3,448)8) Other . 2 3 3 BalanceBaiance at end of year $27,635$27,635 $23,802$23,802 $21,737$21,737 Treasury Shares Balance at beginningbeginning of year (115) $ (4,584)(4,584) (79) $ (3,482)(3,482) (46) $ (2,(2,071)071) Purchase of shares (21) (490)(490) (44) (1,456)(1,456) (47)(47) (2,(2,068)068) Issuance of shares 8 376 8 354 14 657 Balance at end of yearyear (128) $ (4,698)(4,698) (115) $$ (4,584)(4,584) (79) $ (3,(3,482)482) Additional Minimum PensionPension Liability AdjustmentAdjusfmenf Balance at beginningbeginning of year $ (1_73)(1373) $$ -- $ -- Required charge (net of taxes of $210 and $904) 341 ' (1,473)(1,473) -- Balance at end of year $ (1,132)(1,132) $$ (1,473)(1,473) $ -- Accumulated OtherOfher Comprehensive Income, net of taxtax Balance at beginningbeginning of year $ (978)(978) $ (1,589)(1,589) $ (1,307)(1,307) Foreign currency translationtranslation adjustment, net of taxestaxes of $302, $309 andand $(172) 561 628 (320)(320) Unrealized gains (losses)(losses) on available-for-sale securities, net of taxestaxes of $264, $(19) and $(35) 536 (38)(38) (64)(64) Less reclassificationreclassification adjustment for net (gains)(gains) losses includedincluded in net incomeincome (119)(119) 7 5 Less reclassificationreclassification adjustment for loss includedincluded in deferred revenue _m 14 97 Other comprehensive income (loss)(loss) 978 611 (282)(282) Balance at endend of yearyear $ _ $ (978) $ (1,589)(1,589) TotalTotal Comprehensive Income Net income $$8,8,505505 $$5,5,653653 $$7,7,008008 Additional minimum pension liability adjustmentadjustment per above 341 (1,473)(1,473) -- Other comprehensive income (loss)(loss) per above 978.978 611 .... " (282) Total Comprehensive Income $$9,9,824824 $$4,4,791791 $$6,6,726726 Theaccompanyingaccompanying notesareare anIntegralintegral partof the consolidatedfinancialfinancial statements. PAGE[ 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS D01!arsDollars inm!llionsmillions exceptper share amountsamounts NOTE 1. SUMMARY OF SIGNIFICANT Cash Equivalents -—Cash andand cash equivalents includeinclude ACCOUNTING POLICIES all highly liquidliquid investments with original maturities of threethree months or less,less, and the carrying amounts approximate Basis of Presentation -—Throughout thisthis document, SBC fairfair value. InIn addition to cash, our cash equivalents include Communications Inc. isis referredreferred toto asas "we" or nSBC".SBC".The municipal securities,securities, money market funds and variable- consolidated finandalfinancial statementsstatements includeinclude the accountsaccounts of rate securities (auction(auction raterate and/or preferred securities SBC and ourour majodty_)wnedmajority-owned subsidiaries.subsidiaries. Our subsidiaries issued by domestic or foreign corporations, municipalities and affiliates operate inin the communicationscommunications services industry or dosed-endclosed-end management investment companies). At both domestically and worldwide providing wireline and December 31, 2003, we held $309 inin cash, $356 inin municipal wireless telecommunications services and equipment as well securities, $1,705$1,705 inin variable-rate securities, $2,399$2,399 inin money as directorydirectory advertising and publishing services. market funds and $37 inin other cash equivalents.equivalents. All significant intercompany transactionstransactions are eliminated Investment Securities -—Investments in securities principally inin the consolidation process. InvestmentsInvestments in partnerships, consist of held-to-maturity or available-for-saleavailable-for-sale instruments. jointjoint ventures, including Cingular Wireless (Cingular), andand less Short-term andand long-termlong-term investments in money market than majority-owned subsidiaries where we have significant securities andand other auction-type securities are carried as influenceinfluence are accountedaccounted for under the equity method. We held-to-maturity securities. Available-for-sale securities account for our 60% economiceconomic interestinterest inin Cingular underunder consist of variousvarious debt and equityequity securities that areare long- the equity method since we shareshare control equally (i.e.,(i.e. 50/50) , term in nature. UrirealizedUnrealized gains and losses onon available-available- with our 40% economic partner inin thethe joint venture_venture. We for-sale securities, net of tax,tax, are recordedrecorded in accumulated havehave equal votingvoting rights and representation on the board other comprehensive income.income. of directors that controls Cingular. Earnings from certain of directors that controls Cingular. Earnings from certain Revenue Recognition -—Revenues and associated expenses foreignforeign investmentsinvestments accounted for using the equity method relatedrelated to nonrefundable, upfront wireline service activation are included forfor periods endedended within up to threethree months fees are deferred and recognized overover thethe average customer of ourour year endend (see(see Note 6). life of five years. Expenses, though exceeding revenue, are InIn January 2003, the Financial Accounting Standards Board only deferreddeferred toto the extent of revenue.revenue. (FASB)(FASB) issued FASB interpretationInterpretation No. 46 "Consolidation"Consolidatioii of Certain revenuesrevenues derived from local telephone, long.-long- • Variable Interest Entities, an Interpretation of Accounting distance, data and wireless servicesservices (principally fixed fees)fees) Research Bulletin (ARB)(ARB) No. 51" (FIN(FIN 46). FIN 46 provides are billed monthlymonthiy in advanceadvance and are recognized the guidance for determining whether an entity isis aa variable followingfollowing month when servicesservices are provided. Other revenues interestinterest entity (VIE), and which equity investor of that VIE, derived from telecommunications services,services, principally long- ifif any,any, should includeinclude thethe VIE inin itsits consolidated financialfinancial distance and wireless airtime usage (in excess or ir_in lieu of statements. In December 2003,2003, thethe FASB staffstaff revised FIN 46 fixed fees) and network access,access, are recognized monthly as to clarify some of thethe provisions. For certain VIEs, FINFIN 46 services are provided. became effective forfor periods endingending after December 15, Prior to 2003, we recognizedrecognized revenues and expenses 2003. In 2003, we recordedrecorded anan extraordinaryextraordinary lossloss of $7, net related to publishing directories on the "issue basis" method of taxestaxes of $4, relatedrelated toto consolidationconsolidation of realreal estate leases of accounting,accounting, which recognizesrecognizes thethe revenues and expenses under FIN 46. InIn addition, thethe revision delayed the effective at the timetime thethe initialinitial delivery of the related directory isis date for application of FIN 46 by large public companies,companies, such completed. See the discussion of our 2003 changechange in directory asas us, until Periodsperiods endingending afterafter March 15, 2004 forfor all types accounting inin thethe "Cumulative Effect of Accounting Changes" of VIEs other than special-purpose entities, including our sectionsection below. investment in Cingular. We are currentlycurrently evaluating how the The Emerging Issues Task Force (EITF),(EITF), a tasktask force provisions of FIN 46 will affect our accounting forfor Cingu!ar.Cingular. established toto assist the FASB on significant emerging TheThe preparation of financialfinancial statementsstatements inin conformity accounting issues, has issuedissued EITF 00-21, "Accounting for with accounting principles generally accepted iinn the United RevenueReveriue Arrangements with Multiple Deliverables" States (GAAP) requires management to make estimates and (EITF 00-21). EITF 00-21 addresses certain aspectsaspects of assumptions that affect thethe amounts reported inin thethe financial:financial accounting for sales that involveinvolve multiple revenue- statements and accompanying notes, includingincluding estimates of generating products and/or services sold underunder aa single probable losses andand expenses. Actual results could differ contractual agreement.agreement. For us, this rule became effective from those estimates.estimates. We have reclassifiedreclassified certain amouhtsamounts for sales agreements enteredentered into beginning July 1, 2003 inin prior-periodprior-period financial statements to conform toto the and itit did not have a material effect on our consolidated current year's presentation. financial statements. Income Taxes -—Deferred incomeincome taxestaxes are provided for Allowance for Uncollectibles -—Our bad debt allowanceallowance isis temporary differences between the carrying amounts of estimated primarily based on analysis of history andand future assetsassets and liabilities for financial reportingreporting purposespurposes andand thethe expectations of our retailretail and our wholesale customers in amountsamounts used for tax purposes. We provide valuation each of our operating companies. For retail customers, ourour allowancesallowances against the deferreddeferred tax assets for amounts estimates aleaI'e basedbased on our actual historicalhistorical write-offs, net when thethe realization is uncertain.uncertain. of recoveries, andand the agingaging of accountsaccounts receivable balances. Investment taxtax credits earned prior to theirtheir repeal by the Our assumptions are reviewed at leastleast quarterly and adjust- Tax Reform Act of 1986 areare amortizedamortized as reductions inin ments areare made to our bad debt allowance asas appropriate. income tax expense over thethe liveslives of the assets which gave For our wholesale customers, we use a statistica!statistical model rise to the credits. based on our aging of accounts receivable balances. Our riskrisk ~PAGEPAGE] 38 categories,risk percentages andand reservereserve balance assumptions removalremoval in thethe period inin which thethe obligations are incurred builtbuilt into the model are reviewed monthly andand thethe bad debt andand capitalize that amount as part of the book valuevalue of the allowance is adjusted accordingly. long-lived asset. To determine whether we have a legallegal Reporting Gains andand Losses from Extinguishment of Debt obligation toto remove our long-lived assets, we reviewedreviewed On January 1, 2003, we adopted Statement of Financial statestate and federalfederal lawlaw andand regulatoryregulatory decisions applicable Accounting_StandardsAccounting'Standards No. 145, "Rescission of FASBFASH State- toto our subsidiaries,subsidiaries, primarily our wireline subsidiaries, which ments No. 4, 44, and 64, Amendment of FASB Statement have long-lived assets.assets. Based on thisthis review, we concluded ments No. 4, 44, 64, " No.No. 13, and Technical Corrections, _ (FAS 145). The standard, that we are not legallylegally requiredrequired to removeremove any of our among other changes, rescinded FASB Statement No. 4, long-livedlong-lived assets, exceptexcept inin a few minor instances. UReportingReporting Gains and Losses from Extinguishment of Debt, However, inin November 2002, we were informedinformed thatthat thethe an amendment of APB Opinion No. 30". As a result,result, thethe Securities and Exchange Commission (SEC)(SEC) staffstaff concluded criteria in APB Opinion No. 30, UReporting"Reporting the Results of that certain provisions of FAS 143 requirerequire thatthat we exclude Operations - Reporting the Effects of Disposal of a Segment costs of removalremoval from depreciation rates and accumulated of aa Business, and Extraordinary, Unusual and InfrequentlyInfrequently depreciationdepreciation balances inin certain circumstances uponupon adoption,adoption, Occurring Events andand Transactions,"Transactions, "now will be used toto even where no legal removal obligations exist.exist In ourour case, classifyclassify gains andand losseslosses fromfrom extinguishmentextinguishment of debt. In thisthis means thatthat for plant accounts where our estimatedestimated costscosts accordanceaccordance with thethe provisions of FAS 145,145, we have reclassified of removal exceed the estimated salvage value, we are our 2001 lossloss Ofof $18 (net of taxes of $10) relatedrelated toto thethe prohibited fromfrom accruing removalremoval costs in thosethose depreciationdepreciation early redemptionredemption of $1,000$1,000 of our corporation-obligated rates and accumulated depreciation balancesbalances inin excessexcess of mandatorily redeemableredeemable preferred securities of subsidiary the salvage value. For our other long-lived assets, where trusts fromfrom an extraordinary loss to an ordinaryordinary lois.loss. The our estimatedestimated costs of removalremoval are less thanthan the estimated effect of this reclassificationreclassification was to decrease our previously salvage value, we will continue to accrue the costs of reportedreported 2001 income before extraordinary itemitem and removalremoval inin those depreciation rates and accumulated cumulative effect of accounting change by $18, or $0.01$0.01 depreciation balances. per share, with nono impactimpact on our net income. Therefore, in connection with thethe adoption of FAS 143 on Cumulative Effect of Accounting Changes January 1, 2003, we reversed allall existingexisting accrued costscosts of Directory accounting Effective January 1, 2003,2003, we removalremoval for those plant accounts where our estimated costscosts changed our method ofof recognizing revenuesrevenues and expenses of removal exceeded the estimated salvagesalvage value. The relatedrelated toto publishing directories fromfram the "issue basis" noncash gain resulting from thisthis reversal was $3,684,$3,684, net of method toto the "amortization" method. The issue basis deferreddeferred taxestaxes of $2,$2,249,249, recordedrecorded as a cumulative effect of method recognizes revenues andand expensesexpenses at thethe timetime the accountingaccounting change on the Consolidated Statement of initial delivery of the relatedrelated directorydirectory isis completed. Income as of JanuaryJanuary 1, 2003. Consequently, quarterly income tendstends toto vary with thethe During thethe fourth quarter of 2003, TDC/MSTDC A/5 (TDC), thethe number andand size ofof directory titlestitles published during a Danish national communications company in which we quarter. The amortization method recognizesrecognizes revenuesrevenues andand hold an investmentinvestment accountedaccounted for on thethe equity method, expenses ratably over the life of the directory, whichwhirh isis recordedrecorded a lossloss upon adoption of FAS 143. Our share of typicallytypicaliy 12 months. Consequently, quarterly incomeincome tendstends that loss was $7, which included no tax effect. This noncash to be more consistent over the coursecourse of aa year. We decided chargecharge of $7 was also recorded as aa cumulative effecteffect of to changechange methods because thethe amortizationamortization method has accountingaccounting change onon thethe Consolidated Statement of now become the more prevalentprevalent method used among Income as of January 1, 2003. significantsignificant directory publishers. This change will allow a more Beginning inin 2003,2003, for thosethose plant accounts where our meaningful comparisoncomparison between our directorydirectory segment and estimated costscosts of removalremoval previouslypreviously exceeded thethe estimated other publishingpublishing companiescompanies (or(or publishing segments of salvage value, we expense all costs of removal as we incur largerlarger companies). them (previously(previously thosethose costs had been recordedrecorded in our Our directory accounting change resultedresulted inin a noncash depreciation rates). As a result, our 2003 depreciation charge of $1,!36,$1,136, net of an incomeincbme taxtax benefitbenefit of $714, expense decreased and our operations andand supportsupport expense recordedrecorded asas a cumulativecumulative effect of accounting change on the increasedincreased as thesethese assetsassets were removed from service. The Consolidated Statement of Income as of January 1, 2003. effect of this changechange was toto increase consolidatedconsolidated pre-taxpre-tax The effect of thisthis change was to ihcrease consolidated income and our wireline segmentsegment incomeincome forfor 2003 by $280 pre-taxpre_tax incomeincome and our directory segment income for 2003 ($172 net of tax,tax, or $0.05$0.05 per diluted share). However, over :byby $80 ($49 net of tax, or $0.01$0.01 per diluted share). We thethe life of thethe assets,assets, total operating expenses recognized included thethe deferred revenue balance inin the "Accounts under thisthis new accounting method will be approximately payable and accrued liabilities"liabilities" line itemItem on our balance sheet.sheet the same as under the previous method (assuming(assuming the cost DepreciationDepredation accounting On January 1, 2003, we of removalremoval would be the samesame under both methods). adopted Statement of Financial Accounting Standards Goodwill and otherotherinfangibleintangible assets accountingaccaunfing No. 143, UAccounting"Accounting for Asset Retirement Obligations" On JanuaryJanuary 1, 2002,2002, we adopted Statement of Financial (FAS(FAS 143). FAS 143 sets forth how companies must account Accounting Standards No.Na. 142, "Goodwill"Goodwiil and Other for the costscosts of removalremoval of long-lived assets when thosethose Intangible Assets" (FAS 142). Adoption of FAS 142 means assets areare no longer used in aa company's business, but onlyonly if thatthat we stopped amortizing goodwill, and at least annually aa company isis legallylegally required to remove such assets. FAS 143 we will test the remaining book valuevalue of goodwill for requires that companies recordrecord the fair value of the costscasts of impairment. Any impairments subsequent to adoption will be PAGE I 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Dollars inmillionsexceptper shareamountsamounts recorded in operating expenses. We alsoalso stopped amortizing Year Ended December 31, 2003 2002 2001 goodwill recorded on our equityequity investments.investments. This embeddedembedded Net income -—as reported $$8,8,505505 $$5,5,653653 $$7,7,008008 goodwill will continue to be tested for impairmentimpairment under goodwill will continue to be tested for Remove extraordinaryextraordinary item thethe accounting rulesrules for equity investments,investments, which are based and cumulative effect of on comparisons between fair value andand carrying value. Our accountingaccounting changes (2,534)(2,534) m totaltotal cumulativecumulative effect of accounting change from adopting Directory change, net of tax (107)(107) (!45)(145) FASFAS 142 was a noncash charge of $!,820,$1,820, net of an incomeincome Depreciation change, net of tax 172 172 tax benefitbenefltofof $5, recordedrecorded as of JanuaryJanuary1,1, 2002. Goodwill amortization, net of tax _ 201 in Adjusted resultsresults The amountsamounts in the following tabletable Equity methodmethod amortization, ._ havehave been adjustedadjusted assumingassuming that we had retroactively net of taxtax _ _ 258258 appliedapplied the new directory and depreciation accounting Net incomeincome -—as adjustedadjusted $$5,5,97.1971 $5,$ 5,718718 $$7,7,494494 methods, and goodwill and equityequity method amortization dis-dis- cussedcussed above. (FA_(F+ 142 did not allowallow retroactive application Basic earningsearnings per share: of thethe new impairmentimpairment accounting method, and did not Net income-income —asas reported $$2.2.5656 $$1.1.7070 $$2.2.0808 allow these adjusted resultsresults to exclude thethe cumulativecumulative effect Remove extraordinary itemitem of accounting change fromfrom adopting FASFAS 142.)142.) and cumulative effect of accounting changes (036)(0.76) .... Year Ended December 31, 2003 2002 2001 Directory change, net of taxtax (0.03)(0.03) (0.04)(0.04) Income before extraordinary Income before extraordinary Depreciation change, net of taxtax 0.050.05 0.050.05 item and cumulative effect item and cumulative effect Goodwill amortization, netnet of tax _ 0.060.06 of accounting changes- of Equity method amortization, as reported $ 5,971 $ 7,473 $ 7,008008 as reported $5,971 $7,473 $7, net of tax _ m 0;08 Directory change, net of tax m (107) (145)(145) Net income-income —as adjusted $ 1.8080 $$1.1.7272 $$2.2.2323 Depreciation change, net of tax m 172172 172 $1. Goodwill amortization, net of taxtax m _ 201 Diluted earnings per share'.share: Equity method amortization, Net income-income —as reported $$2.2.5656 $$1.1.6969 $$2.2.0707 net of taxtax m m 258 Remove extraordinary item IncomeIncome before extraordinary andand cumulativecumulative effect of item and cumulative effect accountingaccounting changes (0.76)(0.76) m of accounting changes-changes- Directory change, net of taxtax (0:03)(0.03) (0.04)(0.04) as adjusted S$5,5,971971 $$7,7,538538 $$7,7,494494 Depreciation change,change, net of tax 0.050.05 0.050.05 Goodwill amortization, net of taxtax _-- 0.050.05 Basic earnings per share:share: per Equity method amortization, IncomeIncome before extraordinary net of tax -- -- 0.0.0808 itemitem and cumulative effect Net income-income —as adjusted $$1.1.8080 $$1.1.7!71 $$2.2.2121 of accounting changeschanges-- as reported $ 1.801.80 $$2.2.2424 $$2.2.0808 Directory change, net of tax -- (0.03)(0.03) (0.04)(0.04) Depreciation change, net of tax 0.050.05 0.050.05 Goodwill amortization, net of taxtax _ 0.060.06 Equity method amortization, net of tax 0.080.08 IncomeIncome before extraordinary item and cumulative effect of accounting changeschanges-- as adjustedadjusted $ 1.801.80 $$2262.26 $$2.2.2323 Diluted earningsearnings per "share:'share: Income before extraordinaryextraordinary itemitem and cumulativecumulative effect of accounting changeschanges-- aass reported $1.1.8080 $$2.2.2323 $$2.2.0707 Directory change, net of taxtax -- (0.03)(0.03) (0.04)(0.04) Depreciation change, net of tax 0.0.0505 0.050.05 Goodwill amortization, net of tax -- 0.050.05 Equity method amortization, net of tax 0.080.08 Income before extraordinary itemitem and cumulativecumulative effecteffect of accounting changeschanges-- as adjusted $$1.1.8080 $$2.2.2525 $$2.2.2121 FAGEI40PAGE 40 Property, Plant and Equipment -—Property, plant and equip- other nonvested stock units. We accountaccount for these plans ment isstated at cost. The cost of additions andand substantialsubstantial using thethe preferable fairfair value recognition provisions of improvementsimprovements to property, plant andand equipment iscapitalized. Statement of Financial Accounting Standards No. 123, The cost of maintenance and repairs of property, plant and "Accounting"Accounting forfor Stock-Based Compensation"Compensation" (FAS(FAS 123). equipment isis Chargedcharged to operating expenses. Property, plant Under thisthis method, the estimated fairfair value of the options and equipment are depreciated using straight-line methods granted is amortized to expense over thethe options' over theirtheir estimated economic lives.Certain subsidiaries vesting period. Pension and Postretirement BenefitS -—See Note 10 for a follow composite group depreciation methodology; accord-,accord- Pension and Postretirement Benefits See Note 10 for a ingly,ingly, when a portion of their depreciable property, plant and comprehensive discussionof our pension and postretirement equipment isis retiredretired inin the ordinary courseof business,the benefit expense, includingincluding a discussionof the actuarial grossbook value isreclassifiedreclassified toto accumulated depreciation; assumptions.assump'tions. no gain or lossisis recognized on thethe disposition of this plant. ' NOTE 2. ACQUISITIONS, DISPOSITIONS, : Software Costs -—It isis our policy to capitalizcapitalizee certain costs AND VALUATION AND OTHER ADJUSTMENTS incurredincurred inin connection with developing or obtaining internalinternal use software. Capitalized software costs are includedincluded in Restructuring of Investments -—In thethe fourth quarter of Property, Plant and Equipment and are being amortized 2002, we internally restructured our ownership !nin several over three years.years. Software coststhatthat do not meet capitali- investments,investments, includingincluding Sterling. As part of thisthis restructuring,restructuring, zation criteria are expensed immediately.immediately. a newly created subsidiary borrowed $244 from an Goodwill -—Goodwill represents the excessof consideration independentindependent party at an annual interest rate of 4.79%,4.79%, paid over net assetsacquired inin business combinations. repayable in fivefive years (see NoteNote 7). Additionally, a total Beginning inin 2002, goodwill is not amortized, but isis tested of $43 of preferred securitiessecurities in subsidiaries was sold to annuallyannually forfor impairmentimpairment (see above discussion under independent parties. The Preferredpreferred interests receive "CumulativeCumulative Effect of Accounting Changes").Changes" ).We have preferred dividends at a 5.79%5.79% annual rate, paid quarterly completed our annual impairment testingtesting for 2003 and (see Note 8). As we remain the primary beneficiary after the determined that no impairment exists. During 2003,2003, thethe restructuring, the preferred securities are classified as "Other"Other carrying amount of our goodwill decreased $32 primarily noncurrent liabilities"liabilities on our Consolidated Balance Sheet3,Sheets, due to the third quarter 2003 salesale of a division of our and no gain or lossloss was recorded on the transaction.transaction. As a subsidiarysubsidiary Sterling Commerce Inc.Inc. (Sterling). result, we recognized inin net incomeincome $280 of taxtax benefits Advertising Costs-—Advertising costsfor advertisingadvertising prod- on certain financial expenses andand lossesthatthat were not ucts and servicesor promoting our corporaterorporate image are previously eligible forfor deferred tax recognition (see(see Note 9). expensedexpensed as incurred.incurred. Acquisitions -—In November 2001, we acquiredarquired the shares Foreign Currency Translation-Translation —Our foreign investmentsinvestments of Prodigy Communications Corporation (Prodigy) thatthat we generally reportreport theirtheir earnings inin theirtheir local currencies.We did not already own through a cash tender offer followedfollowed translate our shareshare of their foreignforeign assetsandand liabilitiesliabilities at by a merger of aa subsidiarysubsidiary intointo Prodigy. We paid approxi-approxi- exchange rates inin effecteffect at the balance sheet dates. We mately $470 and assumedassumed debt of $105. This transaction translatetranslate our share of their revenues and expenses using resulted in approximately $589 inin goodwill. The majority of average rates during the year.year. The resultingresulting foreign currency thethe sharesshares we bought inin the cash tender offer were from translationtranslation adjustments are recorded as a separate component persons or entities affiliated with TelEfonosTeiefonos de MExico,Mhxico, S.A.S.A. of accumulated other comprehensivecomprehensive income inin the accom- de C.V.C.V. (Telmex), of which we own approximatelyapproximately 8.0%.8.0%. panying Consolidated Balance Sheets. Gains and losseslosses Dispositions -—InIn thethe fourthfourth quarter of 2002, we agreed resultingresulting from exchange raterate changes on transactions to sell our 15% interest inin Cegetel S.A.S.A. (Cegetel) toto denominated in a currency other thanthan the locallocal currency are Vodafone Group PLC (Vodafone). The pending _alesale removedremoved includedinciuded inin earnings as incurred.incurred. our significant influence and required usto change our Derivative Financial InstrumentsInstruments -We—We record derivatives accounting for Cegetel to thethe costcost method from thethe equity on the balance sheet at fair value. We do not investinvest ini0 deriv- method. With this change,change, the value of our investment is atives forfor tradingtrading purposes. We use derivatives fromfrom timetime toto reflected in the "Other Assets" lineline on our December 31, timetime as part of our strategy to manage risks associated with 2002, Consolidated Balance Sheet. The sale was completed our contractual commitments. For example, we use interest iinn JanuaryJanuary 2003, and we received cash proceeds of $2,270$2,270 rate swaps to limit exposure to changes in interest ratesrates on and recorded a pre-tax gain of approximately $1,574.$1,574. our debt obligations and foreign currencyrurrency forward-exchange In the secondsecond quarter of 2002, we entered intointo two contracts to limitlimit exposureexposure toto changes inin foreign currency agreements with Bell Canada Holdings Inc. (Bell Canada): ratesrates forfor transactions related toto our foreign investments (see (1)(1)to redeemredeem a portion of our ownership in Bell Canada and Note 8). We include gains or lossesfrom interest rate swaps (2)(2) to give BCE,Inc.Inc. (BCE)thethe right to purchase our remainingremaining when pa!dpaid or receivedreceived in intere_interest expenseon our Consolidated interest in Bell Canada. In JuneJune 2002, we entered intointo an Statements of Income.Income. We includeinclude gains or losselossessfromfrom agreement to redeemredeem a portion of our ownership in Bell foreignforeign currency forward exchange contracts as part of the canada,Canada, representing approximately 4% of thethe company, for transactiontransaction to which the forward exchange contract relates. an $873 short-term note, resultingresulting inin a pre-tax gain of Stock-Based Compensation -.—As discussed more fullyfully inin approximately $148. Under the terms of the agreement, onon Note 12, under various plans, senior and other management July 15, 2002 when we received the proceeds from thethe short- and nonmanagement employees and nonemployee directors term note, we purchased approximately 9 million sharesshares of have received stock options, performance stockstork units, and BCE,thethe majority shareholder of Bell Canada, for approxi- PAGEI41PAGE 41 NOTESTOCONSOLIDATEDCON SOLIDATEO FINANCIALSTATEMENTS(CONTINUED)(rONTINUED) DollarsDollars Inin millions exceptexcept per share amounts mately 250 canadianCanadian dollars (CAD) ($164 at July 15, 2002 effect of reducing revenuerevenue recognizedrecognized on the leasesleases inin the exchange rates). InIn thethe second quarter of 2003, we sold future. In June 2002, with SpectraSite stock tradingtrading at thesethese BCEshares for $173 in cash and recorded aa pre-tax approximately $0.18$0.18 per share, we recordedrecorded another other- gain of approximatelyapproximateiy $9. InIn thethe fourthfourth quarter of 2002, BCE than-temporarythan-temporary decline of $40 ($24 net of tax). exercised its rightright to purchase our remaining 16% interest in We had cost investmentsinvestments inin WilTel Communications Bell Canada at a price of 4,9904,990 CAD. We received proceeds (WilTel) (formerly(formerly WilliamsWilliam's Communications Group Inc.)Inc.) and of $3,158,$3,158, consistingof approximately 8.98.9 million shares of alternative providers of DSL services accounted forfor under BCEstock and the remainderremainder of $2,997$2,997 inin cash and recognized Statement of Financial Accounting Standards No. 115, a pre-tax gain of approximately $455. InIn the third quarter of "Accounting for Certain Investments in Debt and Equity 2003,2003, we sold thethe BCEstock forfor $191 inin cashcash and recorded a Securities" (FAS(FAS 115). We periodicallyperiodicallyreviewreview thethe investments pre-tax gain of approximately $31. toto determine whether an investment's decline inin valuevalue isis In November 2001, we sold the assets of Ameritech's othe'r thanthan temporary.temporary. If so, the cost basis of the investment isis cable televisiontelevision operation forfor approximately $205, resultingresulting written down toto fair value, which becomesbecomes thethe new costcost basis.basis. in aa pre-tax loss of $61. In thethe first quarter of 2001, in In thethe second quarter of 2001, we concluded that thethe anticipation of the disposal of these cable operations andand continued depressed market valuesvalues for certain of ourour in accordanceaccordance with FAS 121, we evaluated these operations investmentsinvestments in other telecommunications companies,rompanies, as for impairment. We.We estimatedestimated thatthat thethe future undiscounted well as difficulties experienced by many similar companies, cashcash flows of thesethese operations were insufficient to recover indicatedindicated the decline inin value of our investmentsinvestments was other theirtheir relatedrelated carryingcarrying values. The impairment was measured than temporary. ASAs aa result of these reviews, we recognizedrecognized by comparing the book value toto fair valuevalue of the assets as a combined charge of $401 ($261($261 net of tax) inin thethe second indicated by prevailing market prices. The resulting adjust- quarter of 20012001 inin other incomeincome (expense) -—net, primarily ment of approximately $316 ($205($205 net of tax)tax) to reducereduce thethe relatedrelated to our investment inin WilTel. book valuevalue of these assets, primarily writing down property, 2002 WorkforceWorkforre Reduction and Related Charges -—During piantplant and equipment, was recordedrecorded inin the firstfirst qbarterquarter of 2002, our continuingcontinuing review of staffing needs led toto deci- 2001 as a charge to operating expenses. sions to further reduce our number of management and In January 2001, we sold SecurityLink, our electronic nonmanagement employees. InIn 2002, we recorded chargescharges security servicesoperations, for approximately $479. As a of approximately $356 ($224 net of tax) for severance and result of the pending sale, as well as aa general decline in the realreal estate costscosts related toto worL'force-reductionworkforce-reduction programs. market value of companies in the security industry, we hadhad ASAs discussedinin Note 10, these workforce-reduction programs recognized impairmentsimpairments toto thethe carrying value of Security[.inkSecurityLink also requiredrequired usto record $486 in special termination benefits of approximately $614 ($454 net of tax)tax) inin thethe fourth andand net pension settlementsettlement gains of $29. quarter of 2000. 2001 Comprehensive Review of Operations -—During thethe Valuation Adjustments -—In January 2002, we purchased fourth quarter of 2001, we performed a comprehensivecomprehensive from AmericaAmhrica MbvilMovil S.A.S.A. de C.V.C.V. (America M6vil)Movil) itsits approxi- review of operations thatthat resulted in decisions toto reducereduce our mately 50% interestinterest in Cellular Communications of Puerto workforce, terminate certain realreal estate leasesleases and shut down Rico (CCPR) for cash andand a note redeemableredeemable forfor our invest-invest- certain operations. The charges relatedrelated to those decisions, ment in Telecom Americas Ltd. (Telecom(Telecom Americas). We which we recorded as expense inin 2001 areare as follows:follows: retained the rightright toto settle the note byby delivering Telecom •~ Workforce reductionreduction charges Our reviewreview of staffing AmericasAmhricas shares.shares. This representedrepresented a forward sale of our needs ledled toto decisionstoto reducereduce our number of interest inin Telecom Americas. InIn connection with thisthis management and nonmanagement employees. We transaction,transaction, we reviewedreviewed the values at which we would carrycarry recorded a chargecharge of approximately $377 ($244 net of CCPRand our interestinterest inin Telecom Americas and recognized a tax),tax), related to severance costs under our existing plans charge of $390 ($262($262 net of tax) for thethe reductionreductiori of our and an enhanced retirementretirement benefit forfor certaincertain directdirect and indirect book values to thethe value indicated by the nonmanagement employees. transaction. We based this valuation on a contemporaneous •~ Leaseterminationtermination charges As part of a reviewreview of real transaction involving CCPR and an independentindependent thirdthird party. estate needsforfor our adjusted workforce, allall company-rompany- The charges were recordedrecorded in both other incomeincome (expense)(expense)—- leased facilitiesfacilities were evaluated forfor probability of net ($341) and equity in net income of affiliates ($49).($49). futurefuture usefulness.For each leaselease having no substantive AmericaAmhrica MOvilMovil exercised itsits optionoption to acquire our shares of future use or benefit toto us, an accrual was made which Telecom Americas inin July 2002. represented either the buyout provisions of thethe lease,lease, As discussed in more detail inin Note 5, inin the thirdthird quarter a negotiated leaselease termination or future requiredrequired of 2001, we recognized an other-than-temporary decline of payments under the lease, net of anticipated subleasesublease $162($97($97 net of tax) in the value of SpectraSite Communi- rentals.rentals. We recorded a charge of approximately $138 cations Inc. (SpectraSite)(SpectraSite) shares we receivedreceived as payment of ($90net($90 net of tax)tax) inin relation to thesethese leases. future rentsrents on landland and wireless towers and related equip- •~ AssetAssetimpaiimentsimpairment_ and other charges A reviewreview of ment. ASAs we were requiredrequired to hold the shares, we determined certain nonstrategicnonstrategir operations indicated the need, inin thatthat we needed to adjust the valuevalue of the totaltotal consideration some cases,for either impairmentimpairment or shutdown. VV'eWe received from SpectraSite forfor entering into thethe tower leasesleases recorded assetimpairment and shutdown costsandan'd other to reflect actualactual realizablerealizable value. Accordingly, we reducedreduced the chargesof approximately $104 ($91 net of tax)tax) forfor opera- amount of deferreddeferred revenue that was recordedrecorded when these tions including exiting operations at inQuentInQuent Technologies shares were originally received.received. This adjustment will have the Inc.,Inc, thethe parent company of Webhosting.com.Webhosting. corn. PAGEPAGE I 42 NOTE 3. EARNINGS PER SHARE NOTE 4. SEGMENTSEGMENT INFORMATIONINFORMATION A reconciliationreconciliation ofof thethe numerators and denominators of Our segments are strategic business units thatthat offer different basic earnings per shareshare and diluted earnings per share for products andand services and are managed accordingly.accordingl. Under incomeincome before extraordinary item andand cumulative effect of GAAP segment reporting rules, we analyzeanalyze our variousvarious .accounting, accounting changes forfor thethe years ended December 31, 2003, operating segments basedbased on segment income. Interest 2002 and 2001 are shown inin the table below.below: expense, interest income,income, other incomeincome (expense)(expense) -—net and income tax expense areare managed only on a total company YearYear Ended December 31; 20032003 2002 2001 basis and are, accordingly, reflectedreflected only inin consolidated Numerators results. Therefore, these itemsitems areare not included inin the Numerator for basic earnings calculation of each segment's percentage of our consolidated per share: results. We have five reportable segments that reflect the Income before extraordinary current management of our business: (1) wireljne;wireline; (2)(2) itemitem and cumulative effect Cingular,Cingular; (3)(3) directory; (4) international; and (5)(5) other. of accounting changes $5,971$5,971 $7,473$7,473 $7,OO8$7,008 The wireline segment provides landlinelandline telecommunicationstelecommunications Dilutive potential common shares: services, includinglnduding locallocal and long-distancelong-distance voice, switched 7 6 Other stock-based compensation 9 access, data and messaging services.services. Numerator forfor diluted The Cingular segment reflectsreflects 100% of the resultsresuits earnings perper share $5,980$5,980 $7,$7,480480 $7,014$7,014 reported by Cingular, our wireless joint venture.venture. Beginning Denominators with 2003, thethe Cingular segment replaces our previously titled "wireless" segment, which included 60% of Cingular's Denominator forfor basic earnings titled wireless segment, which included 60% of revenues and expenses. Although we analyzeanalyze Cingular's per share: and Although we Weighted average number revenues andand expenses under the Cingular segment, we consolidated financial of commoncommon shares eliminate the Cingular segment inin our consolidated financial statements. In our consolidated financial statements, we outstanding (000,000)(000,000) 3,3,318318 3,3303,330 3,3663,366 statements. In our consolidated statements, Cingular's results as Dilutive potential commoncommon report our 60% proportionate shareshare of Cingular's results as shares (000,000):(000,000): equity in net income (loss)(loss) of affiliates. For segment reporting,reporting, in our Stock options 1 8 21 we reportreport thisthis equity inin net incomeincome (loss) of affiliates in our Other stock-based compensation 10 10 9 other segment. The directory segment includesincludes all directory operations, Denominator for diluted including Yellow and White Pages advertising and electronic earnings per share 3,3293,329 3,3483,348 3,3963,396 publishing. InIn the firstfirst quarter of 2003 we changedchanged our Basic earningsearnings per share method of accounting for revenuesrevenues and expenses in our IncomeIhcome. before extraordinary directory segment. Results forfor 2003, and going forward,forward, will itemitem and cumulative effect be shown under the amortization method. This means that of accounting changes $$1.1.80&0 $$2.2.2424 $$2.2.0808 revenuesrevenues and direct expenses are recognized ratablyratably over Extraordinary item -- -- the lifelife of thethe directory, _picallytypically 12 months. This accounting Cumulative effect of change will affect only thethe timingtiming of the recognitionrecognition of accounting changes 0.760.76 (0.54)(0.54) m revenues andand direct expenses. It will not affectaffect thethe totaltotal Net income $ 2.562.56 $ 1.701.70 $ 2.082.08 amounts recognized. Our internationalinternational segment includes all investmentsinvestments with DilutedDiluted earnings per share segment primarily international operations. The other segmentsegment IncomeIncome before extraordinary includesincludes allall corporate andand other operations as well as thethe item andand cumulative effect !1 Cingular equity incomeincome (10ss),(loss), asas discussed above.above. of accounting changes $$1.1.8080 $$2.2.2323 $$2.2.0707 In thethe following tables,tables, we show how our segment ExtraordinaryExtraordinary item ,. m resultsresults are recondledreconciled to our consolidated resultsresults reported inin Cumulative effect of to . accordance with GAAP. The Wireline, Cingular, Directory, accounting changeschanges 0.0.7676 (0.54)(0.54) InternationalInternational andand Other columns represent thethe segment s Net incomeincome $ 2.5656 $ 1.6969 $ 2.0707 $2. $1. $2. resultsresults of each such operating segment.segment The Consolidation and Elimination column adds in those line items thatthat we At December 31, 2003, 2002 and 2001, we had issued manage on a consolidated basis only: interestinterest expense, options to purchase approximately 231231 million, 229 million interestinterest incomeincome andand other incomeincome (expense) - net. This and 207 million SBC shares. Approximately 212 million, columncolumn alsoalso eliminateseliminates any intercompany transactions i80180 million and 62 million shares respectivelyrespectively were not used includedincluded inin each segment's results. Since our 60% share of toto determine thethe dilutivedilutive potential commoncommon sharesshares as thethe thethe results fromfrom Cingular is already includedincluded in thethe Other exercise price of thesethese options was greater than the average column, the Cingular Elimination column removesremoves the resultsresults market pdceprice of SBC common stock during thethe specifiedspecified periods.periods. of Cingular shown in thethe Cingular segment.segment In the balance sheet section of the tables below, ourour investmentinvestment in Cingular isis includedincluded inin thethe "Investment"Investmerit in equity method investees"investees" lineline item in the Other column ($5,118($5,118 in 2003, $4,583$4,583 inin 2002 and $3,556$3,556 inin 2001). PAGE"43PAGE 43 NOTES TOT 0 CONSOLIDATEDC 0 N S 0 L I D A T E D FINANCIALF I N A N C I A L STATEMENTS5 T A T E M E N T S (CONTINUED)(c0 II 1 I N U E 0 j Dollarsinin millionsexcept pershare amountamountss Segment results,results, indudinginduding aa reconciliation to SBC consolidated results,results, for 2003, 2002 and 2001 are as follows:follows At December 31, 20032003 Consolidation CingularGng via r Consolidated or for thethe yearyear ended Wireline CingularGngular Directory International Other andand Elimination Elimination Results Revenues fromfrom external customers $36,372$36,372 $15,483$'15,483 $4,182$4,182 $$3030 $$259259 $ u— $(15_183)$(15~3) $$40,40,843843 Intersegment revenues 32 --— 72 m 4 (108) \ m _ Total segment operating revenues 36,40436,404 15,48315,483 4,2544,254 30 263263, (108) (15_183)(15r%3) 40,84340,843 Operations and support expensesexpenses 24,59924,599 !1,10511,105 1,9321,932 47 34 (108)(108) (11,105)(11,105) 26,50426,504 Depreciation and amortization expenses 7,7637,763 2,0892,089 21 w 86 (2,089)(2,089) 7,7,870870 Total segment tI operating expenses 32,36232,362 13,19413,194 1,9531,953 47 120 (108)(10&) (13,194)(13,194) 34,37434374 Segment operating "incomeincome 4,0424,042 2,2892,289 2,3012,301 (17)(17) 143 --; (2,289)(2,289) 6_1696+69 InterestInterest expenseexpense -- 856 m _ _ 1,2411,241 (856)(856) 1,2411,241 InterestInterest income -- 14 _ _ -- 603 (14) 603 Equity in net income of affiliates m (323)(323) _ 606 647 _ 323 1,2531,253 Other income .(expense).(expense) -—net -- _(74)(74) ------1,8171,817 74 1,8171,817 Segment income before • incomeincome taxestaxes 4,0424,042 1,0501,050 2,3012,301 589589 790 1,1791,179 (1,050)(1,050) 8,9018,901 Segment assets 68,43468,434 25,52625,526 1,5151,515 8,8,550550 61,06761,067 (39,400)(39,400) (25,526)(25,526) 100,166100,166 -Investment-Investment inin equity methodmethod investeesinvestees m 2,2,288288 22 6,6,747747 5,2965,296 u (2,288)(2,288) 12,06512,065 Expenditures forfor additions toto long-livedlong-lived assets 5,1475,147 2,2,734734 1 w 71 _ (2,734)(2,734) 5,2195,219 At December 31, 2002 Consolidation CingularCin gular Consolidated or for theyearthe year endedended Wireline Cingular Directory International Other and Elimination Elimination Results Revenues"Revenues from external customers $38,362$38,362 $14,903$14,903 $4,371$4,371 $$3535 $$370370 $$ _— $(14,903)$(14,903) $43,138$43,138 IIntersegmentntersegment revenues 30 ---—- 80 --- 19 (129)(129) -- -- TotalTotal segment operating revenues 38,38,392.392 14,90314,903 4,4514,451 35 389 (129) (14,903)(14,903) 43,13843,138 Operations and support expensesexpenses 23,98123,981 10,53210,532 1,9311,931 85 69 (129) (10,532)(10,532) 25,93725,937 Depreciation and amortization expenses 8,4428,442 1,8501,850 30 _ 106 _ (1,850)(1,850) . 8,5788,578 :Total segment •operatingoperating expenses 32,42332,423 12,38212,382 1,9611,961 85 175 (129)(129) (12,382)(12,382) 34,51534,515 Segment oPeratingoperating incomeincome 5,9695,969 2,5212,521 2,4902,490 (50) 214 -- (2,521)(2,521) 8,6238,623 Interest expenseexpense m 911 -- -- 1,3821,382 (91(911)I) 1,3821,382 InterestInterest incomeincome --- .2929 -- -- 561 (29) 561 Equity in net income of affiliatesaffiliates (265) — 1,1521,152 769 _ 265265 1,9211,921 Other incomeincome (expense)(expense) -—net (1(123)23) _ 734 123 734734 SegmentincomeSegment income before income taxestaxes 5,9695,969 1,2511,251 2,4902,490 .1,1021,102 9839&3 (87) (I,251)(1,251) 10,45710,457 Segment assets 66,11766,117 2_12224, 122 2,8392,839 8,3528,352 57,43157,431 (39,68_(39,682) (2_12_(24,122) 95,95,057057 Investment inin equity method investeesinvestees 124 2,3162,316 2828 5,6685,668 4,6504,650 -- (2,316)(2,316) 10,47010,470 Expenditures forfor additions to long-livedlong-lived assets 6,7366,736 3,0853,085 11 -- 61 -- (3,085)(3,085) 6,8086,808 PAGE 144 At December 31, 2001 Consolidation Cingular Consolidated or for the year ended WirelineWirellne CingularClngular Directory International Other and Elimination ElimihationElimination Results Revenues fromfrom external customers $40,660$40,660 $14,268$14,268 $4,382$4,382 $$152152 $$714714 $ --— "$(14,268)$(14,268) $45,908$45,908 Intersegment revenues 30 --— 86 33 54 (203)(203) -- -- Total segment operatingoperating revenuesrevenues 40,6.9040,690 14,26814,268 4,4_84,468 185 _68768 (203) (14,268)(14,268) 45,90845,908 OperationsandOperations and support expenses 24_00924,009 9,7999,799 1,9021,902 238 377 (203)(203) (9,799)(9,799) 26,32326,323 Depreciation and . amortizationamortization expenses 8,4618,461 1,9211,921 36 3 577577 -- (4,921)(1,921) 9,0779,077 Total segment operating expenses 32,47032,470 11,72011,720 1,9381,938 241 954 (203) (11,720)(11,720) 35,40035,400 Segment operatingoperating incomeincome 8,2208,220 2,5482,548 2,5302,530 (56)(56) (186) -- (2,548)(2,548) 10,50810,508 Interest expense -- 822 ------1,5991,599 (822) 1,5991,599 Interest incomeincome -- 63 ------682 (63)(63) 682 Equity inin net income of affiliatesaffiliates -- (68)(68) -- 555 1,0401,040 -- 68 1,5951,595 Other incomeincome (expense)(expense) -—net -- . (21)(21) ------(236)(236) _ 21 (236) Segment incomeincome before income taxes 8,2208,220 1,7001,700 2,5302,530 499 854 .(1,153)(1,153) :(1,700)(1,700) 10,95010,950 SegmentSegment assetsassets 71,03771,037 22,53022,530 2,7772,777 9,4569,456 57,97057,970 (44,918)(44,918) (22,530)(22,530) 96,32z96,322 Investment in equity method investeesinvestees 120 2,0232,023 2121 8,1968 196 3,6303 630 --- (2,023)(2,023) 11,96711,967 Expenditures for additions to long-livedlong-lived assets 1.1,03211,032 3,1563,156 2424 -- 133 -- (3,156)(3,156) 11,1891 1,189 Geographic InformationInformation NOTE 5.S. PROPERTY, PLANT AND EQUIPMENT Our investmentsinvestments outside of the United States are primarilyprimarily ProperLy,Property, plantplant and equipment is summarized asas followsfollows at accounted for under the equity method of accounting.acc'ounting. for equity December 31: Accordingly, we do not includeinclude in our operating revenues Lives and expenses the revenues andand expenses of thesethese individual and expenses the (years)(years) 2003 2002 investees. Therefore, lessless than 1% of our total operating Land -- $$ 639 $ 627 revenues for all years presented are from outside the United 35-45 11,519 11,168 States. Buildings 35-45 11,519 11,168 Central office equipment 3-10 55,12055,120 54,77454,774 Long-lived assetsassets consist primar!iyprimarily of net property, plantplant Cable, wiring and conduitconduit 10-50 52,07652,0I6 50,(_6550,665 and equipment; goodwill; andand the book value of our equity Other equipment 5-15 9,5909,590 9,9979,997 investments,investments, which' are shownshown inin the table below: Software 3 3,5993,599 3,0163,016 December 31, 2003 2002 Under construction --- 1,3801,380 1,5081,508 United States $59,056$59,056 $54,934$54,934 133,923133,923 131,755131,755 3,246 2,689 Denmark 3,246 2,689 Accumulated depreciation and amortization 81,.79581,795 83,26583,265 Belgium 1,2361,236 1,1221,122 Property, plant and equipment- net $$52,52,128128 $$48,48,490490 Mexico 1,0791,079 945 South Africa 919 623 Our depreciation expense was $7,667$7,667 in 2003, $8,379$8,379 inin 2002 268 290: Other foreign countries 268 290 and $8,596$8,596 in 2001. Total $65,804$65,804 $60,603$60,603 Certain facilities andand equipment used in operationsoperations are leasedleased under operating or capital leases. Rental expenses underunder operating leasesleases were $420 for 2003, $586 forfor 2002 andand $799 forfor 2001. At December 31, 2003, thethe future minimum rental payments under noncancelable operating leases forfor the yearsyears 2004 throughthrough 2008 were $32!,$321, $279, $213, $169 andand $145 with $238 due thereafter.thereafter. Capital leasesleases are not significant. PAGET45PAGE 45 NOTES TO CONSOLIDATED FINANCIALFINANCIAl STATEMENTS (CONTINUED)(coNTINUED) Dollarsinin millions except pershareamounts SpectraSite Agreement NOTE 6. EQUITY METHOD INVESTMENTSINVESTMENTS InIn August 2000, we reached an agreementagr'cement with SpectraSite We account forfor our nationwide wireless joint venture, under which we granted SpectraSite thethe exclusive rights to Cingular, and our investments inin equity affiliates under the leaselease space on a number of our communications towers.towers. equity method of accounting. These operating leases were scheduledscheduled to closeclose over a Cingular -—The following tabletable isis a reconciliation of our periodendingperiod ending inin 2002. SpectraSite would sublease space on investmentsinvestments in and advances to Cingular as presented on ouroui' the towerstowers to Cingula_rCingular and als0also agreed to build or buy new Consolidated Balance Sheets: towers for Cingular over thethe next five years. Cingular'sCingulaVs subsub-_ lease payments toto SpectraSite reducereduce Cingular's net income 2003 20022002 and partially offset the rental income we receive fromfrom Beginning of year $10,468$10,468 $$9,9,441441 SpectraSite.Spectra Site. Contributions m 299 Under the terms of the original agreement,agreement„wewe received Equity inin net incomeincome 613 759 a combinationcombination of cash andand stock as complete prePaYmentprepayment Other adjustments (78)PB) (31)(31) of rent with the closing of each leasing agreement. The of End of year $11,003$11,003 $10,468$10,468 prepayments were initially recordedrecorded asas deferred revenue, and will be recognized in income as revenue over the lifelife Undistributed earnings from Cingular were $2,481$2,481 and of thethe leases. In November 2001, we receivedreceived $35 from $1,868$1,868 at December 31, 2003 and 2002. SpectraSite inin consideration for amendingamending the agreement, We account forfor our 60% economic interest inin Cingular to reduce the maximum number of towers subject tOto its under the equity niethodmethod of accountingaccounting inin our consolidated terms, and to extend the schedule forfor towertower closingsclosings until financial statements since we share controlcontrol equally (i.e.,(i.e., first quarter of 2004. 50/50)50I50) with our 40% economic partner inin the joint venture. In the third quarterquarter of :_001,2001, we recognized an other-than- We have equal voting rights and representation on thethe temporarytemporary decline of $162 ($97($97 net of tax)tax) inin the value of board of directors thatthat controls Cingular. Cingular serves SpectraSite shares we had received as part of the prepayment. approximatelyapproximately 24 million wireless customers,customers, is the second- This amount reflectedreflected thethe decline inin the stock market price largest wireless operator in the U.S.U.S. in termsterms of customers Ofof SpectraSite sharesshares below our carrying value. As we Werewere andand has approximately 236 million potentialpotential customers inin required toto hold the shares, we determined that we needed 45 states, thethe District of Columbia, Puerto Rico and the toto adjust the valuevalue of the total consideration received from U.S.U.S. Virgin Islands. entering into thethe leasesleases toto reflect actual realizable value. The following tabletable presents summarized financial Accordingly, we reduced the amount of deferreddeferred revenue information forfor Cingular at December 31, or forfor the periodperiod thatthat was recordedrecorded when thesethese shares were originally received. thenthen ended:ended: A similar reduction of $40 ($24 netnet of tax) was made inin 2003 2002 2001 second quarter of 2002 with SpectraSite sharesshares tradingtrading at approximately $0.18$0.18 per share. These adjustments will have Income Statements the effecteffect of reducingreducing revenuerevenue recognized on the leasesleases inin Operating revenues $15,483$15,483 $14,903$14,903 $14,268$14,268 the future.future. OperatingOperating income 2,2892,289 2,5212,521 2,5482,548 In late 2002, SpectraSite and certaincertain ofof its senior debt holders Net incomeincome 1,0221,022 1,2071,207 1,6921,692 agreedagreed toto restructure itsits debtdebt. To effect the restructuring, Balance Sheets SpectraSite filedfiled a "pre-arranged""pre-arranged" plan of reorganization Current assets $$3,3,300300 $$2,2,731731 under Chapter 11 of thethe United States Bankruptcy Code. NoncurrentNonctirrent assets 22,22622,226 21,39121,391 We agreed with SpectraSite, subjectsubject to completioncompletion of itsits Current liabilitiesliabilities 3,1873,187 2,7872,787 chapterChapter 11 reorganization, to decrease the number of Noncurrent liabilitiesliabilities 13,85513,855 13,13,794794 towers to be leasedleased to SpectraSite and toto extend thethe Scheduleschedule forfor tower closing until the third quarter of 2004. h_tAt December 31, 2003 andand 2002, we had notes receivable In addition, we exchangedexchanged all of our shares in SpectraSite fromfrom cingularCingular of $5,885.$5,885. InIn July 2003, we renegotiated for warrants toto purchase shares representing less than 1% the termsterms of thesethese advancesadvances to reduce the interestinterest raterate of thethe restructured companycompany with no significant financial from 7.5%7.5% to 6.0%6.0% and extended the maturity date of impact on us. SpectraSite emergedemerged from bankruptcy in 2003. the advances fromfrom March 31, 2005, to June 30, 2008.?008. The interest income fromfrom Cingular was approximately $397 in 2003, $441 in 2002 andand $555 in 2001. This interestinterest income does not have a material impact on our net incomeincome as itit isis mostly offset when we record our share of equity income inin Cingular. PAGEI46PAGE 46 OtherEquityMethodInvestments-—Ourinvestmentsinvestments in InIn October 2003,2003, ADSB announced that itit had entered equity affiliatesincludeprimarilyinternationalinvestments.investments. into an agreement with the Belgian government and Thefollowingtable is a reconciliation of our investments inin Belgacom toto proceed with the preparations for a potential equityequity affiliates as presented on our Consolidated Balance initialinitial public offering (IPO)(IPO) of Belgacom. As part of the Sheets: agreement, ADSB will have thethe exclusive right from JanuaryJanuary 1, 2004 until JulyJuly 31, 2005, subject to certain restrictions, to 2003 20022002 sell shares inin an IPO of Belgacom. InIn the fourth quarter of Beginning of yearyear $$5,5,887887 $$8,8,411411 2003, as a conditioncondition to the IPOIPO and related transactions,transactions, Additional investments m 268 Belgacom transferred to thethe Belgian government certain EquityEquity in net income 640 1,1621,162 pension liabilitiesliabilities related to certaincertain employees, proceeds Dividends received (288)(288) (335) from the safesale of pension assets and cashcash Sufficientsufficient to fully Currency translation adjustments 867 962 fund the obligations. This transfer resulted in a one-time ' fund the obligations. This transfer Dispositions " (89) • (867) charge to our equityequity income from Belgacom which, including Other adjustments (70) (3,714)(3,714) our direct and indirect ownership, reducedreduced our fourth- End of year $$6,6,947947 $$5,5,887887 quarter 2003 diluted earnings per share by $0.03,$0.03, determined on a GAAP basis. The currency translationtranslation adjustment forfor 2003 primarily In thethe fourth quarter of 2003, also pursuant to the reflects thethe effecteffect of exchange rate fluctuations on our agreement, Belgacom repurchased approximately 6% of the and Telkom investmentsinvestments in TDC, Belgacom S.A.S.A. (Belgacom) and Telkom Belgacom shamsshares held byby ADSB. This fourth-quarterfourth-quarter repurchaserepurchase Sa_.SA. Limited (Telkom). Dispositions for 2003 reflect thethe decreased our economic ownership of Belgacom from 24.4%24.4% decrease in our ownership percentage of Belgacom. to 23.5%.23.5%.Since the share price remainsremains subject toto adjustmentadjustment The currencycurrency translationtranslation adjustment foforr 2002 primarily asas explained below, GAAP prohibits us from recording a gain reflectsreflects the effect of exchange raterate fluctuationsfluctuations on our (in 2003) onon thethe 2003 sale of Ourour shares back to Belgacom.Belgaco. investmentsinvestments in TDC, Belgacom and Telkom. Dispositions for Based on our ADSB ownership percentage, our portion of 2002 reflect the sale of shares of Bell Canada of $719 (see 2002 reflect the sale of shares of Bell Canada of $719 (see thethe proceeds, using thethe tentative share price, would be Note 2), Telmex L shares of $98, America MOvilMovil L shares of Note 2), Telmex L shares of $98, America shares of approximately $148 and we have estimated thatthat our portion $40 and Amdocs sharesshares of $10. Other adjustments forfor 2002 of the proceeds received would exceed our carryingcarrying value by from include adjustments of $2,887$2,887 and $696 resultingresulting from our approximately $59. As partpart of thethe October 2003 agreement, changechange from thethe equityequity method toto the cost method of Belgacom agreed toto make a second buyback offer in thethe accountingaccounting for investmentsinvestments inin Bell Canada andand Cegetel, event of an IPO.IPO. Should thethe IPO occur, the price perper share of respectively (see Note 2). Other adjustments for 2002 also both buybacks will be adjusted to the IPO price, which will included a dividend fromfrom TDC that was treatedtreated as a return resultresult in our recognition of a gain or lossloss associated with the TDC's of capital due to TDC's insufficientinsufficient undistributed earnings. fourth-quarter 2003 sale and the salesale associated with the Undistributed earningsearnings fromfrom equity affiliates were $2,496$2,496 IPO. IfIf no IPOIPO occurs before July 31, 2005, there will be no and $2,195$2,195 at December 31, 2003 and 2002. adjustment toto thethe proceeds fromfrom the firstfirst buyback. As of December 31, 2003, our investments inin equity As of December 31, 2003, our investments equity InIn 2002, we entered intointo two agreements with Bell Mexico's affiliates included an 8.0%8.0% interest inin Telmex, Mexico's Canada: (i)(1) to redeemredeem a portion of our ownership inin Bell in national telecommunicationstelecommunications company; a 7.6%7.6% interest in Canada, representingrepresenting approximately 4% of thethe company Mexico, America M6vil,MOvil, primarily a wireless provider inin Mexico, and (2) to give BCE the rightright to purchase our remaining with telecommunications investmentsinvestments in the U.S.U.S. andand interestinterest in Bell Canada. BCE exercisedexercised its rightright toto purchasepurchase Latin America; a 41.6% interest in TDQ the national Latin America; a 41.6% interest in TDC, the national our remainingremaining interestinterest inin Bell Canada during the fourth interest communications provider inin Denmark; a 16.9%16.9% interest quarter of 2002. See Note 2 for a more detailed discussion inin Belgacom, thethe national communications providerprovider inin on thisthis divestiture. telecommuni- Belgium; and an 18% interestinterest in Telkom, aa telecommuni- InIn 2002, we agreed toto sell to Vodafone our 15% equity holds cations company of South Africa. TDC also holds a 15.9%15.9% interest inin Cegetel, aa jointjoint ventureventul. e thatthat Ownsowns 80% of thethe interestinterest in Belgacom, bringingbringing our effective interestinterest toto 23.5%.23.5%. second-largest wireless provider inin France. The pending salesale TDC's Both our investmentinvestment and TDC's investment inin Belgacom removedremoved our significantsignificant influence and required us toto changechange V. are held throughthrough ADSB Telecommunications B.V.B. (ADSB), of our accounting forfor Cegetel to the cost method from the which we directly owned 35%. ADSB owned one share lessless which we directly owned 35%. one equity method. With thisthis change, the value of our investment thanthan 50% of Belgacom andisand is a consortiumconsortium of SBQSBC, TDC, isis reflected inin thethe "Other"Other Assets" line on our December 31, Singapore Telecommunications andand a group of Belgian 2002 Consolidated Balance Sheet.Sheet This transaction closedclosed in ADSB financialfinancial investors. Through our 35% ownership of ADSB thethe first quarter of 2003. (See(See Note 2) and our 41.6%41.6% ownership of TDC, we had a 24.4%24.4% economic ownership of Belgacom. PAGET47PAGE 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(coNTINUED) Dollarsinin millionsexceptper share amounts The following tabletable presents summarized financial NOTE 7. DEBT informationinformation of our significant internationalinternational investmentsinvestments Long-term debt of SBC and itsits subsidiaries, includingincluding interestinterest accounted for using the equity method, taking into account rates and maturities, isis summarizedsummarized as followsfollows at December 31: all adjustments necessary to conform toto GAAP(aAAP but excluding December 31 our purchase adjustments, including goodwill, at December 31 2003 2002 or for the year then ended: Notes and debenturesdebenturesi 1 2003 20022002 2001 0.00%0 00% - 5.98%5 98% 2003 - 20382203&2 $$5,5,987987 $$6,6,666666 IncomeIncome Statements 6.03%6.03% -7.85%—7.85% 2003 -.20483—204&8 10,89410,894 13,11813,118 Operating revenues $34,747$34,747 $30,414$30,414 $44,773$44,773 8.85%8.85% _-—9.50%9.50% 2005 -—2016 153 o166 Operating income 9,0679,067 8,1028,102 10,61710,617 17,03417,034 19,95019,950 Net incomeincome 4,6894,6&9 6,4936,493 5,9815,981 Unamortized discount- net of premium (159) (203) Balance Sheets Total notes and debentures 16,87516,875 19,74719,747 CurrentCurr ent assets $11,282$11,282 $$9,9,575575 Capitalized leasesleases 65 143 Noncurrent assets 40,89540,895 32,61332,613 Total long-term debt, including Current liabilitiesliabilities 10,10110,101 8,9028,902 currentcurrent maturities 16,94016,940 19,89019,890 Noncurrent liabilitiesliabilities 23,39323,393 19,79819,798 Current maturities of long-term debt (880)(8&0) (1,354)(1,354) Total long-termlong-term debt $16,060$16,060 $18,536$18,536 At December 31, 2003, we had goodwill of approximatelyapproximateiy $1,682$1,682 relatedrelated toto our international investmentsinvestments in equityequity tin 2003,thethe $90$90 falrfair .valuevalue of ourvariableraterate Interestraterate swapsswaps Isls reportedwith Itsits correspondingdebt.debt. affiliates. 2Includessincludes $1,000$1,000 of4.18%4.18% PuttableReset Securities5ecuritles (PURS)maturlngmaturing inin 2021with aa Based on thethe December 31, 2003 quoted market priceprice put option by holderinIn 2004 and$250of 5.95%5.95yo debentures maturingInln 2038 of TDC stock, the aggregate market value of our invest-invest- withaa putoptionopt!on by holderinIn 2005.2005. 3Includessindudes $125of 635%69516 debenturesmaturingInin 2026with a put option by holder ment inin TDC was approximately $3,269.$3,269. Based on thethe inln 2006. December 31, 2003 quoted market price of Telkom Stock,stock, At December 31, 2003, the aggregate principal amountsamounts of the aggregate market value of our investmentinvestment in Telkom At December 31, 2003, the aggregate long-term debt and weighted average interest rate scheduled was approximately $1,060.$1,060. The fair valuevalue of Ourour investment long-term debt and weighted average interest rate inin Telmex, based on thethe equivalent value of Telmex L for repayment forfor the years 2004 through 2008, excludingexcluding shares at December 31, 2003, was approximately $1,607.$1,607. the effect of interest rate swaps, were $880 (6.5%),(6.5%), $1,097$1,097 The fair value of our investmentinvestment in America M6vil, based (6.7%),(6.7%), $2,638$2,638 (5.9%),(5.9%), $1,912$1,912 (5.(5.2%)2%) andand $700 (6.3%)(6.3%) with on the equivalentequivalent valuevalue of America M6vilMovil L shares at $9,782$9,782 (6.6%)(6.6%) due thereafter.thereafter. As of December 31, 2003, December 31, 2003, was approximately $1,345.$1,345. Belgacom we were inin complian(:ecompliance with all covenants and conditions Substantially all our was not publicly traded at December 31, 2003, and thusthus of instrumehtsinstruments governinggoverning our debt.debt Substantially all of our does not have a readilyreadily available market value. Our outstanding long-term debt isis unsecured. weighted average share of operating revenues shownshown FinandngFinancing Activities above was 17% inin 2003, 2002 and 2001. During 2003, approximatelyapproximately $1,259$1,259 of long-termlong-term debt obligations, and $1,000$1,000 of one-year floating raterate securities matured. The long-termlong-term obligations carriedcarried interestinterest rates ranging from 5.8%5.8% toto 9.5%,9.5%, with an average yield of 6.1%.6.1%. The short-term notes paid quarterly interest based on thethe London Interbank Offer Rate (LIBOR):sFunds(LIBOR);,Funds fromfrom operations and dispositionsdispositions were usedused to pay off these notes. During 2003 we called, prior toto maturity, approximately $1,743$1,743 of debt Obligationsobligations with maturities ranging between February 2007 and March 2048, and interestinterest rates rangingranging between 6.5%6.5% and 7.9%.7.9%.Of thethe $1,743$1,743 calledcalled debt, approxi- mately $264, with an average yield of 7.2%7.2% was called inin July; $1,$1,462,462, with anan average yield of 7.4%7.4% was called inin June; and $17, with an average yield of 6.9%6.9% was calledcalled in March. These included the remainingremaining' subsidiary notes that were listed on public bond exchanges. Funds fromfrom operations and dispositions were usedused to pay off thesethese notes. PAGEI48PAGE 48 Debtmaturingwithinoneyear consistsofthefollowing three year period on a straight lineline basis. Our short-term atDecember 31: investments,investments, otherother short-termshort-term and long-termlong-term held-to-maturity investmentsinvestments andand customer deposits are recorded at amortized 2003 2002 2003 cost,cost, and the carrying amounts approximate fair values,values, The Commercial paper $$999999 $,1,148$.1,148 fair value of more thanthan 95% of our available-for-sale equity Current maturities of long-termlong-term debt 880 1,354'I,354 securities was determined based on quoted market pricesprices Other short-term debt m 1,0031,003 and the carryingcarrying amount of the remaining securities Total $1_79$'I 479 $3,505$3,505 approximatesapproximates fairfair value. InIn addition, we held otherother short- term held-to-maturity securities of $378 as comparedcompared toto The weighted average interest raterate on commercial paper $1 at December 31, 2002. At December 31, 2003 we held debt at December 31, 2003 and 2002 was 1.08% and t.43%. debt at December 31, 2003 and 2002 was 1.08% and 1A3%. other 10ng-termlong-term held-to-maturity securities of $84, which In October 2003, we renewed our 364-day creditcredit agreement mature within two years from thethe date of purchase, and totaling $4,250 with a syndicate of banks replacing our credit totaling $4,250 with a syndicate of banks replacing our $0 at December 31, 2002.2002. agreement of $4,250$4,250 thatthat expired on October 21, 2003. Preferred Stock IssuancesIssuances by SubsidiadesSubsidiaries -—InIn thethe fourth The expiration date of the current credit agreement is quarter of 2002, we restructured our holdings inin certain October 19, 2004. Advances underunder thisthis agreement may be investments, includingincluding Sterling. As part of thisthis restructuring, used for generalgeneral corporate purposes, including support of a newly createdcreated subsidiary issued approximately $43 of commercial paper borrowings and other sh0rt-termshort-term preferred stock.stock. The preferred stockstock will accumulate dividendsdividends borrowings. Under thethe termsterms of thethe agreement_agreement, repayment at an annual rate of 5.79%5.79% and Rancan be converted,converted, at the y'ears of advancesadvances up toto $1,000$1,000 may be extended two years from option of the holder,hoider, to common stockstock (but not aa controllingcontrolling the termination date of thethe agreementagreement. Repayment of interest) of the subsidiarysubsidiary' atat any time.time. (See Note 2) advances up toto $3,250$3,250 may be extended to one year from InIn June 19971997 and December 1999, an SBC subsidiary issued thethe termination date of the agreement. There isis no $250 and $100 of preferred stock in private placements. The material adverse change provision governing the drawdown holders of thethe preferred stock may'may require thethe subsidiary of advances under thisthis credit agreement. We had no to redeem thethe shares after May 20;20, 2004. Holders receive credit as borrowings outstandingoutstanding under committed lines of credit as quarterly dividends based on a rollingrolling three-monththree-month LIBOR. of December 31, 2003 or 2002. The dividend rate forfor the December 31, 2003, payment was 1.91%. NoTENOTE 8. FINANCIAL INSTRUMENTS 1.91% The preferred stocstockk of subsidiaries discussed above isis The carrying amounts and estimatedestimated fairfair values of our long- includedincluded inin "Other noncurrent liabilities"liabilities" on the termterm debt, including current maturities and other financial Consolidated Balance Sheets. instruments, are summarizedsummarized as follows atat December 31: Derivatives -We—We use interestinterest raterate swaps to manage interest rate risk.risk. Each swap matches exact maturity dates 2003 " 2002 of the underlyingunderlying debt to which they are related, allowing Carrying Fair Carrying Fair Carrying Carrying forfor perfectly effective hedges. The notional amounts,amounts, Amount Value Amount Value carrying amounts and estimated fair values of ourour derivative Notes and debentures $16,$16,875875 $18,126$18,126 $19,747$19,747 $20,992$20,992 financial instrumentsinstruments are summarizedsummarized asas follows at Commercial paper 999 999 1,1,148148 1,1481,148 December 31: Cingular notenote receivablereceivable 5,8855,885 5,8855,885 5,5,885&85 5,8855,885 ' Notional Carrying Fair Available-for-sale equity Amount Amount Value securities 844 844 1,3471,347 1,3471,347 20032003 EchoStar note receivablereceivable 441 441 _ m Interestinterest raterate swaps $3,500500 $90 $90 Preferred stock of swaps $3, subsidiariessubsidiaries 393 393 . 393393 393 2002 InterestInterest raterate Swapsswaps . $1,000$1,000 $79 $79 The fair valuesvalues of our notes andand debentures were estimated based onon quoted market prices, where available, or onon inIn August 20032003 we entered intointo $1,$1,000000 inin variable interest thethe net presentpresent value method of expected future cash - raterate swap contracts on our 5.875%5.875% fixedfixed rate debt which flows using current interest rates. The carrying amount of matures inin August 2012. In the fourthfourth quarter of 2003 we commercial paper clebtdebt approximatesapproximates fairfair value. entered into two variable rate swapswap contracts onon our fixedfixed Our notes receivablereceivable from Cingular are recordedrecorded at faceface rate debt. We entered into $1,000$1,000 in variable rate swapswap valu.e,value, and thethe'carryingcarrying amountsamounts approximateapproximate fair values. contracts on our 5.875%5.875% fixedfixed rate debt which matures inin The fair value of our EchoStar note receivable was based on February 2012 and $500 inin variable raterate swap contracts on ;thethe present value of cash and interest payments, which isis our 6.25%6.25% fixed rate debt which matures in March 2011. At accreted on the note up toto the face value of $500 over aa December 31, 2003 we had interestinterest raterate swaps with a notional value of $3,500$3,500 and a fair value of approximately $90. PAGEI49PAGE 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Dollarsin millionsexcept per shareamountsamounts NOTE 9. INCOMEINCOME TAXES A reconciliation of incomeincome taxtax expense andand the amount computed by applyingapplying thethe statutorystatutory federal income taxtax rate Significant components of our deferred taxtax liabilitiesliabilities and Significant components (35%) to income before income taxes, extraordinary itemsitems assets are as followsfollows at December 31: assets are as at 31: and cumulative effect of accounting changechange isis as follows:follows: 2003 2002 2003 2002 2003 2002 2001 Depreciation and amortization $13,438$13,438 $ 9,231231 $9, Taxes computed atat federalfederal Equity in foreign affiliates 945 643 Equity in foreign affiliates statutorystatutor'y rate $3,115$3,115 $3,660$3,660 $3,832$3,832 expenses 493 Deferred directory expenses (93)(93) 493 IncreasesIncreases (decreases) in Other 4.,416 4,6114,611 4/16 incomeincome taxestaxes resultingresulting from:from: Defe.rredDeferred tax liabilities 18,70618,706 14,97814,978 State and locallocal income taxestaxes-- Employee benefits 3,2603,260 3,0783,078 net of federalfederal Currency translation adjustments 228 519 income tax benefit 250 269 399 Allowance forfor uncollectibles 282 456 Restructuring/sale of Unamortized investment tax credits 86 93 preferred interestinterest -- (280) Other 954 1,2851,285 Effects of internationalinternational Deferred taxtax assets _ 4,8104,810 5,4315,431 operations (230) (354)(354) . (22)(22) Goodwill amortization -- --o 86 Deferred tax assets valuation allowance 144 148 Goodwill amortization Tax settlements (41) (171) Net deferred tax liabilitiesliabilities $14,040$14,040 $ 9,695695 $9, Contributions of The decreasedecrease in the valuation allowanceallowance is thethe resultresult of an appreciatedappreciated investments m -- (208) Other -—net (164) (140) (145) evaluation of thethe uncertainty associated with thethe realization Other net (164) (140) (145) of certain deferreddeferred tax assets.assets. The valuation allowance isis Total $2,930$2,930 $2,984$2,984 $3,942$3,942 maintained inin deferred tax assetsassets for certain {musedunused federalfederal Effects of internationalinternational operations includeinclude itemsitems such as andand state loss carryforwards. foreign tax credits, salessales of foreignforeign investmentsinvestments andand the effects The componentscomponents of income tax expense are asas follows: foreign tax of of undistributed earningsearnings fromfrom internationalinternational operations. 2003 2002 20012001 Deferred taxes are not provided on the undistributed earnings Federal:Federal." of subsidiariessubsidiaries operating outside the United States that have Current $ (466) $$377377 $1,793$1,793 been or are intendedintended toto be permanently reinvested,reinvested. ' Deferred -—net 3,3,043043 2,2512,251 1,5871,587 NOTE_OTE 10. PENSION AND POSTRETIREMENT BENEFITS Amortization of investmentinvestment tax credits (24)(24) (30)(30) (44)(44) Pensions -—Substantially all of our employees are coveredcovered by 2,5532,553 2,5982,598 3;3363,336 one of various noncontributory pension and death benefit State andand local: plans. At December 31, 2003, management employees Current (38) 116 206 participated in either cash balance or defined lump sum ' " Deferred -—net 401 219 385 pension plans. Additionally, allall management employeesemployees Foreign 14 51 15 participatedparticipated in a traditional pension benefit formula, stated as a percentage of thethe employees'employees' adjusted careercareer income. 377 386 606 percentage The pension benefit formulaformula for most nonmanagement Total $2,930$2,930 $2,984$2,984 $3,$3,942942 employeesemployees isis based on a flat dollar amount per yearyear according to job classification. Most employees can elect toto receivereceive InIn thethe fourth quarter of 2002, we internally restructuredrestructured our to job employees their pension benefits inin either a lump sum payment or 0wnershipownership inin several investments_investments, includingincluding Sterling (see(see their pension benefits annuity. We use a December 31 measurement date forfor Note 2). The restructuring includedincluded the issuanceissuance of externalexternal calculating the values reportedreported forfor plan assets and benefitbenefit debt (see(see Note 7), andand the issuance andand sale of preferred obligations for our plans. stock inin subsidiaries (see Note 8). As we remainremain thethe primary for ourOur objective in fundingfunding the plans,plans, inin combination with beneficiary after the restructuring,restructuring, the preferred securities the standards of the Employee Retirement Income Security are classified as "Other noncurrentnoncurrent liabilities" on our the standards of the Employee ACt of,i974, as amended (ERISA), isis to accumuiateaccumulate assets Consolidated Balance Sheet, and no gain or lossloss Waswas recorded Act of 1974, sufficient to meet thethe plans' obligations to provide benefits on thethe transaction.transaction. As a result of thethe sale of preferredpreferred stock, to employees upon theirtheir retirement.retirement. Required funding is we recognizedrecognized inin net incomeincome $280 of tax benefits on certain to employees upon ' based on the present value of future benefits,benefits, which is financialfinancial expenses and losseslosses that were notnot previously the present similarsimilar to the projected benefit obligation discussed below. eligibleforeligible for deferred taxtax recognition. PAGETPAGE 50 Anyplan contributions,asdeterminedbyERISA regulations, Amounts recognized in our Consolidated Balance Sheets at are made to a pension trust for the benefit of plan partidpants.participants. December 31 are listedlisted below andand are discussed in the InIn July 2003, we voluntarily contributedcontributed $500 toto the pension fourthfourth paragraph followingfollowing these tables:tables: trust for thethe benefit of plan participants. No significant 2003 20022002 cash contributions to the trust will be required under ERISA Prepaid pension costcost'1 $8855$ 8_455 $$8,8,052052 regulationsregulations during 2004; however,,however, we may make_contdbutionsmake. contributions Additional minimum pension liabilityliability22 (2,720)(2,720) (3,455)(3,455) inin i_xcessexcess of minimum fundingfunding requirements. We are consid- IntangibleIntangible assetasset'I 894 1,0781,078 eringering a voluntary contribution of assets, which may includeinclude Accumulated other comprehensivecomprehensive incomeincome 1,1321,132 1,4731,473 cash and/orandlor other investmentsinvestments of $1,000$1,000 or more. Accumulated Deferred tax asset 694 904904 For defined benefit pension plans, thethe benefit obligation Deferred tax is the "projected benefit obligation",obligation", the actuarial present Net amount recognizedrecognized, $$8,8,455455 $$8,8,052052 value, as of the measurement date, of all benefits attributed value, as of the measurement date, of llndudediinduded inin "Other Assets'.Assets". byby the pension benefit formula to employee service rendered 21ndudedtlnduded inin "Postemp!oyment"Postemployment benefitbenefit obligation'.obligation . to thatthat date. The following tabletable presents this reconciliation The followingfollowing table presentspresents thethe components of net pensionpension and shows thethe changechange inin the projected benefit obligation The cost (benefit) recognized in our Consolidated Statements for the years endedended December 31: of Income (gains areare denoted with parentheses and losses 20032003 2002 are not): Benefit obligation at beginning of year $26,148$26,148 $25,060$25,060 2003 2002 2001 Service cost-.benefitscost —,benefits earned Service cost -—benefits earned during the periodperiod 732 645 duringduring the periodperiod $$732732 $ 645 $$ 550 InterestInterest cost on projected benefit obligation 1,6661,666 1,7801,780 Interest cost onon projectedprojected Amendments 1 (33) benefit obligation 1,6661,666 1,7801,780 1,8471,847 Actuarial loss 1,9311,931 2,5342,534 Expected return on plan assets (2,456)(2,456) (3,429)(3,429) (3,515)(3,515) Special termination benefitsbenefits 71 456 Amortization of prior service cost Benefits paid (2,932)(2,932) (4,294)(4,294) and transitiontransition asset 94 100100,_ 81 Benefit obligationobligation at endend of year $27,617$27,617 $26,148$26, 148 Recognized actuarialactuarial gain 53 (233)(233) (413) Net pension cost (benefit)(benefit) $$8989 $(1,137)$(1,137) $(1,450)$(1,450) The following tabletable presents the change iinn thethe value of pension plan assetsassets forfor the years ended December 31 and InIn determining thethe projected benefit obligation and thethe net thethe pension plans' funded status at December 31: pensionpension cost (benefit), we used the following significantsignificant weighted-average assumptions: 2003 2002 Fair value of plan assets at 2003 20022002 2001 beginning of year $24,999$24,999 $32,715$32,715 Discount raterate forfor determiningdetermining Actual return on plan assets 5,5845,584 (3,442)(3,442) projected benefit obligation Employer contribution 500 -- at December 3131 6.25%6 25'/o 6.75%6.75% 7.50%7.50% Transfer from CingularCingular' 1 m 6 Discount rate inin effect forfor Benefits paidpaid (2,929)(2,929) (4,280)(4,280) determining netnet pension Fair valuevalue of plan assetsassets atat endend of yearyear22 $28,154$28,154 $24,999$24,999 cost (benefit) 6.75%6,75% 7.50%7.50% 7.75%7.75% Long-term rate of return on Funded (unfunded)(unfunded) status plan assets 8.50%8.50% 9.50%9.50% 9.50%9.50% (fair(fair valuevalue of plan assets Composite raterate of lessless benefit obligation)3 $$537537 $(1,149)$ (1,149) compensation increaseincrease 4.25%4.25% 4.25%4.25 /e 4.25%4.25% unrecognizedUnrecognized prior service costcost 1,3971,397 1,6421,642 Unrecognized netnet (gain)(gain) loss 6,5886,588 7,7777„777 Our assumedassumed discountdiscount rate of 6.25%6.25% at December 31, 2003, Unamortized transition asset (67) (218) reflectsreflects the hypothetical rate at which thethe projected benefit Net amount recognizedrecognized $$8,8,455455 $$8,8,052052 obligation couldcould be effectively settled,settled, or paid out toto participants,participants, on thatthat date. We determined otirour discount raterate of pension assets and liabilities based on final IAssodated'Assodated with thethe 2002 true-uptruewp of pension assets and liabilities based on final return valuationsvaluations ofof the 2002001! employeeemployee transfer to Cingular.Gngular. basedbased on a rangerange of factors includingincluding the ratesrates of return &Plan;_Plan assets includeInclude SBC common stockstock of $6 atat December 31, 2003, andand $8 at on high-quality, fixed-incomefixed-income corporate bonds available at December 31, 2002. thethe measurement date. The reductionreduction in thethe discount rate 3FundedaPunded (unfunded)(unfunded) statusstatus isIs not IndicativeIndicative ofof ourour abilityability toto payp'ay ongoing pensionpension benefits. Required pensionpension funding is determined "inin accordance with ERISAERISA at December 31, 2003 and 20.02,2002, by 0.50%0.50% and by 0.75%,0.75%, regulations.regulations. respectively, resulted inin an increaseincrease inin ourour pension plan benefit obligation of approximately $1,081$1,081 and $1,480$1,480 at December 31, 2003 and 2002. Should actual experienceexperience differ fromfrom actuarialactuarial assumptions, thethe projected benefit obligation and net pension cost (benefit)(benefit) would be affected. PAGE_51PAGE 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(CONTINUED) Dollarsinmillionsexceptexcept perper shareamounts Our expected long-term rate of returnreturn on plan assets of Shown below is aa summary of our obligations andand thethe 8.5%8.5% for 2003, reflectsreflects the average raterate of earnings fairfair valuevalue of plan assets forfor the years ended December 31, 2003 and 2002. expectedexpected on thethe funds invested,invested, or toto be invested,invested, to 2003 and 2002. provide for the benefits included inin the projected benefit 2003 2002 obligations. We consider many factors that include,include, but are Projected benefit obligation $27,617$27,617 $26,148$26,148 not limite_dlimited to historic returnsreturns on planplan assets, current market Accumulated benefit obligation 25,24925,249 24,24,223223 informationinformation on long-termlong-term returns (e.g.,(e.g., long-term bondbond Fair valuvaluee of plan assel;sassets 28,15428,154 24,99924,999 rates)rates) andand current andand target asset allocations between asset categories, The target asset allocation is determineddetermined based categories. The target asset During 2003, 2002 andand 2001, as part of our workforce On consultations with external investmentinvestment advisors.advisors. on consultations with external reduction programs, an enhanced retirementretirement program was As noted above, the projected benefit obligation isis the As noted above, the projected benefit obligation offered toto eligible Pacific Telesis Group (PTG) nonmanagement actuarial present value of all benefits attributed by the actuarial present value of all benefits by employees.employees. This program offered eligibleeligible employees who rendered pension benefCcbenefit formulaformula to previously rendered employeeemployee voluntarily decided to terminate employment an enhanced service. The calculation of the obligation generally consists service. The calculation of pension benefit and increased eligibility forfor postretirement payments in of estimatingestimating thethe amountamount of retirement income payments in medical, dental and life insurance benefits. Employees thatthat retires terminates service future years after thethe employee retires or terminates service accepted this offer and terminatedterminated employment totaled and calculating the present value at thethe measurement date. and calculating the present at approximatelyapproximately 339 before thethe end of December 31, 2003. depends on a number of The amount of benefit to be paid depends on a number of Approximately 3,6003,600 and 1,4001,400 employees terminated future events incorporated into the pension benefit formula, future events incorporated into the pension before the end of December 31, 2002 andand 2001, respectively.respectively. including estimates of average lifelife of employees/survivors including estimates of average InIn addition toto thethe net pension cost (benefit) reportedreported inin the is measured based and averageaverage yearsyears of service rendered. It is measured based tablestables above,above, enhanced pension benefits related to this interest rates and future on assumptions concerning future interest rates and future program were recognizedrecognized as anexpensean expense of $42 inin 2003, levels. employee compensationcompensation levels. $456 inin 2002,2002, and $164 in 2001. In contrast to the projected benefit obligation,obligation, the accu- In contrast to the projected benefit In September 2003, thethe InternalInternal Revenue Service (IRS)(IRS) actuarial present mulated benefit obligation represents the actuarial present increasedincreased thethe interest rate applicable toto fourth-quarter value of benefits based on employee serviceservice and compensation value of benefits based employee pension plan lumplump sum calculations from 4.53%4.53% to 5.31%.531%. as of a certain date and does not includeinclude an assumption as of a certain date and does not An increaseincrease inin the interest raterate had a negative impact on levels. On a plan-by-plan basis, about future compensation levels. On a plan-by-plan basis, lump sum pension calculationscalculations forfor somesome of our employees. if the accumulated benefit obligation exceeds plan assets if the accumulated benefit obligation plan We chose to extend thethe 4.53%4.53% pension plan lumplump sum and at least this amount has not been accrued, an additionaladditional and at least this amount not benefit payout rate through October 31, 2003. The offset an minimum liabilityliability must be recognized,recognized, partially offset byby an extension of thethe lumplump sum benefit payoutpayout rate was service cost, with the intangible asset for unrecognized prior service cost, with the accounted for as a specialspecial terminationtermination benefit and remainder a direct charge to equity net of deferred tax remainder a direct charge to equity of increased our fourth-quarter pension benefit expense benefits. These itemsitems are included in thethe third table above benefits. These are approximately $28 inin 2003. recognized in our Consolidated thatthat presents thethe amounts recognized in our Consolidated InIn October 2000, we implementedimplemented a voluntaryvoluntary enhanced Balance Sheets at December 31. At December 31, 2003 and Balance Sheets at December 31. 31, pensionpension and retirement program (EPR) toto reduce the 2002, for three of our plans, the accumulated benefit 2002, for three of our plans, the number of management employees. Approximately 7,7,000000 obligation (aggregate balance of $13,724724 forfor 2003 and obligation (aggregate balance of $13, of thethe employees who accepted thisthis offer terminated $13,289 for 2002) exceeded plan assets (aggregate balance $13,289 for 2002) exceeded plan (aggregate employment before December 31, 2000; however, under of $13,016 for 2003 and $11,525 for 2002). Because of our of $13,016 for 2003 and $11,525 for thethe program, approximately 2,4002,400 employees were retained increased asset returnsreturns inin 2003, during thethe fourth quarter increased for upup toto one year.year. We recognized $940 inin settlement gainsgains of 2003 we were able to reduce our minimum liabilityliability by of 2003 we were able to reduce by inin 2001 primarily associatedassociated with thethe EPR program,program. $735, which resulted in a direct increaseincrease to equity of $341 $735, which resulted in a direct to equity Also, in additionaddition toto thethe net pension cost (benefit)(benefit) (net of deferred taxes of $210). In 2002, Ourour decreased (net of deferred taxes of $210). reportedreported in thethe tabletable disclosingdisdosing thethe components of our discount rate and lowerlower asset returns,returns, requiredrequired us to recordrecord discount rate and asset net pension cost (benef_)(benefit) and the aforementioned EPR direct an additional minimum liabilityliability of $3,455$3,455 andaand a direct settlement/curtailmentsettlement/curtailment gains, we recognized $29 in net deferred taxes of $904) charge to equity of $1,473$1,473 (net of deferred taxes of $904) settlementsettlement gains inin 2002 and $423 in 2001. Net settlementsettlement in the fourth quarter of 2002. This reclass,reclass, while adjusting in the fourth quarter of gains inin 2002 include settlement losses during thethe latter comprehensive income, will not affect our equity andand comprehensive income, will not affect our part of thethe year, reflectingreflecting thethe continued investmentinvestment losses future results of operations or cash flows. future results of operations sustained by thethe plan. We did not recognizerecognize any settlement gains or losses inin 2003. PAGE I 5252 Plan assets consist primarily of private andand publicpublic equity, Postretirement Benefits -—We provide certain medical, government and corporate bonds,bonds, indexindex funds andand real dentaldental and lifelife insurance benefits to substantiallysubstantially all retired estate. We maintain assetasset allocationsallocations to meet ERISA require-require- employeesemployees under various plans and accrue actuariallyactuarially ments. Our principal investment objectives are: toto ensure thethe determined postretirernentpostretirement benefit costs as active employees availability of funds to paypay pension benefits as they become earn these benefits. We maintain Voluntary Employee " due under a broad range of future economiceconomic scenarios;scenarios, toto Beneficiary Association (VEBA) trusts to partiallypartialiy fundfund thesethese maximize long-term investmentinvestment return with an acceptableacceptable postretirement benefits; however, there areare no ERISA or level of riskrisk based on our pension obligations; and toto be other regulationsregulations requiring thesethese postretirement benefitbenefit broadly diversified across and within thethe capitalcapital markets to plans toto be fundedfunded annually. insulate asset values against adverse experienceexperience inin anyany one For postretirement benefitbenefit plans, thethe benefit obligation market. Each asset class has a broadly diversified style.style. is thethe "accumulated postretirement benefit obligation", thethe Substantial biases toward any particular investing style or actuarial present value as of aa date of all future benefits type of security are avoided byby managing the aggregation attributed under the terms of the postretirement benefit of all accounts with portfolio benchmarks.benrhmarks. Asset and benefit plan to employee service rendered to thatthat datdate.e. obligation forecastingforecasting studiesstudies are conducted periodically,periodically, In January 2004, thethe FASB issuedissued preliminary guidance generally every two toto threethree years, or when significant (referred(referred toto as FSP FAS 106-1) on how employers should changesrhanges have occurred in benefits,benefits, participant demographics, account forfor provisions of thethe recently enacted Medicare or fundedfunded status. Decisions regarding investment policypolicy are Prescription Drug, Improvement and Modernization Act of made with an understanding of the effect of asset allocation 2003 (Medicare Act). The Medicare ACtAct allows employers Onon fundedfunded status, futurefuture contributions and pension expense. who sponsor a postretirement health carecare plan that providesprovides Our current assetasset allocation policy is based on a forecastingforecasting a prescription drug benefit toto receive a subsidy for thethe costcost studystudy conducted in 2002. of providing that drug benefit. In order for employers, suchsuch Our pensionpension plan weighted-average asset target andand as us, toto receive the subsidy paymentpayment Underunder the Medicare actual allocations, by asset categorycategory are as follows:follows: Act, thethe value of our offered prescription drug plan must be at least equal to the value of the standard prescription drug Percentage of at least equal to the Plan Assets at coverage provided under MedicareMedicar'e Part D. Due toto our lower Target Allocation December 31, deductibles andand better coverage of drugdrug costs, we believe 2004 2003 2002 2004 2003 that our plan is of greater valuevalue thanthan Medicare Part D. Equity securities FSP FASFAS 106-1106-1 permits usus to recognize immediately this Domestic 40%40 /a - 50%50 /a 49%49 /0 45%45'/o subsidy on our financial statements. Accordingly, our International 12%12o%%d - 18%18oio 17 15 accumulatedaccumulated postretirement benefit obligation decreased by Debt securities 25%25/o - 35%35/o 27 30 $1,629,$1,629, which, because the Medicare Act was enacted inin Real estateestate 3%3'/o - 6%6'/o 3 3 2003, was calculated using our year end 2002 assumed Other 4%4/o - 7%7/o 4 7 discount rate of 6.75%.6.75/o. Had, at thethe time of adoption, we Total 100%100/o 100%100'/o used our year end 2003 assumed discount rate of 6.25%,6.25/o, we would have decreased our accumulated postretirement Securities held include SBC common stock of approximately benefit obligation by $1,888.$1,888. We accounted forfor the $6 and $8 and SBC bonds of approximately $2 and $5 at Medicare Act as aa plan amendmentamendment and recorded the December 31, 2003 and 2002. Holdings inin SBC securities adjustment inin the amortization of our liability,liability, fromfrom thethe representedrepresented approximatelyapproximately 0.03%0.03/o and 0.05%0.05/o of total plan date of enactment of the Medicare Act, December 2003. assets at December 31, 2003 and 2002. This decreased our 2003 postemployment benefit expense At December 31, 2003, benefit payments expected toto be approximately $22 and we expect an annual decrease in paid for thethe years 2004 through 20082008 were $2,463,$2,463, $2,224,$2,224, prescription drug expense of $250 to $350 in future years. $2,290,$2,290, $2,369$2,369 and $2,467$2,467 with $13,512$13,512 toto be paidpaid inin thethe Our accounting assumes that our plan will continue to fivefive years thereafter.thereafter. These expected benefit payments are provide drug benefits equivalent to Medicare Part D, thatthat estimated using the same assumptions used inin determining our plan will continue to be the primaryprimary plan forfor our retirees our benefit obligation at December 31, 2003. Because and thatthat we will receivereceive thethe subsidy. We dodo not expect that benefit payments will depend on future employment and the Medicare Act will have aa significant effect onon Ourour retirees' compensation levels,levels, average years employedemployed atat SBC and participationparticipation inin our postretirement benefit plan. Specific average life spans,spans, among other factors,factors, changes inin anyany of authoritativauthoritative e guidance from the FASB on thethe accounting forfor these factors couldcould significantlysignificantly affect thesethese expected thisthis federal subsidysubsidy is pending and that guidance, when amounts.amounts. issued, could require usus toto change our estimates. PAGPAGEE"[ 53 NOTES TO CONSOLIDATE'DCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(CONTINUED) DollarsDollars inin millions exceptexcept per share amountsamounts The followingfollowing table presents a reconciliationreconciliation of the The followingfollowing table presents the components of postretirement beginning and ending balances of thethe benefit obligation benefit costcost recognized in our Consolidated Statements of andand shows the change in thethe accumulatedaccumulated postretirement Income (gains areare denoted with brackets and losseslosses are not): benefit obligation for thethe years ended December 31: "'" 2003 2002 2001 2003 20022002 Service cost -—benefits earned Benefit obligation at beginning of year $24,564$24,564 $20,140$20,140 Benefit obligation at beginning of year during thethe period $ 378 $ 293 $ 256 Service cost -—benefits earned Service cost benefits earned InterestInterest costcost on accumulated 378378 293 duringduring thethe periodperiod postretirement benefit obligation 1,6021,602 1,4301 430 1,3161 316 Interest cost on accumulated Expected returnreturn on assets (525) (689)(689) (665)(665) 1,602602 1,430430 postretirement benefit obligation 1, 1, Amortization of prior service (1,629) -- Medicare Act initial recognition (1,629) costcost (benefit) (122) (28)(28) 94 Amendments 110) Amendments (53) (1,110)(1, Recognized actuarial (gain)(gain) lossloss 413 49 13 Actuarial loss 3,5523,552 4,9324,932 Postretirement benefit cost'cost1 $1,$1,746746 $1,055$1,055 $1,014$1,014 Special termination benefits 2 30 Benefits paid (1,185)(1,185) (1,1.51)(1,151) 1Dudng'During 2003, the Medicare Act reduced postretirementpostretirement benefit cnstcost by $22. This effect isIs IncludedInduded in several line Itemsitems above.above. Benefit obligation at endend of year $27,231$27,231 $24,564$24,564 The fair value of plan assets allocated to thethe payment of lifelife retirees were notified of InIn early 2004,2004, nonmanagement retirees were notified of insuranceinsurance benefits was $535 and $516 at December 31, 2003 nedical coverage changes that will become effective onon medical coverage changes that and 2002. At December 31, 2003 and 2002, thethe accrued life January 1, 2005. These changes include adjustmentsadjustments to January 1, 2005. These changes insuranceinsurance benefits included inin the accrued postretirement deductibles for prescription drugs and a choice co-pays and deductibles for prescription drugs and a choice benefitbenefit obligation were $1,059$1,059 and $943. of medical plan coverage between thethe existing plans, includingincluding of plan InIn addition toto thethe postretirement benefit cost reportedreported monthly contribution provisionsprovisions or a plan withhigherwith, higher co-pays monthly in thethe tabletable above, enhanced benefitsbenefits related to thethe PTG and deductibles but no requiredrequired monthly contribution fromfrom and but nonmanagement early retirement program were_recognizedwere. recognized the retireeretiree during 2005. We expect thisthis change to reduce ~ as anan expense of $2, $30 and $9 inin 2003, 2002 and 2001.2001 the benefit obligation inin the range of $2,000000 to $3,500500 the benefit obligation the range $2, to $3, The medical cost trendtrend rate in 2004 is 9.0%9.0% forfor retirees 64 in 2004. in 2004. and under andand 10.0%10.0% forfor retireesretirees 65 and over, trendingtrending toto The following table sets forth the changechange inin the valuevalue The an expectedexpected increase of 5.0%5.0% inin 2009 for all retirees, prior toto of plan assets for the years ended December 31, the plans' of plan adjustment for cost-sharing provisions of the medical and funded status at December 31 and thethe accrued postretirement funded status at dental plans for certaincertain retired employees. The assumed benefit obligation liability recognized in our Consolidated benefit obligation liability dental cost trend raterate in 2004 is 5.0%.5.0%.A one percentage- Balance Sheets atat December 31: point change inin the assumed combined medical and dental 2003 2002 costcost trendtrend rate would have the following effects: Fair value of plan assets at One Percentage- One Percentage- beginning of year $$4,4,917917 $$6,6,275275 Point Increase Point Decrease Actual return onon plan assets 1,1671,167 (802) IncreaseIncrease (decrease)(decrease) inin total Employer contricontribution'bution 1 1,3121.312 3 of service and interest Benefits paid (429) (559) cost components $$301301 $ (239) Fair value of.planof,plan assets at end of yearyear22 $$6,6,967967 $$4,4,917917 IncreaseIncrease (decrease) in accumulatedaccumulated postretirement Unfunded statusstatus (fair(fair Valuevalue of plan benefit obligation 3,3463,346 (2,731)(2,731) assetsassets less benefit obligation)obligation)33 $(20,263)$(20,263) $(19,647)$(19,647) benefit service cost (benefit) 664) (1,109) Unrecognized prior service cost (benefit) (2,664)(2, (!,109) We used the same significantsignificant assumptionsassumptions forfor thethe discount Unrecognized net loss 12,78812,788 10,33510,335 Unrecognized rate, long-term raterate of returnreturn on plan assetsassets and composite Accrued postretirement benefit obligation $(10,139)$(10,139)' $(10,421)$(10,421) rate of compensationcompensation increase usedused inin calculating thethe accumulated postretirement benefit obligation and related 12003'2003 Includesinrludes reimbursementsreimbursements from a VEBA trusttrust toto us ofof $167 forfor qualifiedqualified daims paid byby us. At t_ethe timetime of reimbursementreimbursement we made a contributioncontribution of $167 toto aa postretirement benefit costs that we used inin developing thethe different VEBA. pension information. The reduction inin the discount rate at 2Plan SBC common stock of $5 at December 31, 2003 and 2002. • 2Plan assets includeinclude SBC common stock of $5 at December 31, 2003 and 2002. December 31, 2003 andand 2002 resultedresulted inin an increase inin our 3(Unfundecl)s(Unfundec0 funded statusstatus isis not indicative of our abilityability to pay ongoingongoing postretlrement benefits. As notednoted above, while many companies dodo not_not, we postretirement benefit obligation of approximately $1,800$1,800 maintain truststrusts to partially fundfund thesethese postretirement benef'ds;benefits; however,however, there and $2,062,$2,062, respectively. Should actual experience differ fromfrom al'eare nono ERISA or other regulationsregulations requiringrequiring thesethese postretirement benefit plansplans toto be fundedfunded annually.annually. thethe actuarial assumptions, thethe accumulated postretirement benefit obligation and postretirement benefit cost would be affected inin future years. PAGEIPAGE $454 For thethe majority of our labor contracts thatthat contain an At December 31, 2003, benefit payments expected toto be annual dollar value cap for thethe purpose of determining paid_aid forfor the years 2004 throughthrough 2008 were $I,341,$1,341, $1,443,$1,443, contributions required from nonmanagement retirees, we $1,475,$1,475, $1,567$1,567 and $1,651$1,651 with $9,235$9,235 toto be paid inin the five have waived thethe cap duringduring the relevantrelevant contract periodsperiods yearsyears thereafter.thereafter. These expected benefit payments are esti- and thus not collected contributions fromfrom thosethose retirees. mated using thethe same assumptions used in determining our Therefore, inin accordance with thethe substantive planplan provisions benefit obligation at December 331,I, 2003. Because benefit required inin accounting for postretirement benefits under payments will dependdepend on future employment and compen-compen- GAAP, through 2003, we did not accountaccount for the_capthe' cap inin thethe sation levels,levels, averageaverage years employed atat SBC and average valuevalue of our accumulated postretirement benefit obligation life spans,spans, among other factors,factor's, changes inin any of these (i.e.,(i.e., we assumed thethe cap would be waived for all future factors could significantly affect these expected amounts. contract periods),periods). if we had accounted forfor the capcap as written Combined Net Pension and Postretirement Cost inin the contracts, our postretirement benefit cost would have (Benefit) -—The followingfollowing table combines net pension beenbeen reducedreduced by $884, $606 andand $476$476 in 2003, 2002 and - cost (benefit) with postretirement benefit cost (gains areare 2001. As noted above, thethe lettersletters sentsent toto nonmanagement denoted with parentheses and losseslosses are not): retirees informed themthem of changes inin medical coverage 2003 2002 2001 beginning inin 2005. We anticipate the changes will reducereduce Net pension cost (benefit) $ 89 $(I,137)$(1,137) $(I,450)$(1,450) postretirement benefit cost inin the rangerange of $300 toto $600 $89 Postretirement benefit cost 1,7461,746 1,0551,055 1,0141,014 during 2004. Plan assets consistconsist primarilyprimarily of private and public equity, Combined net pension andand (436) government and corporate bonds and indexindex funds. Our " postretirement cost (benefit)(benefit) $1,835$1,835 $ (82) $$ (436) principal investmentinvestment objectivesobjectives are: to ensure the availability Our combined net pensionpension andarid postretirement benefit of fundsfunds to pay postretirement benefits as theythey becomebecome decreased in 2003 primarily due toto net investment losseslosses andand due under a broad range of future economic scenarios; to pension settlement gains recognized in 2002 and previousprevious maximize long-termlong-term investmentinvestment return with an acceptable years, which reducedreduced the amount of unrealized gains levellevel of risk; and to be broadly diversified across and within recognized inin 2003. (Under(Under GAAP, if lump sum benefits paid thethe capitalcapital markets toto insulate asset valuesvalues against adverse from a plan toto employees upon terminationtermination or retirement experience in any one market. exceed required thresholds, we recognizerecognize a portion of Our postretirement benefit plan weighted-average previously unrecognizedunrecognized pension gains or losses attributable asset targettarget and actual allocations,allocations, by asset category are toto that plan's assets andand liabilities.liabilities. Until 2002, we hadhad as follows: unrecognized net gains,gains, primarily because our actualactual Percentage of investmentinvestment returns exceeded our expectedexpected investment Plan AssetsatAssets at returns. During 2002, we made lump sum benefit payments inin Target AIIocationAllocation December 31, returns. During 2002, 2004 2003 20022002 excess of the GAAP thresholds,thresholds, resultingresulting in thethe recognition of net gains, referredreferred to asas "pension"pension settlement gains".)gains".) Equity securitiessecurities of gains, also increased our DomesticDomestic'1 50% - 60% 45% 58% The following four other factorsfactors also increased our combined net pension and postretirement cost inin 2003: Internationalinternational 15% - 25%25 16 16 combined net pension and •~ Our decision to lower our expected long-term rate of Debt securities 20% - 30% 28 24 Our decision to lower our expected return on plan assets from 9.5%5% toto 8.5%8.5% for 2003, Real estate none -- return on plan 9. based on our long-term view of future market returns, Other 0% - 10% 11 2 based on our of increased costs approximately $343. Total 100% 100% •~ The reductionreduction of thethe discount rates used toto calculate tAtrAt December31,2003,2003, Domesticequityequity securitiesdid not Indudeindude thethe fundsfrom service and interest cost from 7.5%7.5% toto 6.75%,6.75%, in ourour latelate December2003voluntaryvoluntary VEBAcontribution.OurDur subsequentsubsequent Inve_mentinvestment responseresponse to lower corporate bondbond interestinterest rates, in January 2004resultedInanallocationwithinthethe targetrange.range. increasedincreased thisthis costcost approximately $163=$163. Securities held includeinclude SBC common stock of approximately •~ Higher-than-expected medical and prescription drug $5, or 0.07%0.07% of plan assets, andand $5, or 0.1%0.1% of planplan assets,assets, claimsclaims increasedincreased expense approximatelyapproximately $152. at December 31,200331, 2003 and 2002. •~ We increasedincreased the assumed medical cost trendtrend raterate in While not required, we voluntarily contributedcontributed $445 and 2003 from 8.0%8.0% to 9.0%9.0% for retirees 64 andand under and $700 to the VEBA truststrusts to partially fund postretirement from 9.0%9.0% toto 10.0%10.0% for retirees 65 and over, trending benefits inin thethe firstfirst and fourth quarters of 2003, respe_ively.respectively. to an expected increaseincrease of 5.5.0%0% inin 2009 for all retirees, We are currently considering aa voluntary contribution of prior to adjustment forfor cost-sharingcost-sharing provisions of the assets, which may include cash and/or other investments of medical and dental plans for certairicertain' retired employees,employees, $1,000$1,000 or more. in responseresponse to risingrising claim costs. This increaseincrease inin the medical cost trend rate increased our combinedcombined net pension and postretirement cost approximately $187. PAGEPAGF I ss55 NOTES TO CONSOLIDATEDCONSOLIDATEO FINANCIAL STATEMENTS (CONTINUED)(CONTINUED) Dollarsinin millionsexceptexcept per shareamounts As a result of thisthis increaseincrease inin our combined net pensionpension approximately $605 toto ourour combined net pension and and postretirement cost, we have taken steps tOto implementimplement postretirement cost inin 2003 as comparedcompared with not usingusing this additional cost controls. To offset some of the increases in methodology. This methodology did not havehave a significantsignificant medical costs mentioned above, inin January 2003, we effect on ourour 2002 or 2001 combined net pension and implemented cost-savingcost-saving design changes in ourour management postretirement benefit as thethe MRVA was almost equal toto thethe healtilhealth plans includingincluding increasedincreased participant contributions fair value of plan\assets.plan, assets. Largely due to investment returns in for health coveragecoverage and increasedincreased prescription drug co- 2003, we do not expectexpect thisthis methodology to have a significant payments. These changes reduced our postretirementpostretirement cost impactimpact in our combined net pension and postretirement approximately $229 inin 2003. costs inin 2004. As previouslypre'viously discussed, inin earlyearly 2004, the majority of Supplemental Retirement Plans =—We also provide nonmanagement retireesretirees were informed Qfof medical coverage senior-senior- and middle-management employees with nonqualified, changes. Retirees have thethe option of continuing coverage on unfunded supplemental retirement and savings plans. These their current plan,plan, with thethe cap enforcement, or opting for plans include supplementalsupplemental pension benefits as well as coverage on an alternative plan with no required monthly compensation deferral plans,plans, some of which includeinclude aa contribution fromfrom thethe retiree during 2005. We expect this correspondingcorresponding match by us based on a percentage of the change to reducereduce 2004 expensesexpenses in the rangerange of $300 to compensation deferral. Expenses related toto thesethese plans were $600 and the projected benefit obligation inin thethe range of $142, $142 and $166 in 2003, 2002 and 2001. Liabilities of $2,000$2,000 to $3,500.$3,500. $1,718$1,718 and $1,629$1,629 related to thesethese plans have been included While we will continue our cost-cuttingcost-cutting efforts discussed inin "OtherOther noncurrent liabilities" on our Consolidated above, certain factors,factors, such as investment returns, dependdepend Balance Sheets atat December 31, 2003 and 2002. largelyla'rgely on trendstrends inin the U.S.U.S. securities markets and the NOTE 11. EMPLOYEE STOCK OWNERSHIP PLANS (ESOP) general U.S.U.S.economy,economy, and we cannotcannot control thesethese factors.factors. InIn particular,particular, uncertainty in the securities markets and U.S.U.S. We maintain contributory savings plans thatthat cover substan- economy could resultresult inin investmentinvestment volatility and significant tiallytially all employees. Under the savings plans, we match a changes inin planplan assets, which under GAAP we will recognize statedstated percentage of eligible employee contributions,contributions, . over the next several years. As a resultresult of these economic subjectsubject to a specifiedspecified ceiling. impactsimpacts and assumption changes discussed above, we expect We extended thethe termsterms of certaincertain ESOPs through previous a combined net pension andand postretirementpostretirement costcost of between internal refinancing of the debt, which resulted inin approxi- $1,000$1,000 and $t,400$1,400 inin 2004. Approximately 10% of thesethese mately 7575 million of allocated SBC shares and significantly costs will be capitalized as part of constructionconstruction labor, lessless thanthan 1 million unallocated SBC shares remainingremaining inin providing aa smallsmall reduction in thethe net expense recorded.recorded. one of those ESOPsESOPs at December 31, 2002. This internal Additionally, should actual experience differ fromfrom actuarial refinancingrefinancing of ESOP debt was paid off inin December 2002 assumptions, combined net pension and postretirement costcost with our matching contributions toto the savings plan, dividends would be affected in futurefuture years. paidpaid on SBC shares andand interestinterest earned on fundsfunds held by thethe The weighted average expected returnreturn on assets ESOPs. There were no debt_financeddebt-financed SBC sharesshares held by the assumption, which reflects our view of long-termlong-term returns,returns, ESOPs, allocated or unallocated, at December 31, 2003. is one of the most significant of the weighted averageaverage InIn 2003, our match of employee contributions to the assumptions used to determine ourour actuarialactuarial estimates of savingssavings plans was fulfilled with purchases of SBC's stock on pension and postretirement benefit expense. Based on our thethe open market. Prior to December 31, 2002, our match of long-termlong-term expectation of market returnsreturns in futurefuture years, our employee contributions toto the savings plan was fulfilledfulfilled long-termlong-term rate of returnreturn on plan assets isis 8.5%8.5% forfor 2004. with shares of stockstock purchased with thethe proceedsproceeds of an ESOP IfIf all other factorsfactors were to remainremain unchanged, we expect a note and the purchases of SBC'sSBC's stock in the open market. 1% decrease in thethe expectedexpected long-term rate of return would Shares purchased with thethe proceeds of an ESOP note were cause 2004 combinedcombined pension andand postretirement cost toto releasedreleased for allocationallocation toto thethe accounts of employees asas increase approximately $408 over 2003 (analogous(analogous change employer-matching contributions were earned by participants would result from a 1% increase). andand paid to thethe ESOP by us. InIn 2003, thethe benefit cost was Under GAAP, thethe expected long-term raterate of return is based on the cost of shares allocated toto participatingparticipating calculated on thethe market-related valuevalue Ofof assets (MRVA).(MRVA). employees'employees' accounts.accotlnts. Prior to December 31, 2002, benefit GAAP requires that actual gains and losses on pension and cost was based on a combinationcombination of thethe contributions to the postretirement planplan assetsassets be recognizedrecognized in the MRVA savingssavings plans andand thethe cost of shares allocated to participating equally overover a period of not more than five years.years. We useuse a employees' accounts. Prior to December 31, 2002, both methodology, allowedallowed underunder GAAP, under which we hold thethe benefit cost and interestinterest expense on thethe ESOP notes were MRVAIVIRVA toto within 20% of thethe actual fairfair value of plan assets, reduced byby dividends on SBC's sharesshares held by the ESOPs and which can have thethe effecteffect of acceleratingarcelerating the recognitionrecognition interestinterest earned onon the ESOPs' funds.funds. of excess actual gains andand losseslosses intointo thethe MRVA to less than fivefive years. Due to investmentinvestment losseslosses on plan assets experiencedexperienced in recent years, thisthis methodology contributed ~PAPAGE5 6 I s65 6 InformationInformation relatedrelated totothethe ESOPsESOPsandand thethesavingssavings plansplans isis TheThecompensationcompensation costcostthatthat hashasbeenbeen chargedcharged againstagainst summarizedsummarized below:below: incomeincome forforthesethese plansplans andand ourourotherother stock-basedstock-based compensationcompensation plansplans isisasasfollows:follows: 20032003 20022002 20012001 2003 20022002 20012001 BenefitBenefit expenseexpense -—netnet ofof 2003 dividendsdividends andandinterestinterest incomeincome,_$300$300 $216$216 $185$'I85 StockStockoptionoption expenseexpense under FAS 123 $183 • $390 $380 TotalTotal expenseexpense $300$300 $216$216 $185$185 under FAS 123 $183 $390 $380 Mark-to-marketMark-to-market effecteffect CompanyCompanycontributionscontributions forfor ESOPsESOPs $$ --— $165$165 $177$177 onon dividenddividend equivalentsequivalents 44 (36)(36) (33)(33) DividendsDividends andand interestinterest incomeincome OtherOther 5757 1919 3333 forfor debtdebt serviceservice $ -- $ 8 $ 58 TotalTotal $244$244 $373$373 $380$380 NOTENOTE 12.12.STOCK-BASEDSTOCK-BASED COMPENSATIONCOMPENSATION TheThe estimatedestimated fairfair valuevalue ofofthethe optionsoptions whenwhen grantedgranted isis amortizedamortized toto expenseexpense overover thethe options"options' vestingvesting period.period. TheThe Under. 'our various plans, senior and other management and Under'our various plans, senior and other management and weighted-average,weighted-average, fairfair valuevalue ofof eacheach optionoption grantedgranted duringduring nonmanagement employees and nonemployee directors nonmanagement employees and nonemployee directors ' 2003,2003,20022002andand 20012001waswas $3.88,$3.88, $6.57$6.57 andand $8.37.$8.37.TheThe fairfair have received stock options, performance stock units and have received stock options, performance stock units and ' valuevalue forfor th_sethese optionsoptions waswas estimatedestimated atat thethe datedate Ofofgrant,grant, . other nonvested stock units. Stock-options issued through . other nonvested stock units. Stock options issued through usingusing aa Black-ScholesBlack-Scholes optionoption prisingpricing modelmodel withwith thethe fol!owingfollowing DecemberDecember 31,31,20032003 carrycarry exerciseexercise pricesprices equalequal toto thethe marketmarket weighted-averageweighted-average assumptionsassumptions usedused forfor grantsgrants inin 2003,2003, 20022002 priceprice ofof thethe stockstock atat thethe date of grantgrant andand havehave maximummaximum ' andand 2001:2001:risk-freerisk-free interestinterest raterate ofof 3.64%,3.64/0, 4.33%4.330/0 andand 4.51%;4.51 /0, terms ranging from five to ten years. Beginning in 1994and terms ranging from five to ten years. Beginning in 1994 and dMdenddividend yieldyield ofof4.40%,4AO/o, 3.04%3.04/0 andand 2.37%;2.37/ei expectedexpected volatilityvolatility endingending inin 1999, certaincertain Ameritech employees werewere awardedawarded factorfactor ofof 22%,22/0, 23%23 /e andand 24%;24/0, and expectedexpected optionoption lifeiife ofof grants of nonqualified stock options with dividend equivalents. grants of nonqualified stock options with dividend equivalents. 6.7,6.7, 4.44/4 andand 4.04.0 years.years. Depending upon the grant„vesting of stock options may Depending upon the grant, vesting of stock options may InformationInformation relatedrelated toto optionsoptions isis summarizedsummarized belowbelow occur up to five years from the date of grant, with most occur up to five years from the date of grant, with most (shares(shares inin millions):millions): options vesting on aa graded basisbasis Overover three years (t/3(1/3 of Weighted- thethe grant vests after one year,year, another i/31/3 vests afterafter twotwo Weighted- Average years and thethe finalfinal 1/3 vests after three years fromfrom thethe grant NumberNumber Exercise Price date). Performance stockstock units are granted toto key emp!oyeesemployees based upon the common stock price at the date of grant Outstanding at January/anuary 1, 2001 156156 $33.53$33.53 and are awarded inin the formform of common stock and cash at Granted 76 43.4143.41 the end of a twO-two- or three-year period, subject to thethe Exercised (13) 24.4124.41 achievement of certain performance goals. Nonvested stock Forfeited/ExpiredI:orfeited/Expired (12) 43.0943.09 units are valued at the market price of the stock at the date Outstanding at December 31, 2001 of grant and vest over a three- to five-year period. As of (109 exercisable at weighted-average December 31, 2003, we were authorized to issue up to 80 207 37021 31, to up to price of $32.$32.36)36) 207 37.21 million shares of stockstock (in addition to shares that may be of (in to may be Granted 3636 35.5035.50 issued upon exercise of outstanding options or upon vesting issued upon exercise of outstanding options or upon vesting Exercised (7)(7) 20.20.8080 of performance stock units or other nonvested stock units) of performance stock units or other nonvested stock units) Forfeited/Expired (7) 41.41.2020 to officers, employees andand directorsdirectors pursuantpursuant to these Outstanding at December 31, 2002 various plans.plans. (154 exercisable at weighted-average We useuse an acceleratedaccelerated method of recognizingrecognizing compensa-compensa- (154 exercisable at weighted-average price of $36.48) 229 37.31 tiontion costCost forfor fixedfixed awardsawards withwith graded vesting,vesting, which price of $36.48) 229 37.31 Granted 15 24.71 essentiallyessentially treatstreats the grantgrant asas threethree separate awards,awards, with Granted 15 24.71 Exercised (_ 19.64 vestingvesting periodsperiods of 12,12, 2424 andand 36 months forfor thosethose thatthat vestvest Exercised (6) 19.64 _) 37.09 over threethree years.years. As notednoted above,above, aa majoritymajority ofof ourour options Forfeited/ExpiredForfeited/Expired (7) 37.09 vestvest overover threethree yearsyears andand forfor thosethose wewe recognizerecognize approximately OutstandingOutstanding atat December 31,31, 20032003 6161%/o ofof thethe associatedassociated compensationcompensation expenseexpense inin thethe firstfirst (181(181 exercisableexercisable atat weighted-averageweighted-average year,year, 28/e28% inin thethe secondsecond yearyear andand thethe remainingremaining 11/011% inin thethe priceprice ofof $37.$37.66)66) 231231 $36.$36.9494 thirdthird year.year. AsAs allowedallowed byby FASFAS 123,123, wewe accn&eaccrue compensationcompensation costcost asas ifif allall optionsoptions grantedgranted subjectsubject onlyonly toto aa serviceservice requirementrequirement areare expectedexpected toto vestvest. TheThe effectseffects ofof actualactual forfeituresforfeitures ofof unvestedunvested optionsoptions areare recognizedrecognized (as(as aa reversalreversal ofof expense)expense) asastheythey occur.occur. PAGEPAGE] 5757 NOTESNOTES TOTO CONSOLIDATEDCONSOLIDATED FINANCIALFINANCIAL STATEMENTSSTATEMENTS (CONTIN InformationInformation relatedrelated totooptionsoptions outstandingoutstanding atatDecemberDecember 31,31, NOTENOTE 14.14.ADDITIONALADDITIONAL FINANCIALFINANCIAL INFORMATIONINFORMATION 2003: 2003: DecemberDecember31,31, $14.62-$14.62- $17.50-$17.50- $30.00.$30.00- $35.50-$35.50- BalanceBalance SheetsSheets 20032003 20022002 Exerc3se Price Range $17.49 $29.99 $35A9 $58.88 ExercisePriceRange $17.49 $29.99 $35.49 $58.88 AccountsAccounts payablepayable andandaccruedaccrued liabilities:liabilities: Number of options Number of options AccountsAccounts payablepayable $$3,3,108108 $3,395$3,395 (in millions): (in millions): AdvanceAdvance billingbilling andand customercustomer depositsdeposits 1,2521,252 1,2401,240 Outstanding 3 55 8 165 Outstanding 3 55 8 165 CompensatedCompensated futurefuture absencesabsences 823823 858858 Exercisable Exercisable 33 4040 88 130130 AccruedAccrued interestinterest 364364 446446 Weighted-average Weighted-average AccruedAccrued payrollpayroll 1,1781,17& 764764 exerciseexercise price:price: OtherOther 4,145.4,145 2,7102,710 Outstanding $15.57 $24.66 $33.97 $41.57 Outstanding $15.57 $24.66 $33.97 $41.57 TotalTotal $10,870$10,&70 $9,413$9,413 ExercisableExercisable $15.57$15.57 $24.65$24.65 $33.97$33.97 $42.48$42.48 Weighted-averageWeighted-average StatementsStatements ofofIncomeIncome 20032003 20022002 20012001 remainingremaining contractualcontractual lifelife 0.870.87yearsyears 4.384.38yearsyears 5.085.08yearsyears 6.776.77yearsyears AdvertisingAdvertising expenseexpense $$ 867867 $$ 432432 $$ 363363 Interestinterest expenseexpense incurredincurred $1,278$1,278 $1,440$1,440 $1,718$1,718 AsAs ofof DecemberDecember 31,31,additionaladditional sharesshares availableavailable underunder stockstock CapitalizedCapitalized interestinterest (37)(37) (58)(58) (119)(119) optionsoptions withwith dividenddividend equivalentsequivalents werewere approximatelyapproximately TotalTotal interestinterest expenseexpense $1,241241 $1,382382 $1_599599 11 millionmillion inin 2003,2003,20022002 andand 2001.2001. $1, $1, $1r Additionally,Additionally, duringduring 2003,2003, 20022002 andand 2001,2001, performanceperformance stockstock (performance(performance shares)shares) unitsunits andand otherother nonvestednonvested unitsunits StatementsStatements ofofCashCash FlowsFlows 20032003 20022002 20012001 of 2,942,591, 937,094 and 727,046 were issued with a of 2,942,591,937,094 and 727,046 were issued with a CashCash paidpaid duringduring thethe yearyear for:for: weighted-average, grant-date fair value of $24A4, $3530 weighted-average, grant-date fair value of $24.44, $35.30 Interest $1,359$1,359 $1,480$1,480 $1,546$1,546 and $46.63. Interest, and $46.63. IncomeIncome taxes,taxes, net of refundsrefunds 1,3211,321 1,3151,315 2,6962,696 NOTENOTE 13,13.StlAREOWNERS'SHAREOWNERS' EQUITY No customer accountedaccounted forfor moremore than'than 10% of consolidatedconsolidated From timetime toto time, we repurchase sharesshares of common stock revenues inin 2003, 2002 or 2001. for distribution throughthrough our employee benefit plans or inin Approximately two-thirdstwo-thirds ofof ourour employeesemployees are representedrepresented connection with certain acquisitions. InIn December 2003, the by the Communications Workers of America (CWA)(CWA) or the Board of Directors authorized the repurchaserepurchase of up to 350 International Brotherhood of Electrical Workers (IBEW). The million shares of SBC common stock. This replaced previous four largest collective bargaining agreements between the authorizations from November 2001 and January 2000 that CWA and our subsidiaries, covering approximately 56% of combined for up to 200 million shares. As of December 31, our employees, expire April I,1, 2004 through April 3, 2004. 2003, we hadhad repurchasedrepurchased a total of approximately 16116'I In an agreement announced on February 4, 2004, the CWA million shares of our common stock of the 200 million agreed to give us 30 days notice before taking any strike action if a settlement is not reached by contract expiration previously authorized toto be repurchased.repurchased. action if a settlement is not reached by contract expiration InIn 2000 andand 2001, we entered into a series of put options inin early April, 2004. InIn turn, we agreed toto continue toto on SBC stockstock which allowedallowed institutionalinstitutional counterpartiescounterparties toto provideprovide healthhealth carecare benefits to employees inin thethe event of aa sell us SBCSBC shares atat agreed-upon prices.prices. The put options strike.strike. TheThe largestlargest IBEW agreement covering approximatelyapproximately werewere exercisableexercisable onlyonly atat maturity,matur!ty, andand wewe hadhad thethe rightright toto 7%7% ofof ourour employees expiresexpires onon JuneJune 26,26, 2004. settlesettle thethe putput optionsoptions byby physicalphysical settlementsettlement of thethe options oror byby netnet shareshare settlementsettlement usingusing sharesshares ofof SBCSBC commoncommon stock.stock. AtAt DecemberDecember 31,31, 2001,2001, wewe hadhad aa maximummaximum potentialpotential obligationobligation toto purchasepurchase 99 millionmillion sharesshares ofof ourour commoncommon stockstock atat aaweightedweighted averageaverage exerciseexercise priceprice ofof $37.$37.4545 perper share.share. WeWe receivedreceived cashcash ofof $38$38 inin 20012001 andand $65$65 inin 20002000 fromfrom thesethese transactions,transactions, whichwhich waswas creditedcredited toto capitalcapital inin excessexcess ofof parpar valuevalue inin shareowners'shareowners' equity.equi.ty. DuringDuring 2002,2002, putput optionsoptions representingrepresenting 33millionmillion shareSshar_eSexpiredexpired unexercised.unexercised. AdditionallyAdditionally inin2002,2002, 66 millionmillion sharesshares ofof ourour commoncommon stockstock werewere putput toto ususunderunder thesethese optionsoptions atat aaweightedweighted averageaverage priceprice ofof $39.$39.1414 perper share,share, whichwhich waswas approximatelyapproximately $9$9 perper shareshare overover thethe then-marketthen..market priceprice ofof ourour stock.stock. AsAs settlementsettlement ofof thethe obligation,obligation, wewe electedelected toto purchasepurchase thethe sharesshares insteadinstead ofof usingusing netnet shareshare settlement.settlement. TheThe excessexcess cashcash paidpaid ofof approximatelyapproximately $55$55 waswas debiteddebited toto capitalcapital ininexcessexcessofof parpar valuevalue ininshareowners'shareowners' equity.equity. WeWe hadhad nonoputput optionsoptions outstandingoutstanding atatDec'emberDecember 31,31,20032003 oror2002.2002. PAGEPAGEI5858 NOTE 15. RELATED PARTY TRANSACTIONS NOTE 16. CONTINGENT LIABILITIES We have made advances toto Cingular thatthat totaled $5,$5,885885 at InIn addition to issues specifically discusseddiscussed elsewhere, we Decembe_December 31, 2003 and 2002. We earned interestinterest incomeincome on are party toto numerous lawsuits, regulatoryregulatory proceedings these advances of $397 during 2003, $441 inin 2002 and $555 and other matters arisingarising in thethe ordinary course of business.business. inin 2001. In July 2003, we renegotiated thethe termsterms of thesethese In our opinion, although the outcomes of thesethese proceedings advances with Cingular to reduce thethe interest rate from areare uncertain, theythey should not have a material adverseadverse 7.5%7.5% to 6.0%6.0% and extended thethe maturity date of the loanloan effect on the company's financial position, results of from March 2005 to June 2008. InIn addition, forfor access and operations or cash flows. long-distance services sold to Cingular on a who!esalewholesale basis, NOTE 17. SUBSEQUENT EVENT we generated revenuerevenue of $476 in 2003, $343 inin 2002 andand $120 inin 2001. Also, under a marketing agreement with On Februa_February 17, 2004, Cingular announcedannounced an agreement Cingular relating toto Cingular customerscustomers added through SBC to acquireacquire AT&T Wireless Services IncInr„(AT&T(AT&T Wireless). sales sources, we receivedreceived commission revenue of $63$63' in Under the termsterms of thethe agreement, shareholders of AT&T 2003, $6 in 2002 and $0 in 2001. The offsetting expenseexpense Wireless willwili receive cash of $15.00$15.00 per common share or amounts are recorded by Cingular, of which 60% flowsflows back approximately $41,000.$41,000. The acquisition isis subject toto approval to usus through Equity inin Net Income of Affiliates. by AT&T Wireless shareholders and federal regulators. Based on our 60% equity ownership of Cingular, we expect to provide approximatelyapproximately $25,000$25,000 of thethe purchase price. As a result,result, equityequity ownership and management control of Cingular will not be impactedimpacted after thethe acquisition. NOTE 18. QUARTERLY FINANCIALFINANCIAL INFORMATIONINFORMATION (UNAUDITED)(UNAUDITED) Total Basic Diluted Stock Price Calendar Operating Operating Net Earnings Earnings. QuaKerQuarter Revenues Incomeincome IncomeIncome PerPer Share Per Share High Low Close 2003 FirstFirst $10,333$10,333 $1,898$1,898 $4,996$4,996 $$1.1.5050 $$1.1.5050 $31.65$31.65 $18.85$18.85 $20.06$20.06 Second 10,20410,204 1,7491,749 1,3881,388 0.420.42 0;42 27.3527.35 19.6519.65 25.5525.55 Third 10,23910,239 1,6101,610 i,2161,216 0.370.37 0.370.37 26.8826.88 21.6521.65 22.2522.25 Fourth 10,06710,067 1,2121,212 905 0.270.27 0.270.27 26.1526.15 21.1621.16 26.0726.07 Annual $40,843$40,843 $6,469$6,469 $8,505$8,505 2.562.56 2.562.56 2002 First $10,522$10,522 $2,182$2, 182 $(193)$'(193) $(0.06)$(0.06) $(0.06)$(0.06) $40.99$40.99 $34.29$34.29 $37.44$37.44 Second . 10,84310,843 2,2,164164 1,7821,782 0.530.53 0.530.53 38.4038.40 27.8527.85 30.5030.50 Third 10,55610,556 2,2,029029 1,7091,709 0.510.51 0.510.51 31.9631.96 19.5719.57 20.1020.10 Fourth 11,21711,217 2,2,248248 2,3552,355 0.710.71 0.710.71 29.1029.10 19.8019.80 27.1127.11 Annual $43,138$43,138 $8,623$8,623 $5,653$5,653 1.701.70 1.691.69 The firstfirst quarter of 2003 includes cumulative effect of quarter 2003 adoption of FAS 143. The effect of thisthis accounting changeschanges of $2,541$2,541 (income before cumulativecumulative noncash charge was to reducereduce our previouslypreviously reported effect of accounting changes was $2,455):$2,455): a benefit of first-quarter 2003 net income by $7,$7, or $0.01$0.01 perper share. $3,677,$3,677, or $1.10$1.10 pershare,per share, relatedrelated to thethe adoption of The fourthfourth quarter of 2003 includesindudes an extraordinaryextraordinary loss FAS i43143 and aa charge of $1,136,$1,136, or $0.34$0.34 per share, related of $7 (income before extraordinary lossloss was $912) related to the changechange in the method in which we recognize to consolidation of realreal estate leases under FIN 46 (see revenuesrevenues and expenses related to publishing directories from Note 1). The first quarter of 2002 includesincludes aa cumulativecumulative thethe "issue"issue basis" method toto thethe "amortization"amortization method effect of accounting change of $1,820,$1,820, or $0.54$0.54 per share (see Note 1). The benefit of $3,677$3,677 included aa chargecharge of $7 (income(income before cumulativecumulative effect of accountingaccounting changechange representing our share of the lossloss relatedrelated to TDC's fourth- was $1,627),$1,627), from thethe adoption of FAS 142142 (see(see Note 1). PAGE I 59 REPORTREPORT OFOf MANAGEMENTMANAGEMENT REPORTREPORT OFOF INDEPENDENTINDEPENDENT AUDITORSAUDITORS TheTheconsolidatedconsolidated finandalfinandal statementsstatements havehave beenbeen preparedprepared inin TheTheBoardBoard ofofDirectorsDirectors andand ShareownersShareowners conformityconformity withwith generallygenerally acceptedaccepted accountingaccounting principlesprinciples inin SBCSBCCommunicationsCommunications Inc.Inc. thethe UnitedUnited States.States. TheTheintegrityintegrity andand objectivityobjectivity ofofthethe datadata ininthesethese financialfinancial statements,statements, includingincluding estimatesestimates andand judg-judg- WeWehavehave auditedaudited thethe accompanyingaccompanying consolidatedconsolidated balancebalance sheets of SBC Communications Inc. (the Company) as of mentsments relatingrelating totomattersmatters notnot concludedconcluded bybyyearyear end,end, areare sheets of SBC Communications Inc. (the Company) as of thethe responsibilityresponsibility ofofmanagement,management, asasisisallall otherother informationinformation DecemberDecember 31,31,20032003andand 2002,2002,andand thethe relatedrelated consolidatedconsolidated includedincluded ininthethe AnnualAnnual Report,Report, unlessunless otherwiseotherwise indicated.indicated. statementsstatements ofofincome,income, shareowners'shareowners' equity,equity, andand cashcash flowsflows TheThefinancialfinancial statementsstatements ofofSBCSBCCommunicationsCommunications Inc.Inc. forforeacheach ofofthethe threethree yearsyears ininthethe periodperiod endedended DecemberDecember (SBC)(SBCjhavehave beenbeen auditedaudited byby ErnstErnst &&YoungYoung LLP,LLP, independentindependent 31,31,2003.2003.TheseThese financialfinancial statementsstatements arearethethe responsibilityresponsibility ofof auditors.auditors. ManagementManagement hashas mademade availableavailable toto ErnstErnst &&YoungYoung thethe Company'sCompany's management.management. OurOur responsibilityresponsibility isistotoexpressexpress LLPLLPallall ofofSBC'sSBC'sfinancialfinancial recordsrecords andand relatedrelated data,data, asas wellwell asas anan opinionopinion onon thesethese consolidatedconsolidated financialfinancial statementsstatements basedbased thethe minutesminutes ofofshareowners'shareowners' andand directors'directors' meetings.meetings. onon ourour audits.audits. Furthermore,Furthermore, managementmanagement believesbelieves thatthat allall representationsrepresentations WeWe'conductedconducted ourour auditsaudits inin accordanceaccordance withwith auditingauditing mademade toto ErnstErnst &&YoungYoung LLPLLP duringduring itsits auditaudit werewere validvalid andand standardsstandards generallygenerally acceptedaccepted inin thethe UnitedUnited States.States. ThoseThose standards require that we plan and perform the audit to appropriate.appropriate. standards require that we plan and perform the audit to ManagementManagement hashas establishedestablished andand maintainsmaintains aa systemsystem obtainobtain reasonablereasonable assuranceassurance aboutabout whetherwhether ththee financialfinancial ofofinternalinternal accountingaccounting controlscontrols thatthat providesprovides reasonablereasonable statementsstatements areare freefree ofof materialmaterial misstatement.misstatement. AnAn auditaudit assuranceassurance asas toto thethe integrityintegrity andand reliabilityreliability ofofthethe financialfinancial includesincludes examining,examining, onon aa testtest basis,basis, evidenceevidence supportingsupporting thethe amounts and disclosures in the financial statements. An statements,statements, thethe protectionprotection ofof assetsassets fromfrom unauthorizedunauthorized amounts and disdosures in the financial statements. An useuse or dispositiondisposition andand thethe preventionprevention andand detectiondetection ofof auditaudit alsoalso includesincludes assessingassessing thethe accountingaccounting principlesprinciples usedused fraudulentfraudulent financialfinancial reporting.reporting. TheThe conceptconcept ofof reasonablereasonable and significantsignificant estimatesestimates mademade byby management,management, asas wellwell asas assuranceassurance recognizesrecognizes thatthat thethe costscosts ofof anan internalinternal accountingaccounting evaluating thethe overalloverall financialfinancial statementstatement presentation.presentation. WeWe controlscontrols systemsystem shouldshould not exceed, inin managementsmanagement's believebelieve thatthat ourour auditsaudits provideprovide a reasonablereasonable basis forfor ourour judgment,judgment, thethe benefits toto bebe derived. opinion. ManagementManagement maintains disclosuredisclosure controlscontrols and proceduresprocedures InIn ourour opinion, thethe consolidatedconsolidated financial statements thatthat are designed to ensureensure thatthat informationinformation requiredrequired to be referredreferred to aboveabove presentpresent fairly,fairly, inin allall materialmaterial respects,respects, thethe disclosed by SBC is recorded, processed,processecf, summarizedsummarized andand consolidated financialfinancial position ofof SBC CommunicationsCommunications Inc.Inc. reported within the time periods specified by thethe Securities at December 31, 2003 andand 2002, andand thethe results of itsits and Exchange Commission's rules and forms.forms. operations andand itsits cashcash flows for each of thethe three years inin Management also seeks to ensure the objectivity and the period ended December 31,200.331, 2003 inin conformity with integrityintegrity of its financialfinancial data by the careful selection of its accounting principles generally accepted in thethe United managers, by organizational arrangements that provide an States. appropriate division of responsibility and by communication As discussed inin Note 1 to thethe consolidated financialfinancial programs aimed at ensuring that itsits policies, standards and statements, in 2003 the Company changed its method of managerial authorities are understood throughoutthroughout thethe recognizing revenues and expenses related to publishing organization. Management regularly monitors the system of directories, as well as the'the method of accounting for the costs internal accounting controls forfor compliance. SBC maintains of removal of long-term assets. Also as discussed inin Note 1 an internal auditing program thatthat independentlyindependently assesses to thethe consolidated financial statements, inin 2002 the thethe effectiveness of thethe internal accountingaccounting controls and Company changed itsits method of accountingaccounting for goodwill recommendsrecommends improvementsimprovements thereto.thereto. and other intangibles.intangibles. The Audit CommitteeCommittee of thethe BoardBoard ofof Directors meets periodicallyperiodically withwith management, thethe internalinternal auditorsauditors andand thethe independentindependent auditorsauditors toto reviewreview thethe manner inin whichwhich theythey areare performingperforming theirtheir respectiverespective responsibilitiesresponsibilities andand toto discussdiscuss SanSan Antonio, Texas auditing,auditing, internalinternal accountingaccounting controlscontrols andand financialfinancial report-report- February 9, 20042004 inging matters.matters. BothBoth thethe internalinternal auditorsauditors andand thethe independentindependent exceptexcept forfor NoteNote 17,17, asas toto which thethe datedate isis auditorsauditors periodicallyperiodically meetmeet alonealone withwith thethe AuditAudit CommitteeCommittee February 19,19, 20042004 andand havehave accessaccess toto thethe AuditAudit CommitteeCommittee atat anyany time.time. &4 ~QF, M~@ EdwardEdward E.E.WhitacreWhitacre Jr.Jr. ChairmanChairman ofof thethe BoardBoard andand ChiefChief ExecutiveExecutive OfficerOfficer RandallRandall StephensonStephenson SeniorSenior ExecutiveExecutive ViceVice PresidentPresident andand ChiefChief FinancialFinancial OfficerOfficer PA~GEPAGE[60 6ll J SBCSBC BOARDBOARD OFOF DIRECTORSDIRECTORS (as(asofofJanuary30,January 30,2004)2004) +~@ Joyce M. Roche, 56 _,7)"n EdwardEdward IF-E.WhitacreWhitacre Jr.,Jr.62, 62(_s) MartinMartinK.K. EbyEbyJr.,Jr.69, 690@(1._ LynnLynn M.M.Martin,Martin, 64645'"(s,7) Joyce M. Roche, 56 Chairman of the Chairman of the Board Chair of the Council President and Chief Executive Officer BoardBoardandandChiefChief TheTheEbyEbyCorporationCorporation forforthetheAdvancementAdvancement Executive OfRcer ._ Chalr of the Council Executive Officer Wichita,Wichita, KansasKansas Women _ PresidentGirlsGirlsIncorporatedIncorporatedand Chief Executive Officer _ Chairman of the Board ofofWomen _ Chairman of the New York, New York SBCSBCCommunicationsCommunications Inc.Inc. SBCSBCDirectorDirectorsincesince _ AdvisorAdvisortotothetheFirmFirm New York, New York Deloitte & Touche LIP SBC Director _i_nceOctober 1998 SanSanAntonio,Antonio, TexasTexas luneJune19921992 Deloitte Ik Touche LLP SBC Director since October 1998 Southern New England SBCSBCDirectorDirectorsincesinceOctoberOctober 19861986 Background:Background: GeneralGeneral buildingbuilding Chicago,Chicago,IllinoisIllinois Southern New England SBC Director since October 1999 Telecomrnunicatt0nsTelecommunications Background:Background: TelecommunicationsTelecommunications constructionconstruction SBC Director since October 1999 AmedtechAmeritech Director 1993-19991993-1999 Director 1997-19981997-1998 a'n * Director Director GilbertGilbert F.F.Amelio,Amelio, Ph.D.,Ph.D.,6161(6,7) HermanHerman E.E.Gallegos,*Gallegos, 7373(7) Background:Background: Consulting,Consulting, formerformer Background:Backgrourid: MarketingMarketing Senior Partner Independent independent Congresswoman and .:_i_ Senior Partner Congresswoman and Ing. Carlos Slim HelG, 64 is.7) Sienna Ventures ManagementManagement lng. Carlos Slim Helu, 64"'n J ienna Ventures SecretarySecretary ofofLab.orLabor Sausalito, California ConsultantConsultant Chairman of the Board J Sausalito, California John B. McCoy, 60 c_3)@" Carso Global Telecom, SBCSBCDirectorDirector sincesince Gait,Gait, CaliforniaCalifornia John B. McCoy, 60 Carso Global Telecom, _ ChalrmanS.A_de CV.of the Board FebruaryFebruary 20012001 SBCSBCDirectorDirector sincesinceAprilApril 19971997 Retired Chairman and S.A. de CV. Chairman of the Board Advisory Director 1997-2001 Tetesls Chief Executive Officer Chairman Board Advisory Director 1997-2001 PadficPadficTelesls DirectorDirector 1983-19971983-1997 Chief Executive Officer of the BANK ONE CORPORATION Tel_fonos de M_xico, S._ de CV. PacificPadflcTeleslsTelesls DirectorDirector 199541995-1997997 Background:Background: ManagementManagement _ RetiredBANK ONEChairmanCORPORATIONand Tel6fonos de MExico, S.A. de CV. Columbus, Ohio Chairman of the BoardBoard Background:Background: Technology,Technology, consultingconsulting Columbus, Ohio Chairman of the SBC Director since October 1999 America M6vil, S._ de C.V. electronicselectronics engineeringengineering &'~" SBC Director since October 1999 Am6rica M6vil, S.A. de C.V. JessJess 1".T.Hay,*Hay, *7373(1,3,4) AmedtechAmeritech DirectorDirector 1991-19991991-1999 MexicoMexico City,City, MexicoMexico ClarenceClarence C.C.Barksdale,Barksdale, 7171(I,4,7)I' 'I Chairman I Chairman Background:Background: BankingBanking SBCSBCDirectorDirector sincesince SeptemberSeptember 19931993 Retired Chairman of HCB Enterprises Inc HC8 Enterprises Inc Background:Background: Telecommunications,Telecommunications, tl_ethe BoardBoard andand Chairman MaryMary S.S.Metz,Metr„ph.Ph.D.,D. 6666c_.n0'" 'Chairman , consumerconsumer goods,goods, automobileautomobile parts,parts, Chief Executive Officer Texas Foundation for President _ RetiredChief ExecutiveChairman Officerof Texas Foundation for coqstruction,construction, retailingretailing Centerre Bancorporation Higher Education S.S.H.H. CoweUCowell Foundatiori Centerre Bancorporation Higher Education , San Francisco, California Dr. Laura D'Andrea Tyson, 56 (_s)+" StSt.Louis,Louis, MissouriMissouri Dallas, Texas _ PresldentSan Francisco, Caiifornia Dr. Laura D'Andrea Tyson, 56 SBC Director sincesince October 1983 SBCSBC Director sincesince April 1986 SBCSBCDirector sincesince Dean London Business School Southwestern BellBeg Telephone Background: Financial servicesservices ApdlApril 19971997 London Business School Director 1982-1983 Pacific TelesisTelesis DirectorDirector 1986-19971986-1997 London,London, EnglandEngland Director 1982-1983 I Dean James A. Henderson, 69 (4,s,_"e SBC Director since Background: Banking Background: Education, SBC Director since Retired Chairman and administration October 1999 +@ administration October 1999 James E. garnes,Barnes, 70 c_ Chief Executive Officer Amerltech Director 1997-1999 +"' Ameritech Director 1997-1999 Chairman of the Board Cummins Inc. Toni Rembe, Esq.Esq., , 67 (2,7) _ Rettred Chairman and Background: Economics, education and Chief Executive Columbus,columbus, IndianaIndiana Partner Patricia P. Upton, 65 (4,G,7) Officer (Retired) SBC Director since October 1999 Pillsbury Winthrop LIPLLP Patricia P. Upton, 65 "n _ Chairman of the Board MAPCO Inc.Inc. AmeritechAmedtech Director 1983-1999 J : PartnerSan Francisco, California President and SBCDirector since Chief Executive Officer Tulsa, Oklahoma Background:Background: Manufacturing SBC Director since Chief Executive Officer Aromatique, Inc. SBC DirectorDirector sincesince November 1990 January 1998 _. PresidentAromatique,andInc. AdmiralAdmiral Bobby FLR. Inman,Inman,* *72@~72 (_) Heber Springs, Arkansas Background:Background: DiversifiedDiversified energyenergy Advisory Director 1997-1998 :, Heber Springs, Arkansas United States Navy, SBC Director since June 1993 Pacific Telesis Director 1991-'l9971991-1997 SBC Director since June 1993 August A. Busch ill, 66 +" RetiredRetired ' August _= Busch III, 66 (_3) Background:Background: LawLaw Background: ManufacturingManufactudr_g Chairman of the Board Austin, Texas _1_ Chairman of the Board U UnitedAustin, StatesTexas Navy, and marketing of decorative ' ' and marketing of decorative Anheuser-8Anheuser-Buschusch SBCSBCDirectorDirector sincesince S. DonleyDonley Ritdhey,Ritchey, 7070 (1_) homehome fragrancesfragrances Companies,Companies, Inc.Inc MarchMarch 198S1985 Managing Partner Committees of the Board: B St.St Louis,Louis, MissouriMissouri Background:Background: PrivatePdvate investment,Investment, AlpineAlpine PartnersPartners Committees of the Board: Retired Chalrman and (I) Audit SBCSBCDirectorDirector sincesinceOctoberOctober 19831983 educationeducation U RetiredManagingChairmanPartner and (1)Audit Chief Executive Officer (2) Corporate Development SouthwesternSouthwestern BellBellTelephoneTelephone ++si Chief Executive Officer (2) Corporate Development CharlesCharles F.F,KnightKnight, 6868 (_s) O) Corporate Governance DirectorDirector 1980-19831980-1983 LuckyLucky Stores,Stores,Inc.Inc. (3) Corporate Governance Chairman of the Board Danville, California and Nominating Background:Background: Breviing,Brewing, familyfamily Danville, California and Nominating EmersonEmerson ElectricElectric Co.Co. (4) Executive entertainment,entertainment, transportation,transportation, SBCSBCDirectorDirector sincesinceAprilApril 19971997 (4) Executive _ St.ChairmanSt.J.J.ouls,ouls, MissouriMissouriof the Board (5) Finance/Pension manufacturermanufacturer ofofaluminumaluminum PacificPadfic TelesisTelesisDirectorDirector 1984-19971984-1997 (5) Finance/Pension SBCSBCDirectorDirector sincesince beverage containers Background:Background: DiversifiedDiversified retailretail (6)(6) HumanHuman ResourcesResources beverage containers OctoberOctober 19831983 (7)(7)PublicPublic PolicyPolicy andand EnvironmentalEnvironmental The Honorable SouthwesternSouthwestern BellBellTelephoneTelephone The .Honorable AffairsAffairs WilliamWilliam P.P.Clark,Clark, 7272+"(2.7) DirectorDirector 1974-19831974-1983 *Retirlng effective April 30, 2004. Of Counsel Background:Background: ElectricalElectrical *Retiring effective April 30, 2004. Clark,Clark,CaliCallandand manufacturingmanufacturing Negranti, LLP OfNegranti,CounselLIP SanSanLuisLuisObispo,Obispo,CaliforniaCalifornia SBCSBCDirectorDirectorsincesinceAprilApril 19971997 PacificPacificTelesisTelesisDirectorDirector 1985-19971985_.i997 Background:Background: Law,Law,ranchingranching PAGE I 61 PAGE 61 EXECUTIVES OF SBC AND ITS SUBSIDIARIES SBCSBC Senior ExecutivesExecutives David A. Cole, 55 David D. Kerr,Kerr, 51 JoyJoy Rick_Rick, 55 President-industryPresident-Industry Markets President-Kansas Vice President & SecretarySecretary Edward F.E.WhltacroWhltacre Jr.,Jr. 62 , SBCTelecommunications,Telecommunications, IncInc. SBCKansasKansas SRCSBC Communications Inc.Inc Chairman & Chief ExecdtiveExecutive OfficerOfficer SBC Communications IncInc. George ICK. Contopoulos,Contopouios, 58 Jonathan RP.Klug, 4848 Peter A. RItcher,Rltcher, 4343 Senior Vice Pcesident-SBCPresident-SBC DISHDISH Network Vice President-Finance Vice President-Corporate FinanceFinance John H. Atterbury Ui,BI, 5555 SBC Operations, Inc.inc SBCInternational,International, Inc.Inc SBC Communications Inc.Inc. Group President-Operations SBC Communications |ncInc. Catherine M. Coughlin, 4646 Paul V. LOLa Schiazza, 46 A. Dale Robertson, 5555 President-Business President-WiscunsinP reside ht-Wisconsin Executive Vice President-Standardization James W. CaUaway,Callaway, 57S7 Communi_:ationsCommunications Services SBCWiscOnsinWisconsin SBC Operations, IncoInc. Group President SBC5 BC Midwest SBC Communications Inc.Inc. Undalinda S.S.Legg,Legg. 53 Michael A. Roddguez,Rodriguez. 53 PatrldaPatrida DlazDiaz Dennis, 57 ViceVi«e President, General Senior Vice President-Human Resources WilliamWllgam M. Dale_Daley, 55 Senior Vice President, Counsel & Secretary SBC Operations, Inc_Inc. President General Counsel & Secretary Si3CSBC Directory Operations SBC Communications Inc.Inc. PaulPaulR.R. Roth,Rath, 45 SBC West Michele M. Macauda, 47 President-ConsumerPresident~nsumer Markets James D. Ellis, 60 Richard C Dletz, 57 PresidentPresident & Chief Executive Officer SBC Midwest Senior5enlor ExecutiveExecudve Vice PresidentPresident & President & Chief Executive OfficerOfffcer SBC East General CounselCounsel Mark E.E.Royse,Royse. 44 SBC Data Services,Services, Inc. SBCSBCCommunications Inc.Inc. RobinRobin G. MacGillivray,MacGlllivray, 49 Senior Vice President-CallPresldentMII Center MaudceMaurice E. Ddlling,Drilling, 4848 President-BusinessPresident-Bminess Transformation Project KarenKaren E.F Jennlngs, 53 Jennings, 53 President-ArkansasPresident-Arkansas CommunicationsCommunications ServicesServkes SBC Operatlons_Operations, Inc.Inr Senior ExecutiveExecutive Vice President- SBC Arkansas SBCWestSBCWest HumanHuman Resources &&.Communications CharlesCharles E.E.Rudnick,Rudnlck, 51 SBCSBCCommunications Inc.Inc. James M,IIIL Epperson, Jr.,Jr., 48 Paul IC Mandnl,Mandnl. 57 SeniorSenior Vice President,President. Business Marketing Senior Vice Presldent-S.tatePresident-State SeniorSenior Vice PresidentPresident & SBCSBCOperations, Inc.inc, ' JamesJames S. Kahan,Kahan, 5656 LegislativeLegislative & PoliticalPolitical Affairs Assistant General Counsel Senior ExecutiveExecutive Vice President- SylviaSylvia L Samano,Samano, 48 SBC Telecommunications, IncInc. SBCSBCTelecommunications, Inc.Inc. CorporateCorporate Development President-SBCPresklent-SBC Nevada SBCSBCCommunications Inc.Inc. Robert E.E. Ferguson,.44Ferguson, 44 Mary T.T. Manning, 53 SBCSBC Nevada President-GlobalPresident-Global Markets SeniorSenior Vice President-Presldent- ForrostFonest E. Miller, 51 JamesJames 13.IL Shelley,Shelley. 50SO SBCSBCOperations, Inc.Inc. Corporate Real Estate Group PresldentMrporate Planning SeniorSenior Vice President-MarketingPresident-Marketing Group President-Corporate Planning SBCSBCServices, Inc.Inc SBCSBCCommunications IncInc. George S. Rnatwood,Fleetwood, S050 Regulatory Enablement President-Indiana Cynthia G. Marshall, 4444 SBCSBC Operations, Inc.Inc. JohnJohn T. Stankey,Stankey, 41 SBCSBCindianaIndiana Senior Vice President-Regulatory SeniorSenior Executive Vice President & Charles H. Smith,Smffh, 6060 & ConstituencyConstituency RelationsRelat)ons Chief Information Officer Andrew M. Gelsse, 47 President & Chief Executive Officer Officer M. Gelsse, 47 SBCCalifornia SBCSBCCommunicationsCommunications Inc.Inc SeniorSenior Vice President-President- SBCWest Enterprise SoftwareSoftware SolutionsSolutions Norma Martinez Lozano, 47 Randall L Stephenson, 43 JamesJames C Smith, 5454 Stephenson, SBCSBCServices,Services, inc. President-DiversifiedPresident-Olversiffed Businesses C SeniorSenior ExecUtiveExecutive Vice President & Senior Vice Pres_dent-FCCPresident-FCC SBCOperations, Inc.Inc. ChiefChief Finandal OfficerOfficer Michael N. GIIllam,Ggllam, 51 SBCTelecommunications,Telecommunications, Inc.lnc. SBCSBCCommunicationsCommunications Inc.Inc. Vice President-LongPresident-Long DistanceDistance William B. McCullough,McCullough. 52 - JohnJohn J. Stephens,Stephens. 44 Compliance Relief ViceVice President-Competitive Analysis J. Rayford Wilklns,Wgklns, Jr.,Jr., 5252 Vice President & Controller SBCSBCTelecommunications, Inc.Inc. SBCSBCTelecommunications, Inc.Inc, Group President-President- SgCSBC Communications inc.Inc. SBC.MarketingSBCMarketing & Sales Ynocendo Gonzalez_Gonzalez, 46 Shawn M. McKenzie, 4545 Joyce M. Taylor, 46 SBC Communications Inc. President Pmsident-SBQPresident-SBO South AfdcaAfrica $BC Communications Inc. Senior Vice President- SBCSBCLongLong DistanceDistance SBCInternational,International, Inc.Inc. Exti_rnalExtemal Affairs-North JoseJose M. Gutiermz,Gutierrez, 42 Timothy RP. McKone, 39 SBC California Other Executives Other Executives SeniorSenior Vice President-SalesPresident-Sales Senior Vice President-Federal Relations Van H. Taylor,Taylor, 5555 SBC Directory Operations SBCTelecommunications, Inc. Dorothy 1".T. Attwood, 44 SBC Directory Operations President-Network Services Senior Vice President- Senior Vice President- Michael Q. Hamilton,Hamilton, 48 Maureen RP. Merkle, 54 sgcSBC Southwest Federal Regulatory Strategy & Integrationintegration President-Global Markets (West)IWest) President-Procurement W. FredFred Taylor,Taylor, 5757 SBSBCCTelecommunications,Telecommunications, Inc. SBC Operations, Inc.Inc. SBCServices,Services, Inc.Inc PresidentPresident Terry D. Bailey, 47 TimothyTimothy S. Harden, S050 John T.1".Montford,Monfford, 6060 SBC DataComm,DataComm Inc.Inc Preddent-ConsumerPresident-Consumer Markets President President-ExternalPresident-External Affairs SBC Southwest Randy J. Tomlln,Tomlin, 4444 SBC Southwest SBC Telecom, IncInc SBC Southwest Senior Vice President-DataPresident-Data ServicesServices WUliamA.William. A. Blase,Blase, Jr_ 48 Jr„48 Scott C Helblng, 4949 Melba Muscaroles,Muscarolas, 42 SBCSBCData Services, Inc. President & Chief ExecutiveExecutive Officer President Officer Senior ViceVice President-Consumer Marketing Senior Vice President-Legislative AffairsAffairs SBC Southwest Gall EF.Torreano,Torreano, 5353 SBCSouthwest SBC Operations,Operatioru, Inc. SBCSBC California President-Michigan KirkKids R,IL Brannock, 46 Carrie J,J. Hlghtman,Hightman, 46 CarmenCarmen RP. Nave, 41 SBCSBC Michigan President-NetworkPresident-Network Services President-IllinoisPresident-illinois President-ConsumerPresident-Consumer Markets Michael J. Viola, 49 SBC Midwest SBC Illinois SBCSBC West Vice President-Treasurer Cynthia J. Brlnldey_Brinkley, 44 PriscillaPrlsdlla L Hlll=Ardoln;Hill-Ardoln, ' 52 JanJan L Newton,Newton, 50 SBCCommunication_Communications Inc.Inc. President-Missouri President4sfissouri Senior Vice President- President-TexesPresident-Texas SBC Missouri JoeJoe W. Walkovlak, 56 SBC Regulatory ComplianceCompliance SBCSBC Texas President & Cl_iefChief Executive OfficerOfffcer' SBC Telecommunications, Inc.Inc Connie'Connie L Browning,Browning, 50 David CC. Nichols, 4646 SBC5BC Midwest President-Ohio William CC.Huber, 3838 Senior Vice President-President. JudyJudy W. Walsh,Welsh, 6363 SBCSBCOhioOhio President-Network Se_licesServices External Affairs-South Senior Vice President-Government Affairs SBC West SBCCaliforniaCalifornia Donald E.F Cain,Cain, 50 SBCTelecommunications,Telecommunications, inc.Inc. President-Oklahoma John D. Hull, 51 Dennis M. Payne, 51 D. Wayne Watts, 50 SBC Oklahoma Regional President-San Diego President & ChiefChief Executive Officer Senior ViceVice President & SBCSBCWest SBC DirectoryDlrectoiy Operations Ramona S. Carlow,Carlow, 41 Assistant General Counsel ViceVice Pteddent-RegulatoryPresident-Regulatory Ross ICK. Ireland, 57 T. Michael Peyne,Payne, 53 SBC Operations,Operauons, Inc. Affairs & Public Policy Affairs & Public Policy SeniorSenior Exe_iveExecutive Vice President- Senior Vice President & General Counsel Lore ICK. Watts, 47 SBC East Services & Chief Officer SBC Operations, Inc. Services & Chief TechnologyTechnology Officer SBC Operations, Inc. President-External AffairsAffairs Lou_s it. Casall, 52 SBCSBCServices, Inc.inc Louis IL Casag, 52 Richard RP. Resnlck, 3838 SBC West President VicklVicki D. Jones, 42 President-SBaPresident-SBCI Mexico StephenStephen G. Welch, 60 SBC Advanced Solutions.Solutions, IncInc Senior Vice President-Product SBC International, Inc. Senior Vice l_resident-ProdiJct Senior ExecutiveExecutive Vice President-President- Management & Development Margaret M.&L Cerrudo, 55 ChristopherChristopher T.T.Rice,Rice, 46 Sales & CustomerCustomer ExperienceExperience Senior Vice President- SBSBCC Operations,Operations, inc.Inc. Senior Vice President- "Senior'5enior Vice President-Network SBCSBCOperations, inc.Inc Human Resources Services Human Resources Services Frands J.J.Jules,Jules, 47 PlanningPlanning & Engineering AngiollnaAnglollna M. Wiskocll,Wiskodl, 5151 SBC Operations, Inc.inc. President-Global Markets (East)(East) SBCSBC Services, Inc.Inc, SeniorSenior Vice President..President SBCTelecom,Telecom, Inc.Inc. LeaLea AnnAnn Champion,Champion, 45 Alfred G. Richter,Richter, Jr.,Jr., 53 NetworkNetwork Services Staff Senior Executive Vice President.. Senior Executive Vice President- Mark A,A. Kelffer,Keiffer, 4343 SeniorSenior Vice President,President, SBCSBCOperations,Operations, inc.Inc ChiefChief MarketingMarkegng Officer President-Business General CounselCounsel & SecretorySecretary SBCSBCOperations, inCInc. Communications ServicesServices SBCSouthwest SBC Southwest FrederickFrededck R. Chang, 48 SBC Southwest President-Technology Strategy SBCSBC Operations, inc.Inc. PAGEIPAGE 62 STOCKHOLDER INFORMATIONINFORMATION Toll-Free Stockholder Hotline The DirectSERVICEDirectSERVICEnaTM InVestmentInvestment Program Annual.Annual Meeting Call us at 1-800-351-7221 between for Shareholders of SBC Communications The annual meeting of stockholders 8 a.m.a.m. and 7 p.m.p.m. Central Time Monday Inc. is sponsored and administeredadministered by will be held at 9 a.m.a.m. Friday, through I_riday.Friday. TDD 1-888-403-9700 EquiServe Trust Company, N.A.N.A. The April 30, 2004, atat: For help with: program allows current stockholders to For hel p with: Hyatt on Capitol Square •~ Account inquiriesinquiries reinvest dividends, purchase additional 75 E. State St. •~ Requests for assistance, includingincluding •SBC stock or enroll in anan Individual Columbus, Ohio 43215432'l5 stock transferstransfers Retirement Account. •~ Information on The DirectSERVICEDirectSERVICE™TM IndependentIndependent Auditor _;, ForFor more information, callcall Investment Program for Shareholders Ernst &Young& Young LLP .,,: - 1-800-351-7221. of SBC Communications Inc=inc; (sponsored(sponsored 1900 Frost Bank Tower and administered by EquiServe Trust Stock Trading Information 100 W. Houston Company, N.A.)N.A.) SBC is listedlisted on the New York, Chicago San AntomO,Antonio, TTexase.xas_.,78205 and Pacific stock exchanges as well as RequespRequests for' i0-K10-K Written Requests The Swiss Exchange. SBC is tradedtraded on the The SBC Form 10-K, filed with the,the Please mail all account inquiries and London Stock Exchange through the Securities and Exchange Commission, other requests for assistance regarding SEAQ International Markets facility,facility. isis available in paper form by request your stock ownership to:to: Ticker symbol (NYSE): SBC and also is available onon our home SBC Communications Inc.Inc. page on the World Wide Web: Newspaper stock listing:listing: SBC or docio EquiServe Trust Company, N.A.N.A. www.sbc.comlinvestorwww she. comlinvestor relations. SBC ComrnComm P. O. Box 43078 P. O. Box 43078 Investor Relations Providence, RIRl 02940-3078 Information on the InternetInternet Securities analysts andand other members InformationInformation about SBC is available on Please mail requestsrequests for transactionstransactions of thethe professionalprofessional financialfinancial community the Internet. Visit our home page on the involvinginvolving stock transferstransfers or account may call thethe InvestorInvestor Relations Hotline: World Wide Web: ww_.sbc.com.wwwsbc. corn. changes to: 210-351-3327 SBC Communications Inc.Inc. General InformationInformation -—Corporate officesOffices c/ocio EquiServe Trust Company, N.A.N.A. SBC Communications Inc.Inc. RP. O. Box 43070 175 E. Houston Providence, RIRl 02940-3070 RP. O. Box 2933 SanSan Antonio, Texas 78299-2933 You alsbalso may reach thethe Transfer Agent 210-821-4105 for SBC at theirtheir e-mail address: [email protected]@eguiserve. corn Printed onon recycledrecyded paper _i¸_ PAGEIPAGE 63 ~SBCISBCCommunicationsCommunications Inc.Inc. 175175E.E.HoustonHouston P.P.O.O.BoxBox29332933 SanSanAntonio,Antonio, TexasTexas78299-293378299-2933 210-821-4105210:821-4105 V_3, LV, LVV_._ l, I Into _CV_V LVI, U ulv,n,lvL- IU 3Mc' ' Ezhibij- vvi„f+ I, " .... __'. ".[".,f ! Exhibit 2 2 t I I. Nexs_'qg~~P&_PRQPf]ACOBSJACOgsjSa_vO_,@' POLLARDsLet"~ AI_OINE't_SI 17 tstt gt RTB_o svft@a_4SELOR_ts 0 I tt'Hstf I, ogtts;_ k1_AT f ttjjtKV gjj/st, I, _._ I SOSQSS42tv I l tsjcQ Itjs/p ccnl i a i, I, Ii It F=b_ IB, 1998 i: _1_ _ cdum_ I' I ~ I I' jjgjstji to Cojtttujtta i t. I ! ! I Mx, Thomas %eekel l At, l Couth'/Iesterd &8 MobBC Service, axe. I I i 17330 preston Kosd I \ I j; i_._o_o= t_o_Iii , ., :,_' ._ - ::.' ,': 9aHas, Texas 'I/5252, : i [ ' ' RE' lieaticn cf Scuthvsestern Bell CcunnunscatsIenee Segrj'ees, Btc, S/ /It tjsvsestem Bell 9jstsnce fclCC'ertjfjcate Public Cenvcluenca autt .' S Lo , ele_Oll_all_cf "_,_tion Servit:_s": i ,,_XIMessrtysity• forfor AuthorityAutjjordy" ...... totol_ovidePrwide lu_eIntrastatea--om_eSt TTCIecemmuniea66%for A]ter_t:t ".re,__ t,d_Oms88t&c89:__L-_ t ._IVPthm._,_- i_,,, .eta' f South L:_otma _u_-_=._ _ ¢_.,.aPdtenr,._ rljErtrvenerator _e_tv= ,wt ,.,,_th Skat f Sod&...... Camliaa _ as6&ll irequest"_'|'_]L__Qr a._ 0¢-- P~ , ' ,, : IUU_ State o - .,., ,Ifur ....jts Business"-._,, ServiceService un_Offerings eset All Cailiug.. Csusj: ang Opetuter Service : i _fOr _ _u_-_ _ Carolina ' : t oleiags Wrthm the State af Soe@Carobma -._7__ I: Dear 7OGL I I,' D_Tom: !: apptication. ,m,: the abo_o mawr. : I am'enclosing the fied order approving our application 0I the above matter. l I _.m'_'i_osi_i' the _ o_a_rapprovingour ,,I Ã you have aay qoesttons, ylease do not hesi to give me a cd, i' i._o . , Ifyo_ _ve any q_stiet_s, please do _tot h_ i ' i i i I ! I I ;! ' $_ __ j' I I I I. • i :..: ! I l* l ' • l! :_* ' '' ROhet 9.Sible,',j,,,1:' ": _0-.., ,.,.. ; ., II:;',::l I |'! I I t, I I ' l 1 ' ! I , 1 896/myg !.-II , 1 I t RHclcslQc i I E_tomu_ .' I i l cc: MCI fear~~a ~e I I I t I I i ! 1 28238S„&-SI jSSC) . iI QiSBN"1 ,' l ,. I 1; 'v I ~ I v r I vvl,v LV,L V LVVT"_L V V 'T[ I I filo _I;_EvppLvvvtJ v L.uvuvvll _ u zvlt_,_v_..v fovvv 11,J Jdu' ' IVI vv i : i. '= : = ! ! . 4 i i' ! i: o i' i' : i I i i L i I' i i : = " "BEFOREBEFORE I I ;; !', I THE PUBLI_PUSLXC SEEVI_E8FRVXCE COMMISSIOn.CbÃÃXSBXON. OF SOUTH CAROLINACAROLXHA i ; ! DOCKET NO.HO. 97_313-_97-3l3-C - 01_ERbRM8, NO.Mb. _8-4598-45 JANUARYt7hÃUARY 26,26 g 1998L998 I l ' ) I '' ' ' "' '', "I'! ', " " ", 1-I.i: ' "' i_Ngm R_';"i_._RF. "5'A/3'i c'at.lonc'ation:of:of_'S'._u_.hwezbb_,n'8'a&Mw'estern 'Bell."',"i=''Be31 _ ,)_,II, ,_EIIE_.'gRQER ', .', " ': • = "- 'Co_unic_itidn_i!S_vices, Iztc_ D;BA ' ': )i. APPROVING _ " ( 'co'aieunic4t9. ons:Services, xncs DBh. )', AppRQvXKG: SoUthwesternBouthvestern Bell LongK, Distance for )')= C_I_P_C_T_CSRZXPXCATE ! I' _ one. = ! : a Certificate of Publ_cPublic conve_enceConvenience ).) andlNecessltyand gecessity to Provideprovide IntrastateXntzastate )} _e_ecomm_nicatzonsgeliecoxmunications Services within ) the.,0he, StateStats of Sou_hSouth Carolina "andand ) R_uestRequest foefor AiEernativeAlternative Re_ulatlon.pecJggag$, pn, ) II i II , I ] ;." .,.. Thi_'This' imatterImatter come_comes beforebefoxe the PublicPub1ic Service COm_i88_nCdmmi. eej.on o_oZ :. I_, ,I ., Sou_hSouth CarcIlinacar_iin_ [the(the "Commission") hyby way o£of th_th'p _pplica_ionApplication ofof: "3outhwest_#n'SouthwesteIx'n BellBe3,3. Communications Services,Services„ Inc..Inc. d/b/a6/5/a 3outhwes_e_SouthwesterxI, I I I BellSell L_n_'Kong-,i_stan¢_9istance ("SBCS("SSCS _nc,"Xnc-" ogor the "Company")"Co&pa&y") _eque_t_ngrequesting _'a'' I ' Cer_if£c_%Certes. gj, cate of Publicpuh3. ic Convenience and Necessitygecess$, ty' authorizing it:toit:&o'. operate as,as' a resellerxesellex' of _nt_a_tateintrastate interexchangeintexexohange = ! I ° . .| , , teleeeueIuulgeahieue eerViuea, eithirr, the. Sutta. eog Snuth Care3iua~.' ' ' ',I ._.. _- " _ _ I_ , '' I " '' .... :" : _" _ • _ ' '• 1 _ ,_ I _le_o_:cat_ons I _e_vgces.w_th1_I I _he.$_._._ Sou_h .c_.r_na._ I' 1 ,] , ~ ,I • _ , _I; ;" , ' , .... ' : =,_ , ; ,' ,I ',_' _ _' • 'Appl' I " Tb C p 0 8 f 1 d, p weal t. tp S.Cy 8 85 An p~' 'I '1 ; •he,.C_mpa_'s,!_,='Agpl'ida_ion was £1!ed puzs_ant. , t_. S,C4.,..d6d_ J_nn.. _'i,,ti I I '_58-9-28,0.!(Suppo558-9-286 l(Supp. 1996)3.996) _ndan8 the Re_ulat_onsRe~lations of _heth'e Publl_SuMio Se_viqdServicd i I • i commissio_.o£COIMRission . of South Carolina. By its Application,Application. SBCSSECS _ne.Inc. a_o:a3:so _que_edeecpxeste4 _ha_Shat it be gr_nte_grante6 regulatory treatment s_ilarsimilar to _atthat I granted t_ito, ATILTAT&T Com_uni¢_tion_CommunicationS of the So_thern8outhern State_,States, _nc,Xnc. !' ("AT&T")("ATILT") b_bjr OrdersOx'ders No,No. 95-17_495-3.734 andand, 96-5596-65 _nin Docket No„No, 95-661-d.'.!95-663.-C ', ' r The C mmission's Executive Dixector instructed SECS Inc. to The C_mmission_s Executive D_recto_ in_t_ted _BC_ Inc, _oI I publish+public. sh, _ed e tl_e,t9me, _a p_epare_pLeyaz'ed Notice of Filing i_ newzpaper_ oi . :" ! Fi3ing in newspapers og g I = vv I. Z.V..(.VV'T; I, I Vt_*vl _l_ I I DOCKS%DOCKET moNO l 9797_313,C'-313 C e}RDKRORDER NONO. 9898-4545 " i -_" JANUAI_Y 21 , 1998 : JASUAmg 24I~ PAGE 7, '(, 1' ( I' I ! I !; I I ' "generalgeneral pggculationc$_culatlon inin thbth_ affe'eked,af_e'cted areas.areas. theThe purposepurpose ofof the;.their:; noticeNotice pk;F&o_iFilingilin9' Vaewas Cpto informinform interested,interested par0iee,par_e_ ofof 8BCSSBCS Xnc.Inc'spS ' ~ "1; i '_ kpy3,'Ap_licatildh9.cation andand ofof the.the mannermanner andand timetime inin chicwhiOh to_o fj,file3,e thethe : , eppenpninIi&.app_opria_ payee&iinpeplead_ng_ i'erfor pent:inipetienparticipation inin thethe pneeee&iinp.proceeding. specSB_S |, l & . Xnc.Inc. compl'iedcompllied withwith thisthis instructioninstruction andand providedprovid_ed thethe Commission,Commission I, : :.' v3,w_thth pproo_iofro0 f:", of publkcatkohpublz_on ogo.E tlirtthe NQtxceN.ot_ce ofof' p'llpng-Fil_ng..No.. KQ. pethPetltlo_t.1065 ' , -.I- I ,i!' '. '_'' , ' • "II " ' '"il ' , ' "' "".''.;' " ",,:" _" _' : , -' ,_',,"t''Q, . . :; . , ...... , , ...... : • ', : ! .} ,: ; , '...'t'o Xnterve_te.r_e_e e %aswas rece'i„ver're_e'ived concer6ingco.ncerning sscS'SBCS" xnc;~sInc,_s'Ap#_i=a_ioh.AypXipahion. _ !!:" ' 0ÃL i /_ beax'hea_in_, xnf @aswas commence~:_mmenoe_ on ~actuaryJanuary ~_,r '199_,l99~ p atat ll"ll:0O00 &em.a.m. (_ xni_ thethe commission'sComm-s _on's HearingH_$ng Rpem.Room, TheThe Honorable Guy_uy sutler,Butler, I Chairman, presided.p.'resided.. 88OSSBCS Xnc._ne. ~as_as represented'hy_epresented'hy Robert D. Cogi1e,CO_,L_,}I _I & I Remi.Esquire.ree P~lorence_iorenue P. 8'e3._'_Iser,ser, Staff Counsel, representedrepresented. the : i: "_-"" Cam1missiCommlss&on pn _taff. 9__?, .|p4@tf. Thomas _ A. Sec%el,We_kel, St.8r. Manager -—Reg_l_oryRegulatory _orfor SouthwesterhSouthwestern Bell aob_l_,KohileI SystemS,Systems, Inc.,Inc. , appeared and @f_e;edoffered testimony4564 j.mony in suppor_Support ofpf~SSCSISBCS Inc.Xnc. 's Application.App3. ication. TheThe _ecordrecord revealsreveal@ thatthat SBbS83&8, I Inc.Xnc isz, s aa D_laware$618%'are corporationcorporal', on an_anC isis na whelly_owned%holi/'~0~ed subsidlary_subsidiary' bf:of, :: 8'aC ("SEC") , SBC Commun_atlo,s,Communi, catipns, InC.Xng. ("SBC"), „aa holdingholding com,companyp pf one of the • . _., , ," ,.,; [ ,,. ,.:: ,.,,,,, , . ,'',, ,.:._,, ',- ' , _ . .,,,,. : ', ., " e' ~ ' • , _,_ll';• QIP$3,, . _;_a_ger;~aLI" ' _qgIx;5,g _ompanle@,.cOBkpa'ni+Ip'„,_ : I :',S,BCS85CS _nc.'ZAc i_iQ aut_0_i_e_LultbpkxtRe8' " "tOto '_'tg@%8pg't,_...... ' ' !!'.!: , .,. , ,, '.,", . . • . . _si._¢t, , .. , ~ business ~d Sou_hSouth Ca.rolxnaCaro3;9.na asai ae. for_nforeign cor_ora._ioncorpora'tj, pn byby _h'eth'e '_'Sout_"Sputk. "[ ';! any Of one of the| i! i_ I Ca:olinaCaro3. ina S_#retarySecretary of02 State.State. AccordingAc'cording toto Mr.RL. weckml,Real&@3„ SBCS8BC8 Inc_.Inc;. proposesproposes tO!!oEferto(', offer long3.one distancedistance servicesservices usingusing resoldresold t_ansmiss_6_Cransmissiin ! ' ; ' Servicesservices o_oKIunderlyingund_=lyln s _arriersCorri. ebs whichvhich areare duly'duly" certifiedcertify', ed Byby the''the ~ I ", Commlss_on,l}Commission. '.'1 Mr.l4r. Weckelhaeckel explainedexplaine@ thethe Company,s'Company's requestre@met for.for, i " _ ', 1 _utho_tyauthority _tb p_ovldeprovide intere_hang_interexchange tele_ommumgcat_onstelecommunf. ehtm. one _e_vicesservices _nin ._ south CaralgI aa as a reseller The record reveals the Company 8 ' "_-_ South Carol_.,na_. as a _eseller. The record reveals _he Company's _ t ': services,services oo e=atio_eration5. and'and, marketSngmarketing procedures.procedures. I i , i ! : < i i: : ' ,: . ' @&it~ V I VI4~~ J~ cvnu u i v i niivt v& l ~ Lv. Lvv'tg t ~ I unin y~vuv d Hr. Pe ake3. also exylaine8, that. 88CS Xnc. 'possesses the teehnical, '.- financial ac@ eanagexia3. abi3. ilies to provide its I servaess iln South Carolina. Pins'3, ly, Hx. Reckel testified that j' vous. 8 operate in accordance with the'Commission xu3;es; I'cpu Xa'4i QrLB gukdelines, and Commission Orders- Aft, er !fu3. X coasihq;sation of the appZ. i,cabJe law,;.the, Comp~'q ' App3. x +8%5,'QP , , @'Q8 %49 $&i58%56 pr944xLte@ a5 t;4e!hearing, 5he, I I Commission 'h e Eehp issues its %784itkgs of fact @@4 conc3.usionS oZ 'i I P XHGS 0P PACT g8 Xng. is organized @s a, coryoratim. .under the 2.ass of I the 8'ta'tQ Dele+axe and is authorize@ to go business as a foreign cog pox'zL440Q xn the StiKte of Sou'th C8r63,'f58 bp the Secxptarjj K State. I 2. SBCS Xne. operates as a non-facilities based, reseller of interexchan ge services @Ac! wishes to provi68 its services ill South C8XQ13.88» Is BB 8 xsc. ,h88, ;tkl6."expe'rf+xlce, , ', c8'phFkL3-'x, I I ; . resource@ t provide'the services aa describe@. ' p I CQlWCMSX088 CS' hL%' ke8 on the above find'ivies of fact, , the commission I at a Certificate of. Public Convenience and Mecesef. tg anted to~SECS Inc. to provide intrast". ate interXATA I 'to or$.@inane an@ terminate to3,3, t'raffic within the same ZAN s set forth herein, through the resale of intrastate . I Ride Area T 3.eeouununzcations Services (MATS), Message I , 1 Mv i r i vr»ri u v I„v I v vga' i gvuv ivii I" ! DOCKET NO.I::80. : 97-313-C97-33.3-C -— bRBEPORDER NO. 98-459S 45 JmJANUKRY a Y 2 i3.998 Je PAGEpwsz 4 |...... I I I I' I i ! I , j | I! ° TelecommunicationsTeleoomeuzIications Servi_bServicb (_Ts),(Ã'zS), ForeignPoreipn Exchange Service, , ! ! !' I : _rivateP z 1.vate LieEreje Service,Servi. ce, or anyazLy _herother services authorizedauthori. wed for _e_eresale, I by tariff_i!oftat'itive !of carrierscarry. erg approvedaypx'oved byhy the Commission. _ : I 2. _heThe Commission adopts a rate designdesi, gn for SB_SSBCS Inc_Xnc fo_Coz, . il ' "itsits Eesa!eiresale. , 'ofof residential services which inrlugegincludes only max£mum.maximum , rate 3.@veil fox' each tq, riff eh@,rye& A rate;„structure "Irate level_ for e_ch t_ri£_ charge_ A'ratei,St_u_tu_e _ _{' '_'i ':i_co_pera_ng",ieeoryezatfng maxim.um_temaximum 'i;ate levels w_hwith the'.fle_£_£1i_y'_the .flexxhk. lity fax'_ _. I I |, J ad_ustment!_belowadjustment:below the maximummaxi. mum _aterate levels ha_ha's been p_e_ouslyprev'$. ously _ adopted1 8bt',by%theh Commission. In Rez A_plicatlon of GTE S_rin t '' _ ! Communications'Communications Corpor_t£on0cox' oration, etc.,etc. , Order No. 847_22,84-622, _ssuedissued, inia i _; ...... I _I DocketSocket No=._84-10-CNo. i~'.84-3..0-C (A_uSt(August _,2,f 1984).L984). i.! : "'4, li)i (! i _ [SBCS'. SPECS Inc. sh_llsha3. l no_not adjust its resla_n_alresidqnt'ia3, rates belowl.helot. I "thethe app_ovapproving maximum level without notice to the _ommlssi0n'Comm). ssidn and, to, , ' I the publlc_public. With'With regard Coto adjustments to residential rates, SBCSSBCS' I inc.Xnc~ shall;_ileshall ifxle its.proposedits p2'Spoked, rate chan_es_chelng'eely pl_blishpgML817, its notlc_'notice o_:Gf i I sucheurh changes,changes„@n4and f_leCi3.e affidavits of pDblicationpublication with the i _ommission!twoCommission', two weeks prluzprior %_to the effective da_edate o£oK _hethe _h_nges:'changes'. ' i ! I ,,, J=I. ., .. , | ! ~ ~ i . Sc465'Yew) :c: je'%~event: .i6" . e. pubs. 6o@tee, re 'wi~veC~ I an4 'theeegore. i I 'I •.-' _.$ ~ 1 I ' 'no& fox' I' 'ie~XeJ y recfuct:X0%8 below 'the %Sled'xslum NB p in 9ixlst. BIaces l ! . I which do 'n_no t a_fectaffect, the general bo_ybody of subscribers or do no_ i! , ar do not, i constituteconst3. tute }aa _ne_alpenes'el rate reduction.re8uction. Inxn Re=Re: ApplicationA lxrata. on of GTEGTE i ' z I SPrint8 z'i, Co!-o _ni_..a.ti.0ns,UXL9. etc., o_derQx'le%' No. 9_-_38, _ssued in Dock.eti ! nt rations p et+a p So ~ 93 638 g issued in Dbcket! i' !i : No.Ho. 84~10--_84-10-C (July 1_,16, 1993).3.993). Anyhey proposed increase in the me_ilummaximum rate level $eflect_reflected i_zN, the tarifftax'iff which wouldv'cults be applicablefi, tol_. • L be aypj, cab', e to ', the general l!body'body of _hethe Company's subscribers shall constitute _id;i= ! general rat_makin_rat Pmaki. ng p/oc_i_gproceeding a_aan8 will be treatedtreated, in accordance!:accordance I i, ] i,I i I I VIIV V I V I lit V I iW JNL'' ' I V I vvl,VV LV,LV /.VVg:LVV T}1 t , Ivf,,,, _vwv@VVV L.v:,_ _,:v,,,,,v%_ V ~ V V)I F ¢ ,| .. r J ', * ! DOCKET NO'.MO _97-313-C97-313-C -— ORDER NO.WO. 98-45 JANUARYVAÃMar 2626,' 1998l998 PAGE 5 ..PAGE , 5. .. , ---- I I 1 i I" with theWe n_ticenP ticeI _nd:hea_ihgaced;'hearihp provisions of s_S C:,C. CodeCade Ann. : : # i P •_. b : ' S58--9-540'55S-9-540' $_pp.Supp. 199511995).. ' . , , • 4. .,_ith,ith respect to business service 'o£f4offerings_._ngs, credltcredit. cardc@.'ipse: ,';~ I g I!I I services, uperator _ervices. and customerO'Llst&mer net_drkQe'two%'R offerings, s&zv'ices g 8lgex'Gator kervxces g and Q jfeg'i n+8 g ( |, tariff fili_%ss0gs will be p=esumeapresutaed, validv'ali8 _ponzpoxL _il_'nXiling'.9. Iff'theXf'the . : : Qp@mi 5Fiion ,ixLstitutes an investigatj. on of .a, pagticf, u3.a.a siting Cozu_issionl,inst_tutes1 an investigat._on of .a, p.a,_t,i_ut,a_ ei&i:ng i.{ i 'i"' " I 1 ' I ' 'withinw_th_n" se_se'v, ' (7'1'( 7 j' _aysi:da+8 l, %'he_Qi1Mxl the' ta±'_fft8.x'xf f fi2_n_f5.3.'iQQ 'w_l.'l+43.l b_he susp_'_edis'Ll'speaKPB'0l ! - '_ 1 ! ' :, until furtforth err Order of the Commission. Any~y relaxation,relaxati'on in'xri the , 1 future repo_ing _equ_rements that may be adop.ted _or AT&T shali , couture repOYting requirements that may be adopted for AT@'f shal3. I ) I I I I ' ap_lyapply to S:_CS,ZnC.8'BUS Xnc. also.a3.so. Staff _sis instructed to monitor"mamitox. theMe '( i %'I ,1 • ° 1 Company using the+'he 'samesame monitorinmonitoring 9 p_oeesspL'ocess an_an@ techniques as are8,re: _ ' ' _, used to .moe iso,[t_Ir _ATET..MS.T. 1 | 5. ._ _CSCB Znc.Inc. is subject to access chargecha, age@ p_ffsuantpursuant totq I i ' CommlssiunCommission O=de='No.0rd, er 'No. 86-584, in_n whi@hwhich the Commission aeterm/ned"daterm9. ned:. : ' I tha_ for a_esscess pugposes,purposes re_elle_sresellers should be treated'similarlytreated. similarly £oto : i £acilities-_asedfacilities-b @866 interexchangeintetexchaQge carriers.caz'riers. " ; J : 6_ _',ithj.th regardregard, t:oto the Company's _esaleregal. .e of service, an : : ; | I i ,, i . : ,,,: ,, , !. _, _ ,'_',,_,_",.... :, _:,',,::,'"_,,.!. . . ' 'I;;5Q+Qs'@ l",' 'ShIO I)1'6; 56. )fbi)I';ALII:eC):IISI a Ife~e'I)'6fLideXChe'N )!ff)af'Z'itl8'r I)ff:: II : i '.:_,.._,,,, .: .,:,,, :':,_'.:,.1 I v ...... :...... , • .. ,:,,,.....:,. . : !:::i " •. ,,' ,'- .....:_ . ,. , , ,, .. . ., . , . ,. . I ,' ,': f ""'_'~ ") operat,6_c!'i_,,oyerat'. or", Isi~.vz'.c_vi.ck,;prov,provide'rad_e_ iC_._ the end-usere'68-'User so'_deS:i.re_:.sb'&165ile8;- . ,. I_'I , I I I !1 i 7. SSIP_CSCS znc.inc. shall resell the services of onlyon],y ,thosethose 1 I , inte_exchan_einte LexchiKQp' e c_rr£ers'caw'riess' or LEC$lBCs authorizedauthorised to doCo bus_nessbusixLegs iniv Sou_South , Carolina byl,thisbaal t3xis Commission. ZfXZ S_CSSBC8 Znc.Inc. ¢han_eschanges underlyin9underlying ,. , , : carrie=s,carriQx'8 g itig shallsha13. notify the'the Commission iniQ w_£t-in_,o'rS, i , ting ; , : , 8. _:Lthtb regardr'egards to "thethe o_i_in_tionorigin@tioxL and _erminati_nteimination of tolli:i.toll, '.. I f 'I I 1 i I callacalls w_thi:vithi _hethe same_same DATA,.KATA& $BCSSBCS Ing.xnc. shallshal, 3. compl_/comply' wi_hwith the ter_terms:_ I "-7" ) I ;i ofoK O_d_rOrder Nogp ' 93-4_2,93-452, ;OrderOrder Approving Stipulation a_dad@ i%greement, _nA._: Stipulation Agreement !5. f m ! . _ ; !! I l ~ 1 !'I . , I,' I'I , !f F_Lvuth", v vvl,VVI, /-V,Ll/, /.VV'T;_CVVY$ I,t I,Ignltl_nm I QVUV VVIIV ltlVIIllhVL I V i I Z ; . DOCKETDQGKKT NO,NO. h97-313-Q97--313--C - ORDEROR9ER NO.MQ. 98_4598-45 a JANUARYJA.HQ~Y 2( i 1998X99S PAGE,,PzGE 6 6 | ___ .---- I i i t I I ; I ' DoChet SOS ) , , I DoCket NOS!!. 92-182-C,.92-182-c, 92-183-C,9Z-l8R-C, and 92-_00-CM-ZOO-G (3une(June 3, 1993)o19S3). i I I 9. ISBCSBCS Inc. _hail file s_v_llance, repo_s'_n ' a ealenda_i I, Inc. shall file surveillance. r ego rts on a calenda r:, I p III ,I iI O_ fisoal _ea£jear b_sisbasis with the Commission as _equ_rede'e~ix'ed by Order No. i as by Order 5o. I l I 88-178 in _ocketDocket No. 87-483-C. _he p_oper form £oz these repo_tsi in S7-483-C. The proper form for these reports I I isig indicatedindicate d onoa AttachmentMtaehment A. I, I 10. _h~she C'ompany.Company. shall,shall. , _nin co_pllancecompliance w_thwi„tg, .C_mmzsszon..coqunisgion . . i I I .' I I II f ' "i ' xe'gglationg, 'deisj. ~ate. and maintain an aetharz'ied ut&1ity ' ' I :I_ ' i . : _.. .- i.'I !l = repz'esentaI, "ivy vho is prepared to discuss, en 1 repcesenta_ve _o is prepared to d_sduss,'on _ r_latoryregulatory leve_',level, j ~ I I _ustomezpvs6emer re_ti_nrelation (complalnt)(complaint} matters, engineeringengKneerinq operations, I 1 r a58. '@pairs. xa. '. I tests and _'_Pa_rs" zn addition, the Company shall,shall pro_i_eprovide totp the.the I i Commissiongoggle. gsion _n'ia, writing t_ethe n_mename of the a_tho=iz4dauthorized. representative!tolrepreqentativeI to,: i) - he contact in connection with , ! b e _ontact1_- 1p in....connect!?n wl_h _eneralgeneral m_nage_entmanagement duties as wellvela„: I as emergenciesemerge+ mes wh&chwhich occur during non-office h_rs.bdurs. SBCSBBC$ ZnC.Xnc. ! shall file|_heSile the names, addresses and _elephonetelephone _umbersxIumhers of th_s_these I repreSenZa,_ivesrepresent. a4 i~es with the Commission within _hi_tythiity (3_)(30} d3ysdays of I receiptx'ecei pt, of ithis', this order. A_tachmentAttachment B8 shallshard. behe _sedused to file the ' l I name(s) of xegvlatM'y compliance /ex'sonnel. Fu;,rther, the name(s) of regulatory compliance _ersonnel. Fulrther, the CompanyCompassI II , sha13. "pram _y _o_fy "QLRthe C_m-_ssxDnComme ,_n,y_a_.xn' ,,_f_4 ;, ",, . i; .° +y'• ....Jog'~,,_"":...... ssxon twxa'tg.:'_.Qgi'zg_. "'- " '/he""" :....., ' ,, !:]'_i " {t :._:,;._,',:,I , ,~ ,;I ,,,I ' ,." : :"'. ' .... " ' "'_" , "':, " _:i 'i ' ~ ~ i .t': ~ ','I,, ' ' " _ _ ,, ; _ , • s , , .,I , '... " " L&pK'eseR. ta .V S:a_e :_!&eplacecl_laced, r an_@AC _hethe C_m_anyC6mpRAp" _s.&Isl Cix'ectIed'_ire_e_:to to _I . I • "., ; I ' _ . .' {_i Complycomply w_tD.%Pi't !thethe Commission regulations unless w_ivedwaived, by _heHie Commicomiaission.ss i on. I I: i" ! ! l ! : I I, I z 1 I v r V'Vl, ZV, LVV_T! I, 7AIYl12nttl vuv L'Vll'llUVll_ U u._vll_llvu.,i V 1llllVLi jg~&4~ VV I LV, I VV't f I ~~UUV lh_...-,,v. , v ',.i.D "*_' Vill VV k g aa O I J, % DOCKE'ZDOCKET go'„N0; 197-3la-C97-313-C -- oamaORDER NO.NO. 88-4598-45 _" JANUARYJ_ARY 262_la 1998199B \ / Ph._AOEGE 77 i...... i sha2. X rekaia in full£uli forcefores andand'effecteffect un'„iI3.untill I .. o. oo. o, ,n i muxther_*:ther OrgOr_ er e%of thethe CammissioQ.Commissmon. _!i BYST 089ORDER.ZR OP0F TERTHR COMMISSZON: 1 3 '_i"' i , A_-s_-':_I , I / i 'i'. " " ; . ' :._t ! : , i i _ : __, " , .. __._i Ii,,_ect:or i (SEAL) - "' i I 1 | i L ', ! ., : I , i.' t i _ ;I:.::'"'"'"',,... : ..: _,,; ;_:'_'_ ' i, , |. . .. "" " ;i:',i, ,' ' :! .,i..; , ,J • ! " J ,11 . I i i !: : .P ,! 1 I 1 .. o I , o i ! ~ UVl,vv I, LV,LV &VV_)LVV't) l,I l_nmI gnl~l rr~vuv iviiv v i v i nivv v- ~llv Tvl I I V "I:"' C I 4, L; DOCKET NO. 9_7-S13"C - ORDER NO. 98-45 , ,, DOCKET hTO. 9'7-313-C —OEMR NO. 98-45 i -4 JANUART£JAHUARV 26, i19989.998 ATTACHMENT AI/_ i .... ,zi "-- _ • i 'I i: 1 A_UALAR~kL INPOP._L_TIO_XNPOEKMXQH ONOg S6_T_SQUAB C-AROLZ_ACLOROX ISA OPEI_TIO_'SOPEBATIOES i: (; FORP'OR INTEREXCHANGE72PZEREXCHAMG~ COMPAIT_ESCQKPAHXK8 AND AQS"&OS'SS ! iI i i I ! I ! CQHPAMT NANSEI' ! a _ : ' :I ...... I FEIFEX NO.gO. ,... l I ABBESS. \ '- ii' I I i i CITY, S&A&zg, ZXP 'CCDF PBbgg gUKBRR i : C_TY, STATE r-!!ZiP. 'CODE : PHONE R i : I i z (i)( X ) SOUTH CArOLiNA~OLZNA OPERATING R_VENUESREVENUES FORPOR THETHE i_3.7 'MONT_SKgb'ging ENDXNGggP&NG . DECEMBER}'31DECEMBER,",31 OEOR _ISCALFISCAL YEARXRAR ENDINGENDINGS , 11 t (2) SOUTH CAROLINACA'40LXNA O_ERATINGOPERATING EXPENBESKXPEMS88 FOR THETSR 123.2 :MONTHS'NON'THS ENDINGEÃ&&80 I : DECEMBBR:I31D'ECRKRER'. ;31 OR FISCAL YEAR ENDING : . (3) RATE~TF. BAS_BASj INVESTMENTX~STAT INXm SOUTH CAROL_NAeaSOum O_RATIONS*ereemXOmS~ FOR 12~~ MONTHS E_D_NGZliblg6 DECEMBERMCERBER _i31 OR FXSCALFISCAL YEARVZAR 'ENDINGHmoxme ..... : ! * TH_STHIS WOULDMQQLD INCLUDEXMCMQE GROSS PLANT,PLAN'r, ACCS"MULATEDACCUMULATED :DRgRECII%TION,DRPRRCZZTXQN, MATERL%._SKATERXA 'S AND SUPPLIES, CASH WORKINGCORKING CAPITA]i,CAPXTAXi CONSTRUCTZONCONSTRUCTION i ; NOREWORK _N_IPROGRESS,XS(',PROGRESS, ACCUMULATEDACCULTURATED DEFERRED INCOMEXPCOgE TAX, : CONTRIBUTIONSCQNTRXBVTXQNQ II_Xg A_DgQD O_Og CONSTI_UCT_ONCONS'gRUCTXQM AND CUSTOMERCTJSTO55R DEPOSITS.DHPOSXTS. (4) _AEENT'S:_A_ITALWREST'S:'CAPITAL STRUCTURE*STRUCTURE+ AT DECEMBERDEQEKMR 31 O_Q5 _XSCALFXSCM' YEAR'ZEAg i ENDING J' ENDING f, _ _1 _ -- -_ ;---- I 'Rd ~ , . *„ , THXS. 9 XRPX,PBB AXjX LONG TERM .DEST (NQI'. TER,,-CURRRHT PORCX/H ' '~&'"j' .. :..,,.' . i;, PRm&RRFD'iVeCX' +AD COmmcv ZgizgV.<,o,. i, .: _; t: ';,.,!. ,:. :e_"._,Pk~xsi _-_).ii. _'_E_._OC_' _D ,eomzo_..=_z:_: ",' ", "_i: ::"." :.,_' ':f .- : " • illI : ' '' ' '' ' 1' " . ' " ' ; , ";_ ["j' • li, : ' "' '" ' " ' ' "' I "" , (S)(8) PAI_ENT'_SI_EM_EDDEbPARENT' S FNSRDMD COST'PERCENTAGZCOST'PERCENTAGE (%)(4) FORPQR "LONGLONG TEEMTERN ,_.E_T588T iAND'AND !,;, , ', F_,MBEDDED_ZmaEDDED ]_OSTACCOST PERCENTAGE (%)(0) _ORFOR, PREPERREDPREFERRED STOCKSNOCK AT YEARTEAR ENDZ_GENDING '; DRCRKBRR 31 OR FXSCAF YEAR R51DXMG ,, : _ (6) M.ALL X, DETaiLSDZTkk hS ON THETBR AL_OCATZONALLOCATXON METHODHETEOD USeDUSTED TO-DETERMINE'gb .DSTERNH78 T_ETHE ! : AMOUNT 0_" EXPENSES ALLOCATED TO SO_TH CAROLINA OPERATIONS AS i" A5OTJNT Of EXPENSES ALLOCATED TO SOUTH CAROK, XNA OPERATXONS AS I ! WELLHELL A_AS _THODgPiTEOD OFOP ALLOCATIONALLOCATXQN OF COMpi_r_CONFAB@''5 F/_TERKTK BASEBASK INVZSTMENTXMVESTRBMZ (sz_(SEE _343 A_OVE).A BOVE) ~ i : _:' !. --" f' -- i ' ' SZGNATU_ESIGNATURE , I' " " --" ...... ! INAXE PLEASE TREE OF PRINT) } " 1 ! ' ! • : i I" _ l i I t ' TOTlaL P; 18 VV I LIIlV T I jfllll VVV V VV 18 /..V,LV /.VV'T I LVIIV 1 V 11111VL " ' h '"'C Li ij~jClg ExhibitExhibit 33 .o BBFOR_BPIiORE THETHEPUBLICPUBLICSERVIO_,,COMMISSIONSERVICB COMhGSSIGN OFOP SOUTHSOUTH CAXOLINACAROLINA DOCKETDOCKPTNO,NG. 2003-361-C2003-361-C--ORDER.ORDERNO.NG.2004-2282004-228 t JUÃ830,30, 20042004 ININ R.E:RP; ApplicationApplication ofofSouthwesternSouthwestern BellBell . )) ORDERORDER GI_GGRAQTING Commur_icafionsCommunications Services.Services, Inc.Inc. d/b/=td/6/6 SBCSBC )) MOTIONMOTION ]FORPOR LongLong DistanceDistance forfor aaCertificateCerti6cate ofofP'_tbllcP'ubllc )) EXPEDITEDEXPEDHRD I_VIEWREVK%' ConvenienceConvenience andand NecessityNecessity toto Pxovide.ProvMe ResoldResold. )) ANDAND rePLICATIONAPPLICATfON FOP.FOR andand Facilitles-BasedFacllitles"Based l.,ooalLocal ExchangeExchange )) AUTHORrCYAUTHORIIY TOTO T,Telecomxnunications¢lccommunlcafiom ServicesServices andand forfor )) PROVIDEPROVlDF. LOCALLOCAI. Fl_bleFlexible Regulation of itsits _oalLocal BxohmugcExchange )) BXCHANGBEXCHANGE SERVICESSERVICES Services. )) This mattc_matter comes before thethe PublicPubbc Sin-viceService Commission ofof SouthSoutb Carolina (the(tbe ',...j "Com_ssion"Commission"'_)) by way of thothe Applicatior_Apylication of Southwestern Bell Communications S_rvices,Services„ _o.Inc. d/b/a SBC8BC Long Distance ("SBC" or _ethe "Company'O"Company"') requestingrequesting thethe authority to provide local exchange service inin South Carolina.Carolina, SBC is presently certified to provide intrastateintrastate interexchangeintcrcxohang_ telecommunicationstelecommunications services within the State of South | • CaroUnaCarolina as authorized by this Commission inin Order No.No, 98-45 issuedissued January:_auuary Z6,26, 1998, in Docket No. 1997-0313-C.1997,0313-C. Sm,Sincece 1998 the Company has provided,provided interexchangeinterexchange services in South CarolinLCarolina. ByBy thisthis Application,Application, thethe CompanyCompany plansplans toto offer locallocal exchangeexchange servicesservices toto SouthSouth CarolinaCarolina customerscustomers onon aa resoM_old andand faciHties-basedfacilities-based basis.basis. ~er,Parthev, SBCSBC requestsrequests thatthat thethe CommissionCommission regulateregulate itsits locallocal telecommunicationstelecommunications servicesserdces'hl ig accordanceaccordance withwith thethe principlesprinciples andand proceduresp_:ocedures establishedestablished forfor flexibleflexfble regulationleg01ationininOrderOrderNo.No. 98-16598-165ininDocketDocket No.No. 97-467-C.97-467-C, uv I LV L VV T i LVtllt& DOCKET NO. 2003-361-t;2003-361-c.--ORDERORE)EaR. NO. 2004-228 JUNE 30, 2004 PAGE'PAt"H 2 The Application of SBCSHC was filedGled pm,suantpursuant to S.C,S.C. Code Ann.Aun. Section 58-9-280,$8-9-280, andand, theRules andsnd RegulationsRelations of theCommission,Commission. I The Com.raissJon'sCommission's Executive Director instructed_astrueted SBC to publish,pubHsh, one time,time, a prepared Notice of FilingPiling hlin newspapers ofaf general dreulafio_acirculation hain the a/_'eotedadTected. areas, The Company compliedcomplied. with thisibis hastructioninstruction andaud providedprovided, bethe Coxm3aissionComrrjlssion with proof of publication of thethe Notice of Filing.Piling. APetifionAT'etition to Intervene was received fromf'rom thethe South Caro_rmC~oH~ TelephoneTel@hone CoalitionCo&t on ("SCTC"),("SCTC"). •On Pebram3rFebruary 17, 2004, coumelcounsel for the SCTC filed61ed with thethe CommissionCorumission an executed Stipulation in whichwhkh SBC stipulated that it would seek authority o_,yonly inin non- rural local exchange ("LEC')("LPC") service areas of South Carolhaa'Carohna andand. not provide anyany local II service to any customer located inin a rural incumbent'sincumbent's serviceservice area, u_ale_sunless andand until SBC providedprovided. w_tteawatten notice of itsits intent prior toto thethe date of thetbe intended service. SBC also stipulated thatthat itit was not asking thethe ComxtdsdonCommission toto make a findingending at this timetime zegard_gregarding wtlethexwhetber competition is hain the public interestinterest fo_:for ruralxeric arena.areas. SBC agreed toto abide byby.allall State and Federal laws and toto parfidpateparticipate toto the extent thatthat SBCSEC may be required to do so by theCommission to supportsupport universally availableavadable tdephonetelephone servioeservice ataffordablea6ordable rates, The SCTC withdrew itsits opposition to the granting of a statewidestatewide CertificateCertiGcate of Public. Convenience andand. Necessity to SBC providedprovided, the conditions ¢o_taiuedcontained in the Stipulation areare met. OnGn FebruaryPebruary 24, 2004, SBC subsequently filed a Motion forfor Bxpeditedexpedited P,.gvicw,Review. Along with the Motion, SBC provided the Cox_alsskraCommission with thethe VerifiedVeri6ed Testimony of Mr. Norman W.Vil. Deseoteaux,Descoteaux, SBC's Associate Director - Regulatory, and documentation VV#, Z,.V. LVV"T DOCKET NO. 2003-361-(2-2003-361&—ORDER NO. 2004-228 IUNE3UN8 30, 2004 PAGEPAGB 3 ._v ovid_oingevidencing thatthat the Company possesses _8'tIN' financial,5nancial, operational, andand managerial resourcesresources requiredrequired to provide high qz_lityquality local exchange telecommunicationstelecommunications servicesservices at competitive rates, termsterms and conditions.conditions. The Company additionallyadditlonaoy requestedrequested the waiver of oertaincertain CommissionComxoission ro.lesroles andand. regulatiom,regulations. Speolfieallyo8peci5cally, SBC has requested,requested that the ComanJssionConunission w_ivewaive itsits requirement )I u_tderunder 26 S.C.S.C.Ann. Regs, 103-610 thatthat it be r,_ulredrequired to maintain itsits books andand. records inin South Carolim.Carolina. The CompanyCompaoy states thatthat it does not plan toto establish officesoKces min South Carolina _dand thatthat all of the corporate records _reare mainta_edmaintairgd at its corporate headquarters in Plcas_to_Pleasanton, California. Further,Pmther, thethe Company rcqu_tsrequests that thethe Commission waive the j:equirementrequirement uriderunder 26 S.C.S.C. Ann. Regs. 103-631'103-631 tb.ztthat it publish and distn'but¢distribute aa. locallocal I I iI t I ) directory. Th_The Company states thatthat itit willwiH oontraotcontract with thethe ]LECgILE~Cs to ensure thatthat its customers in South Carolina are includedincluded, in thethe applicableapplicaMe directories. Finally,FimQly, SBC asks thatthat it be permitted to maintain its books and fhaaneialfinancial records in aceordmeeaccordance with Gerter_lyGenerally Accepted Accounting PractisesPractices rather thanthan the Uniform System of Accounts. I " rHNDINGS 0,.m oFOF FACTFA.CT 1. SBC is orKanizedorganized as a corporation under _othe laws of the State of Delaware andand. is}8 authorized toto do business as a foreign corporation in the State of South Carolina by thethe Secretary of State. The Company's corporate headquarters are looatedlocated inin San Antonio, Texas,Texas. 2. SBC was authorizedauthorized, toto operate as a provider of interexehaageinterexchange teloeo_murfieatio_telecommunications by thisthis Commission inin DooketDocket No. 1997-0313-C and now wishes toto exp_dexpand itsits so,visesscavices to include locallocal exchange services.,services. 'V '9 VVl, LV,LV LVV_LVVW I .LVnm. Lyndon V LI V L II I/ L V I A I I V I DOCKET NO.&0.2003-361-C -—ORDEI_.QRDER NO.NO, 2004-228 JUNEStan% 30, 2004 PAGEPAGP, 4 3. The Commission 60dsfinds thatthat SBC8BC possesses thethe necessary expm'ienoe,experience, li capability, and financial resources to p,ovideprovide locallocal exchange telecommunicationstelecorrirnunications in South Caroliua.Carolina, S.C.S.C. Code Ann. Section 58,9-280(B)(1).58-9-280(B)(l). 4. The Commission finds5nds that SBC willwHl support universally available telephone service at affordabIeaffordable xates.rates. S.C.S.C. Code Ann.Ann, Semio_Section 58-9-2800B)(4).58-9-280(B)(4). 5. The Commission fuxthexfurther firt_Gods that SBC will provide communicutionscommunications servicesthatthat will meet thethe service standardsstandards of thethe ComudsSlon.Commission, S,C.S,C. Code Ann,Ann. Section 58-9-280(B)(2).58-9-28003)(2). 6. The Commission Qadsfinds that the provision of locallocal exchange _ervlceservice by SBC "does not otherwise adversely impactimpact the public interest."interest. " S.C.S.C. Code Ann. Section i ss,.9-2soo3)(s).58-9-280(B)(5), 7. Following SBC's execution of a Stipulation with the SCTC, th_the SCTC withdr_withdrew itsits opposition to th_the Application, No further6u&er protes_protests or Motions for InterventionIntervention were filedfQed inm this matter. By SSBC'sBC's Motion £orfor Expedited Review,Review„ thethe Applicant has waived itsits rightright toto be heard under S. C. Code Ann, Sec,Sec. 58-9-280. I 8. The Com_ssionCommission finds6nds that SBC h_has shown goodgood, cause for the Commission to waive the requirementsregiments thatthat the CompauyCompany maLutalnmaintain itsits books and records in South Carolina under N26 S.C,S.C, Ann,Ann. Regs. 103-610, thatthat the CompauyCompany publish s.a locallocal dir_torydirectory under 26 $,C,B,C, Am.Ann. Regs.103-631_Regs. 103-631,and that the Company maintain its booksbooks and I records in accordance with the Uniform System of Accounts. e,- v UVl,VVi LVLU, LUU'I"LVV'T fI .LV/31IILV&i&i VLIV LVflV V iV I lll1VL _P DOCKET NO. 2003-361-C -—ORDER NO. 2004-228 31YN_JUNE 30, 2004 PAGER—5 C,.O.NCLUSIOI_SCONCLUSIONS OFOP LAWI,A% I. The Commission concludes thatthAt SBC possessesthemanagerial,t_hr_cal,technical, and financialresourcesto provide the compbtifivocomp'etitive local exchmgeexchange t¢Iccommlm_cafionstelecommunications I1 servicesas "d_cribed'described £uin its Application.ApplicatiorL 2. The Commission concludes that SBC's "provis:ion'"provision of servicesezvice will not I advadversely.¢rsdyimpact the.availabilitythe, availabiTity of affordabl_affordable localexchange secvicc."service. " ' • 3. The Commission concludes that flBCSBC will parfidpatoparticipate inia the support of universallyavailabletelephone serviceat a:[f'o_blea8ozda51e ratesto the extentthatSBC may be requiredto do so by the Commission.Comnnssion. 4. The Commission concludes that SBC willprovide s_icesservices thatwillmeet I iI t! theservicestandardsof theCommission, 5.$. The Commission concludes thai'thethat'the provisionof 1'ocallocal exchange service by SBC willnot othci'wiseoth~se adverselyimpact theptiblicpublic interest. 6.6, Based on thethe above findingsflings of fact, thethe ComafissionCommission determines that a r- CertificateCer66cate of Public Convenience and Necessity should be granted to SBC to provide competitive _ntrastateintrastate local exchangeservicesonlyto customers locatallocated. in the non-ruralnon.-rural areasof the state.The termstezms of the StipMalionStipulation betweenbeta een $BCSBC andand. SCTC areapproved, andand. adopted as a part of this%is Order, Therefore, any proposal to providepzovide local telecommunications service to rural service areas is Subjectsubject to the termsterzns of the Sfipulatioa,Stipulation. 7. The CommissionCommission. concludes SBC's locallocal telecomm_catlonstelecommunications services shall be regulatedregulated in accordance with the principles and procedures established for W'vl, LV,LV LVV_flVV't l,Llni_l/ l. HAITI VUV LVI1'V fl l V I RIIVL DOCKET NO. 2003-361-C-—ORJ3EKORDER NO.NU, 2004-228 JUNE 30,2004 PAGEPAGE6 6 flexible regulafioaregulation first6rst grantedto NcwSouthNewSouth CommunicationsConmnunications by Order No. 98-165 inia ,) Docket No. 97-46%C,9'7-467-C. Specifically,the Commission adopts forSBC's competitivelocal exchange servicesa ratestructure incorporating max/mumnmximum rateIate levels with the flexibil/tyQexibiTity foradjustmentadjusttnent below the maximum ratelevelelevels thatwillhave been'been, previouslyapproved by the Commission, _rth_r,Purlher, SBC's local exchange sexy-iceservice tarifffil/ngs,61ings ateare presumed v_dvalid upon filing,Sling, subject to thetjlc Commission'sCornlxllssion s fightright withintlKrtythirty (30){30)daysclays to institutean inv_tlgationinvestigation of the tariff filing,6Hng, in wldchwhich case the tariff filingKing wouldwould. be suspended pendingpendiug furtherOrder of the Commission. Fttrthor,Further, any such _taM filingsSlings willbe subject to thesame momtonngmonitoring• ' procesprocessS as similarlysixaBarly situated competitivelocalexchange,carders.exchange camera. ITQ ISE THEREFORE ORDERED, ADJUDGEDAg JUDGED AND DECREED THAT: , II I.l. SBC's Motion forExp@d_todExpedited Re,_ewReview is granted on thebaalsbasis of the facts as statedstated. h_in thisOrdgrOrder andand. on the basis that SBC has previously been found fitGt to provide telecommunications so/vicesservices in South Carol_aCarolina _gee Order No. 98-45), and the instant v • Applicationseeksmerely to expandexpand. thatauthorityto includelocalexchange services. 2. A Certi6cateCertificateof PublicPubHc Convenience andand. Necessity is granted to SBC to provide competitive locallocal exchangeexchange telecommunicationstelecoxatnunications services, via resale or on a fafa0111tles-based'cllities-based basis,b881si 3. The t_sterms ofthoofthe Stipulation betweenbetween SBC and the SCTC _eare approved andsnd adopted as a part of tiffsthis Order. The Stipulation isis attached asas Order _xhibitExhibit I,1. AxxyAny )I proposal to provide coznpefitiwcompetitive local exchange tdecomrat_cafio_telecomxnunications services to ruralrural, sel_ic¢service areas isis su'bj_tsubject to thethe termsterms of thisthis Stipulation. ) ',.IV l, LV, LVV'7 DOCKET NO.NO, 2003-361-uF003-361-c--—ORDER NO. 2004-228 ]L_qEXUm 30,SO, 2004 PA@I_PAGE 7 J 4. SBC shall'file,shall ale, prior to offering'local exchangeexchange services in South Carolina,Carolina„ itsits final local service tariff with the Commism_n.CommissforL SHC'sSBC's tarifftariff shallshaH conform andand. comport with South Carolina law in all matters. SBC's locaIlocal telecommunications services shallshaH be regulatedregulated in accordance with the principles andand. procedures establishedestablished forfor flexible regulation firsterst granted to NewSouthNewsouth ConnnunieationsCoxoxaunications by Order No. 98-165 inin Docket I I No..'97-467-C.No. .97-467-C, Specifically,SpeciRally, the Commissk_uCommhsion adopts for SBC'sSBC s competitive intrastate local exchange services a ratexate struoturestructure incorporating maximum raterate levels with the flexibilityQexibility for adjustment below the maxunummaximum" ' rate' l_velslevels thatthat will have been previously approvedapproved by the Commission. Ftirther,Further, SBC's locallocal exchange service tariffted& Slingsfihugs are I presumed validvalid. upon filing,Sling, subject toto thethe Commission's right within thirty (30)(30) days toto I 1I i I ! ",,,.....j institute an investigation of the tariffted& filing,Gling, in which easecase the tarifftan8 filing6ling wouldwouM be suspended pendingpendiug fiarthexfurther Order of the Commission. Farther,~er, any suchsuch tarifftaiiK filingsSlings will be mlbjeetsubject toto the same monitoring process as s_knilarlysiu8atly situated competitive locallocal exchange carriers. 5. SBC shall be requiredrequired. toto comply with Title 23, Chapter 47,4'7, South Carolina Code of"of LawsLiws Ann.~ which goven_governs the establishment andand. implem_tafionimplementation of"of a "PublicPublic " Safety Comm_mioatlonsComxnunications Center,"Center, which isis more commonly known as a "911 systean"system" or " "911 service."service. Services available throughthrough a 911 systen_tsystem includeinclude law enforcement,enforcement, fire,6re„ andand. emergency medical servio_.services. In recognition of the necessity of qualityquabty 911 services being provided to the citizens of South Carolina,CaroUn0, the Commission hereby instructsinstructs SBC toto iI contact the appropriate authorities regardingregarding 9].911,1 serviee_inservice, in thethe counties and cities where s ,,,,,,..J SBC will be operating, Contact with thethe appropriate 911 serviceservice authorities is to be made 'T " _VI= LU=I. V .LUV'TI V V f L I I 1111 VLIV LVI ~ M II JV IIIIIVI "w DOCKET NO. 2003-36 t-Cr -C -—ORDER NO. 2004_2282004-228 r JUNE3UNS 30, 2004 PAGEPA H88 before beginning telephone service in South Carolina. Accompanying tkisthis Order is an information packet from&om the South Carolina Chapter ofthethe National F.anergencyEmergeocy Number Association ("SC NENA")NHNA. ") with contact inl_ormationinformation and samplesample forms. SBC may also obtain information by contactingcontacting the EPll8911 Coordinator at thethe OfficeOfhce of I._format_onXhforjnation Resources of thethe South Carolina Budget and Control Board,Board. By tiffsthis Order and prior to providing services within South Carolina, SBC shatlshag contact the 911 Coordinator in each county, as well as thethe 911 Coordinator in eacheacb. city where the cityhas £tsits own 911 system, andsnd shallshsU provide Lrffor_afioninformation _:egardingregarding thetbe Compan3_sCompany's operations as requiredrequired. by the 91I911 ,system,system. 6.6, The FCC bain July of 2000 required all telecomm_ficafio_telecorrununications carr_e_sclriers |I .._./ throughout thethe United States tofo implementimplement tl_ee-digit,three-digit, 711, dialing for access toto all Telecommunications Relay Services (TRS).(TPS). The CommissionCommhsion issuedissued sa memorandum in March of 2001 J.ustruetinginstructing _all SouthSottth Carolina teleeontmu_cafionstelecommunications carrierscamers toto implementirnplenMnt thethe serviceservice completely by October of 2001. AllA3 competitive localexchange carriers (CLECs)(CLPCs) andand. incumbentincumbent local exchange CarrierscarrIers (ILECs)(ILBCs) were instructed toto include language in theirtheir tmSffsts6ffs intr6ducingintroducing 711 as sa, new serviceservice offer_agoffering with d_loyaneatdeployment by JutyJuly 1, 2001, and to tr_slatetranslate 711 dialed calls to 1-800-735-2905.1-800-'735-2905. All Payphone ServiceS_o¢ Providers (PSPs) werew_re instructedinstructed toto modify theirtheir pro_ammabloprogrammable phones toto translate calls dialeddialed. as 711 toto the assignedassigned. TRS tolltoll free&ee number 1-800-735-2905 in order toto route 7117tl calls toto the TItSTRS provider before October 2, 2001,2001. Additionally, telephone directoriesdirectories, were requlxedreqnu. ed to be updated madand bill inserts promoting 711 were also required,required. SBC must comply with the applicable mandates,rnandates. For complete informationinformation on compliancecomphsnce with this DOCKET NO.No. 2003-361-_2003-361-v -—ORDEROM3PR NO. 2004-228 JUNE3UNB 30, 2004 PAGEPAGB 9 "..._j' FCCPCC and ComraissionComufission requirement, gb"g5"' to thethe Commission'sComrrnssion's website at ' hh://www.ltp:l/www.pso.state,sc.uslroferencelforms,asp:'sc.state, sc.us/reference/forms. as . 7.7, SBC3BC isis requhedrequited. toto file61e annual financialfinancial informationinformation in thethe form of annual reports andand. gross receipts reports as requir_required by thethe Comraiss_on.Corntnission. The annual reportreport and I the gross receiptsreceipts reportxepoxt will n_ess_tatenecessitate the filing6ling of intrastat_intrastate information,information. Therefore, iI SBC.'SBC'shallsM1 keep financial6nsncial recordsrecoxds on an i_intrastate,trite basis for South Carolina in ord_order toto comply with the Commission's requireraentsrequirements for filing6ling ansn annual report andand a gross ree._iptsreceipts report.xeport. The lenafoxre SBC shall use toto fi]_5le its annual financial&ancial informationinforjnation with thethe Commission can be fouhdfourid on.on thethe Commission'sComrrussion's websiteweb site at f h://www.h___ttp:llwww.psc.state.se.us/refer.ence/forms.as_.sc.state. sc.us/reference/forms. as . The formform isis _ntitledentitled. "Ann'aal"Annual Report for I ,,t Competitive Local Exchange Carriers", and shall be filedfiled with the Commission by April 14'l" of each year,year. Commission gross receipts forms are due to bybe filedGled with thethe Commission no later than August 3131"_t of each year,year. The appropriateappropriate form forfor remittingremitting information forfor gross receipts is entitledentitled, "Gross"Gross Receipts Form for Utility Companies"Companies"' and may also be found on the Commission's websiteweb site at http;//www,pse.state.se.us/reference.forms.asp.h, Nvvpv, sc.state. sc.us/reference. forms. as . 8,8. Addiflomlly,Additiona11y, SBC shall file61e with the Commission a quarterlyrtuaxterly reportrepoxt " entitled "CLEC'"CJ.BC Service Quality Quarterly~erly Report."Report. The proper formform forfor this report is found on the Commission's website at http:/lwww.psc.stato,sc,us/referenc,htt:/twvnv. sc.state. sc.us/reference/femLe/forms.asp, 9. SBCBBC shallshall conduct itsits business in compliaucecompliance with CommissionCornnnssion decisions andand, Ord='s,Oxdexs, both past and future,future, inoludingincluding but not limited to,to, any and all Commission derisionsdecisions which may b_Tenderedbexendered in Dook_Docket :No.No. 96-018-C regarding local competition.corripetition. UVI,~V I ~ /V,LV LVV'[LVV T I ,/ L II|lTIIlllll V U V L V ll'll V l V I I Ill V L DOCKET NO. 2003-361-C-2003-361-C—ORDERNO.ORDPRNO. 2004-228 yURr_JUNB 30, 2004 PAGE 10 I10.0. ForPor good cause shown,shown, SBC is grantedgranted. a waiver andsnd, is hereby authorizedauthorized, to keep itsits books and finaucialfinancial reCordsrecords in accordance with GenerallyGeneraQy AcceptedAccepted, Accounting Praofi_esPractices rather _nClan the UniformUniforin _ystemSystexn ofAccounts method. 1I.j, l. For good cause shown,shown, $BCSBC isis granted a waiverwai'ver of the requirementsroluirements thstthat the Company publish andaud distribute a directory under S.C.S.C, Code Ann. Rsg,Reg. 103-631 andaud, I that it fileQle serviceservice area maysmaps with thethe CommissionlCommission, SBC is orderedordered. to contact thethe _ucumbentjncuinbent ILECs tOto ensure that the Company'sCornpm3y's customers are includedincluded inin the applicableapplicabIe diz_tory.directory. 12.l2. ForPor good cause shown,shown, SBC isis granted'granted a w_verwaiver of thethe requ_e_entrequirement that it rnaintai_Inaintaitr its booksbooks and records in South Cm_lin_tCarolina as requiredrequired. under 26 S,C,S,C, Ann.AIIm. Regs. I 103-610. SBC shallmaintain its books and records stat its corporate headquarters inig Pleasant,Pleasanton,on, Californiaand make such availableto the Commission staffor employees upon their request _t the Company's expense. LV LVV1' i ~ LI r»ri V Ll V I V I ~ 0 II 1 V I t t I I V I DOCKETDOCKETNO.No-2003_361_C2003-361-C- —ORDB/_,ORDERNO.NO.2004-2282004-228 Y[J'NEJUNE30,30,20042004 ": ° PAGEPAGE11ll 13.13. ThisThis OrderOrder shallshall remainremain inin full6iQ ]_rceI'face andand effecteffect untiluntil furtherfurther OrderOrder ofofthethe hi Commission,Commission. BYBYORDERORDEROFOF_THECOMMISSION:COMMKSfow: i I i :N',AgaonMignon L.LClyb_vn,Clybma, Chairmanoman ATTEST:ATTEST,' Bruce F.F, Duke, xeoutive Director i CS(SEAL) AL) | • _:vl, LV, LVV_ I,LLNITI Page 1 of 4 rderrderEr_hibitExhibit1 j. DocketgociretNo,No.2003-361-CN03-361-C OrderOl"derNo,No.2004-2282004-228 Junetune30,30,20042004 BEFOREBH ORE ',,,._j THETHEPUBLICPUBI ICSBRVICESPRUCECOMMISSIONCOMMSS/QNOFOP SOUTHSOUTHCAR,OL]I_ACAROLINA " CAPTCAPTDookaDocketNo.No.2003-.361-C2003-361-C Communications Re: ApplicationApplication ofofSouthwestamSouthwestern BellBeQCommunications ) ) Services,Services,Inc.Inc.dbadbaSBCMCLongLongDistan_Distanceforforaa ) ) Cea'tificat_Certi6cateofofPublicPublicConv_nic'nc_Converlience andand,NecessityNecessity ) ) totoProvideProvide ResoldResoMandsndFacilifies-basea]Psc11xlles@asedLocalLocal]3xchangoBxchange )) ' STIPUI._TIdN' Tcle_ommtmic_onsTelecommunications ServicesServicesininthetheStateStateofofSouthSouth " ) ) sm'TKATIDN' Caroli_Carolha )") )) ThoThe SouthSouth CarolinaCarolina TdcphoneTelephone CoalitionCoalition ("sCTC'$("8CTC") (se_(see attachmentattactgoent "A""A" forfor listlist ofof } co&pKQes) Bnd Southwestern HeH CQTQmuTGcations Services, Inc. Cba Distance ¢ompa_fiea),and Southweateza Bell Comm_catiims S_viCe_; Inc. dba SBCSBC l£ngLong Distance| I ("Southwestern Hell" hereby enter into the stipulations. As consequence these ("Southwc_era BcU") ) hereby _t_r into the followingfollow stipulations. As ,aa co_equcnce ofof the_e! E stipulations and con89jans,conditions, $CTCSCTC doesdora not opposeappose SomhwestcraSouthwestern BelFsBell s Application.Apphcation, SCTC andand Southwestern_outhwestea'a BeNBeQ stipulatestipulate audand agreeagr_ as follows: l.I. 8CTCSCTC doesdoes notnot oppose thethe grantinggraoting ofof a statewide,_tatcwide CertdicafeCeftifica/e of PubHcPublic ConvenienceCony ._afioao¢ andand NecessityNecessity toto SouthwesternSouthwestern Bell,Bell, providedprovided thethe South CarolinaCarolina PublicPublic Service ColnmissionCom_ssion {"Commission")("Commission") makesmakes thethe necessaryncccssmy Geldingsfindings toto justifyjustify grantinggranting ofof suchsuch aa ~cafe,_rtifioate., sndimd providedprovided thethe ccnditionSconditiormcontainedcontain_ withinwithin thist_'s s6pulatiOnstipulationare_o lnet.met. 2.2. SouthwesternSouthwestern BellBell stipulatesstipulatos sndand agreesagrees thatthat anyanyCerti&ateCea'fifioato whichwhich may.maybebe granted,granted'will'will authozheauthorize SouthwesternSouthwestern BellBall toto provideprovide serviceservice onlyonly toto customerscustomers locatedlocated inin non-ruralnon-rural loca3.local exchange_xchangecompanycompany {"LBC")("LEC")serviceserviceareas_rcasofofSouthSouthCarolina,CaTolin%exceptexcc-ptasasprovidedprovMcd herein.hcroim 3.3. SouthwesternSouthwestom BellBell stipulatesstipulates thatthatititisisnotnotaskingasking thetheComlmssionCommission totomakemake aafindingfinding atat thisthistimetimeregardingregarding whetherwbeth_ competitioncompetition isisininthethepuMicpublic interestinterest forforruralruralareas.are_. LV LVV'T I / g. ffftl 'll V'V 'All 'lA I Ll V I ~ VV I, LV, LUV'T I , LLf"" I rll V I„ 4. 8outhwe_crfiSouthwesteroBellBellstipulatesstipulatesandaudagrc_sagreesthatthatit willit wiHnotnotprovideprovideanyanylocallocalservice,service,by byits its , al ow_ownfacil_ticsfacilitiesororotherwise,othe@vise,to toanyanycustomercustomerlocated,.._located. iNa ruta ruralincumbentincurubentLEC'sLEC'sserviceservicearea,area,unlessunless andauduntiluntilSouthwest_nSouthwestern BellBeDprovidesprovidessuchsuchn_ralruralincumbentincumbentLBCLSCandantithetheCommissionComrrussion withwithwrittenmitten _otieenoticeofofitsitsinteatintenttotododososoatatleastleastthirtythirty(30)(30)daysdayspriorpriortotothethedatedateoftheofthe_umndedintended.s_ce.service.DuringDuxing such noiice peiod, the rural incumbent LBC wiH have the opporturnty to petition the Commission such notice p_od_ the fatal _curnb_t I._C will have the opportunity to petition the Commission ¢ I toto _xerciseexercise allall rightsrights affordedafforded itit underunde FederalFederal andand StateState law.lwv. Also,Also, Southwestc_-nSouthwestern BellBell acknowledges that the Commission may suspend thy intended date for service in rural LPC' territory ack_owlc_es that the Co n_nnissionI may su_snd th@_t_d_ date for service in rural I_C territory i II forforrtinetyninety (90)(90)d_ysdayswhilswhilethetheCommission.conductsConnrussion. conducts anyanyproceedingproceeding incldcr_tincidentto¢o thethePetitionPetition ororupon'upon thethe C..ommi_sion's(immission's oWnovvn Motion,Motion, providedprovided thatthat ,thethe CommissionCommission cancan furtherfurther suspendsuspend thethe I unplemenMon date upon of good cause. implementation date upon shoW_,shagg of good c_ua¢. m 5.5. SouthwesternSouthwestern BellBell stipulate_stipu'lates andand agreesagrees that,that, ififSouthwesternSouthwestern BellBeH givesy'ves noticenotice thatthat itit Lutendsintends _oto sm'v_serve aa, customercustomer ]oc_tedlocated inin aa ruralrural incu_n,incmnbentbent LEC'sLRC's s_-viceservice area,area, andand eithereither (a)(a) th_the ConnnissionConunission rcc¢iv_receives a pc.fitionPetition BornRom th_the rural~incumb_ntincumbent L_CLBC toto exercise itsits rightsrights underunder Fe.dcumlFederal oror State lawlavv within'such 30-dayB0-day period, or Co)(b) the CommissionCommlssion hustitutesinstitutes a proceeding of its own, then Southwestern BeHBell wiHwi]] Gotnot provide servicescrvic_ to anyanZ_customercustomer locatedlocated withinwith/n the servicesezvlce area_r_m &1iu without and further Commission questionquestion without priorprior and further Comndsdon approval,approval. I 6,6, SouthwesternSouthw_tern BeHB_ll achnowledgesaclamwledges thatthat arsyany rightright whichwhich itit maymay havehave oror acquireacquire toto seves_fve aa ruralrural telephoretd_hon¢ companycoml_any servicese._,'vic_areaarea inin SouthSouth CarolinaG_lma isis subjectsubject toto theth_ conditionsconditions containedcontained h~he._._u_ andand toto anyany futtlefutm_ poHcies,pohcie_, procedures,procedur=, antiand guidelinesguidelinea relevantrelevant toto such_ch proposedproposed serviceservice whichwhich thethe CommissionCommission maymay iruplement,implement, sosolonglong asas suchsuch policies,polities, procedures,procedures, andand guidelinesguiddi_es dodo notnot conflictconflict vrithwith MeralFederal ororStateState law„law. 7,7. TheThepartiesparties stipulate_pul_tu andandagreea_-¢_thatthat sHallrightsrights underunder FederalFederal andandStateState lawlaw arearereservedr_served totothethe~mml incenbeutincumbent LECsLECs sndandSouthwesternSouthwestern 13ell,Bell, andandthisth_sStipulationStipulation ininnonowayway suspendssuspends oror adverselyadversely aQ'ectsaffectssuchsuchrights,ri_ts, includingi_cluding anyanyexemptions,cxempfion_, suspensions,s_spcnslons, orormodificationsmodifications totowhichwhichtheythey ,..j be entitled maymay be entitled- Page 2 of orderOrderExhibitExhibit 1 1 Page 2 of Docket No. 2003-361-C Socket Ho. 2003-361-C Order No, 2004-228 Order No. 2004-228 anneJune30,30,30042004 LV LVV T t LLI IIII VVV VVIIV VSV IIIIIVI 8.8. Southwe_emSouthwestern BellBelltotoabideabidebybyallaHStateStateandandFederalFederal lawslaws andandtotoparticipate,participate, totothethe extentextent ititmaymay bebe requiredrequired totodo6ososobybythethe Commission,Connnission, ininthethesupportsupport ofofunlversallyuniversally availableavailable i. telephonetel|7hone serviceservice atataffordableaffordable rates.rates. 9.9. SouthwesternSouthwestern BellBellherebyhereby amendsamends its.applicationits application andsnd itsitsprofiledprefiled testimonytestimony ininfigsthis docketdocket totothethe extentextent necessarynecessary totoconformconform withwith thisthis Stipulation.Stipulation. AGRBBD AND BTBIULATBD to this ~d sy to' 4 2004. i I SouthwesternSouthwestern BellBell CommunicationsCommunications ServJcss,Services, SouthSouth CarolinaCarolina TelephoneTelephone CoalitionCoalition Inc.,Inc., d/b/a45/8 SBC8HC LongMng DistanceDistance BoBQQDN .Sh.8healy y 11 _ M. J' o Jr. Robinson,McFaddenMcFadden &t%:Mo_e,Mo e, PC.P.C. Margaret . ox "'x._..f Post OfSoeOnce Bo.xBox 944 Post OfficeOfQce Box 11390 "' Colu.nabia,Colmibia, South Carolina 29202 Columt)ia,Co'lumbia, South Carolin_Carolina 29202 (803)779-8900 (803) 799-9800'799-9800 AttorneysAttom_/s for SBC Long Distance AttorneysARorney_ for the Soul&Sou_ Carolh_aCarolina Telephone .CoalitionCoalition v OrderOrder ExhibitExhibit j1 PagePage33ofof, DocketDocket No.No. 2003-361-C2003-361-C OrderOrder No.No. NQ4-Z282004-228 &»»ssT,,_,QA_tfi ")And?t313A 'VV I L'V LVV T f I Lllltl SBCT CPCN VVVV I,I, LV,LV LVV'T (I , LLntTtLL&~&~ uuvVLIV LVIIU ll 1V I AIIVI /-:" BEFORE THE PUBLIC SERVICE COMMISSION OFOP i SOUTH CAROLINA DOCKETDOCKP.T NO. 2000-0044.432000-00446 --QRDERNO.ORDER NO. 2000-04462000~ MAY 23, 2000 ]N:R,E:IN RE: Applic=fionApjplication ofSBCofSBCTelecom, InoorporatedIncorporated ) forfpr a CertificateCerh6cate ofPubl{cofPublic Conw_d_nceCbnvcrnence mdand ) N_:=sityNecessity toto Pin.deProvide LocalLoad F.xch_.Exchangeg¢ andand, ) ORDER Intrastate/ntm_xchm_eIntrastate Interexchange Telecommunications ) GRANTING Services, for Altem_veAtternauve KcgulafionRegulatidn ofltspf Its ) CERTITICATSCERTIFICATE Int_'_clmngeInterexchange Telecommunications Services ) and for Flexible ReguMfionReguLation of It_Its Local ) Exchange Service Offerm_Offerings ) This'fhis matterrnatter comes before the Publicpublic Servic=Service Commission of South Carolina (the(the Commission) vvay the °, Commission) by way of the Application ofSBCofSBCTdecom,Telecom, Inc. ("AppHcanf'("AppHcant" or th=the "Company")"Company" ) for _uthotityauthotity toto pmvifleprovide local exchange and Ji'Ur_tat_i'ntrastatc intemxchangeinterexchange t_lccommunlcafionstelecommunications services withinwitMn thethe State8tate of South Carolina,CaroEna The Company r_questsrequests thatthat the Commission regulate itsits locallocal tcIccommtmicationsteleconununications servicesservices inin accordance Withvv'ith thethe principles andand, procedures establishedestabHshed for flexibleflexible regulation inin, Order No,No. 98-I6598-165 inin Docket No. 97-467.C.9"/-467 C. In addition,additton, thethe Company requestsreciuests that the Commission regulate~ate its businmsbusiness services ofl'erJns,oFerinSss idcntk_didentical to thatthat gmut_granted. toto AT&TATErT Commum'_tionsCouununications in Ord=Order Nos. 95-1_495-D34 and 96-5596-5$ in Docket No. 95-661-C.9$-65IZ. The Application wasvms filed61ed. pursuant to Chapter 9 of Title $8 of the South Carolina Code Annotated, andmk thethe Rules andand, Res_1_tionsResulatipus of the CommJss/on.Commi'ssion. By letter,lettu; the Commission'sCouuni%ibn s Executive Director instructed thethe Applicant toto publish, onepne time,mme, a prepared Notice of FilingPiling inin. newspaper'snewspapers of general circulation inin the arc:asareas affected by th_the Application. The purpose of the Notice of FilingFiiiug wasms to informinfo' interested parties of thethe manner DOCKETDOCKETNO.NO. 2000-0C_2000-06 C@-ORDER- ORDER NO.N0,2000-04462000-0445 MAYMAY23,23,20002000 PAGE 2 _ nm - .- me andand timetime inmwhichwhich totofilefileth=theappropriateappropriate pleadingspleadings forforpsrticip_ionparticipation ininthethepmcevdings.proceedings. T_The ApplicantApplicant compliedcomphed, withwith thisthis iusmmioninstruction andand.provide1provided thethe CommissionComxuission withwith proofproofofofpubIicafionpublication ofofthetheNoticeNotice ofofFiling.Filing AAPetitionPetition totoIntc_'vcn_Izlltelverl waswas rec_iv_lreceived fi'omQQxn thetheSouthSouth CarolinaCarolina Tclcphon=Telephone CoalitionCoalition ("SCTC")("SCT~ononMarchMarch 14,14,2000,2000, OnGnAprilApril 18,18,2000,2000,counselcounsel forfor SCTCSCTCfliedGled withwith thethe CommisdonCornrnission _ta,StipuIa_nStipulation ininwhichwhich thethe ApplicantApplicant s_ipulatcdstipulated thatthat ititwouldwould. seekseek authorityauthority ininnon-ruralnon-rural locallocal exchangeexchange ("LEC")(''LE~ _ervic_service areasareas ofofSouthSouth CaroLinaCaroLLna andand thatthat ititwouldwould, notnot provideprovide anyany locallocal serviceservice toto_uyany cu_m_rexsluiner locatediocated inin aanu-alrural incumbentsincumbent's serviceservice area,area, unl_sm8ess andand untiluntH SBCSBCTelecomTelecom providedprovided wdncnwritten noticenotice ofofitsits intentintent priorprior toto th=the datedate ofofthethe intendedintended se=vic¢.service. TheThe CompanyComply alsoalso stipulatedstipulated. thatthat itit wzswas notriot _]lgasking the CommissionComznission toto maketnake aa findingBinding _tat thisthis timetime re_hlgregarding whether competitioncomyetition isis inin thethe pubIicpublic interest forfor rural _e_.areas. SBC TelccomTelecom agreedagreed, to abid_abMe by allaH State audard FederalFederal. Iawslaws andau& toto participate totq thethe extent th_ttthat itit may be requiredretluired to do so by the Commission in supportsupport ofof universally availableavail_le udcphoueteieyhone service at a6brdableaffordable rates.~. ThoThe SCTC withdrew itsits opposition toto thvthe granting_artting ofofaa statcwidcstatewide CertificateCetHicate ofPublic CotivemenceConvenience andsud N_esdtyNecessity to the CompanyComp_my provided,provided the conditions containscontained inin thethe Stipulation are met. The Stipulation is approved and.md attached,_1_:hed as OrderOrder Exhibit l.I. AA hearingheafi_.w_was commencedcommen_ed onon MayM_y l11„2000,l, 2000, at 2302".30pm.p.m. in thethe Corumission'sCommission's HeaxingHeating Room.Room. The Honor3MeHonorable PhiTipPhilip BreGey,Bradley, Chaianan,Chakman, prosideLprided. SBCTelecomT¢lecom waswas ~ented._xesented by JohnJolm J.J. Pringle,P_n_o, Jr.Jr.,, Bsquire.F_qg._'c. AdelaideA_lalde D.D. Kline,_ StagStaffCounsel,Counsel, representedrepresented thethe CommissionCommission Staff. KevinKevin M.M. Chapman,Chapman, Director-ReSulatoryDi:ector-Regulatbry AFalrsAffa_ ofofSBC83C Telecorn,Tclecom, appeared.appeared aud,and.testifiedtestified ininsupportsupport ofof thethe Application.Applic_om AccordingAccording toto thethe record,record, Mr.Mr. ChepnlnChapman has@ppro~eiyhas approximately DOCKETDOt:KET NO. 2000-00-.2000-or . _-C~ -—ORDER.ORDza. NO.NO, 2000-04_2000-~ MAY 23, 2000 PAGE 3 dghtecneighteen yearsyearS ofOf experienceeXperienCe in the telecommunicationstelecommnnicatipnS industry.indnStry. His primaryprimaly rcspons_ilitiesXeSppnsibiiitieS includeiILclllde thethe supportsLLyport ofCLEC applications, thethe development oftzri_,oftariff, working with municipalitiesmnnioipalitieS totO determinedeteIXnine applicableapplicable ices,feeS, and contacting 911 agencies totO make~arrm_eunen_alrangeLILLnlta forfor those services. SBC89C TelccomTelecom is a wholly-ownedw'hollyawned snbsidiaty.qubsidiary of SBC Communications,Connnllnjcatlons, Incorporated, a holdinghoMing company that h_has providedpxovided telecommunicatiomteleconnnllnications services for over one hundredhllndred y_"_.years. SBC Communicationscoznmllnications will provide initialinitial capital to SBC Tclecom.Tele@Pin. The CompanyColnpsxly was incorporated underLIILder thethe laws ofth¢ofthe State of Delaware on NovemberNovelnber 20, 1999.4999. SBC TelecomYe&ecoIn was crea_dcreated as ay.condition of a FederalPedelal Communicationscoe!nLLnications CommissioncomInissioa, (FCC)(Fcc)Order, CCccDocket No.ND. 98-14t,98 141„regarthngrcgard_g thethe mergernlerger completedcompleted October 8, 1999, betweenbehVeen SBC Com-_am÷,-_onsCpmmLIni~OILS andand. Ame._dtechAlneritech Corporation. SBC Telecom became SBCBBCCommunicmionsCommllnica6ons outOLLt ofr_gionofregiog, subsidiaz'y,SLIbSidiary. OutQLlt of regionregion marketsInatketS were describeddeSCribed by Mr. Chapman as the ddrW~markets~etS inin statesStateS other than thosethtose statesstatcS inln whichwhlCh SBC CommunicationsCPHXRLuLXLCRtipns operatesOperates several traditionaltNditiOILal telephonetslephpne companies.coInpanless UponUpOn receivingZeCeiVlng ce.nificationCeIti6catipn fromf'rom thisthiS COmmission,CblnmisSion, the CompanyCplnpany seeksSeekS totp providepZOVide a totedtotal rangerange of local exchange andalLd intrastateintrastate interexchangeinterexchange telecommunicationstelecommllnications services toto businessbusixless mdand residentialresideILtial customerscLIstomels to includeinclllde voice, data and operantoperator services, andslid access tota inter and intra..lataintra;18th tolltoH service.setviee. SBC TelecomTelecoln initiallyinitially intends%tends to ut_cttarget andaxLd serveserve York CountyColmty in SouthSollth Carolina,Catalina, part ofIfthe C'tmrlott¢,Charlotte, NOXthNorth Catalina~Carolin_ MctropolitsnMetrOpOlitan StatisticalShd~cai Arcs,Area, an areaax@athethe FCCPC@ ordered SBCTelecom to$erwserve as a resultresldt oftl_ofthe AmedtcchAmeritech merger.m=ger. SBC Telecom hopes to eventoallyeveq~y provide servicesserviceS th_ugho_tbXOLLghout SouthSOuth Carolina.CarolinL ASAs part ofOfitsitS loca[lOCal, exchangeeXChange serviceSerViee offering,PKetjng, SBCTelecomTelecotll will provide custome_customers accesstOh 9-1-1 aeland E-9-1-1 emergengyelxlergency servlc_s,services, dix_torydhectoty assistance, operator call completioncompletion services, accemaccess to inUgcxchangeinterexchange carfiet_carriers, and U_JI.VV I /U.lV. /UUufl. VV't /./Jt_lYii L JAITl OU_,VU'9 L_JI'(_L'4/NU UI,JIr_l_t.l_V j, 0 I AIIVL _J. "ruI JP DOCKETDOCZZr NO. 2000-00-,-,-C2000-OO -C-aRDm,- ORDER NO.NO, 2000-0aA6OOOO~ MAY 23, 2000 PAGE 4 --...... _ custom calling features. InIn addition, t_¢the xccbxd_cord _cvemlsxcvcaLL SBCSECT¢IcoomTclecbm hucndsintends totb provide such local exchange andaxLd longlong distance tclcoommtmicationstelccomnLuxtications services, at leaseleast inm pan:,paxt, by re_ell{_reschrLg the s_vic_services of other berti6cated,certificated locallocal exchange cah-kcsearners andand, lbnglong distanceNstaxtce carrie.carriers. Farther,Further, SBCABC TelcoomTeleeom may provide such servicesservices onbn a facilities-basedfacllities48sed basisb88is by deployingdcploymg its ownowrL _'ansmi_orttxaxL~znissioxx fadlities,fseiTitics, by leasing _the transmissiontxrInsmissibn facilitlosfacilities from&enx a certifiedccrti6cd. Iz'cusporttransport pzovidcr,pxbvldcr, axeand byby leash_leasing unbundlcdunbundled networknetWbxk clcrncntsClenLentS obtainedObtaLXICC from&OnL certificatedCertdLCated incumbentiIlCUlxkcnt locallocal exchangeCXPJ18ngm cm_dczs.carriexS. UsingUSing aa, dirm:tdirect salesSales for¢_,fbxCC, the CompanyCOmpany willwtll m'arkctmadret itsitS servicesSerVioeS totO large andartd m_tiummedium businesses;buSinCSSCS; direct mail andsxLd limitedlirrLited outdoor _mlLdngadvertising will be used to market s¢_c_services to thosethose customera.cttstbmexa. F_o_,FuxttLCxmbrc, the CompanyCbmpaXLy _ue_tsrequeStS dmtthat thethe CommisdonCbmmiSSibn r_l_t_regulate itsitS b_business se_ic_SCXvieca sadand, opcta_roperator servicescr_ico off_-in_offerings in accordance with the ptlnoipksyrlncipics andand, ptoccd=_yroeednxca =tablishcdcstablishcjl by OrderOrCcr Nos. 1995-1734199$-1734andax@ 1996-55 hin Docket No, 1995-661-C.1995461-C. InIxL add_tlon,addition, thethe CompanyCDmyany r_ucstsrequests that thethe CommissionconLrrnssion allow $BCSBcTol¢omTclccbm totb adopt thethe flexibleQexiblc rateram stricturestructure foritsfor its local e,exchangexchange service offerings slndlarsixntlar toto tl_tthat approved by Order No.Ho. 1998-I651998-16Sinin Docket No. 199%1997- 457-C.46'l-C. Mr.Mr, Chapman testifiedtestiGCC _sas toto d¢the Compmy'sCompany s tcdmical,tecbmcal, maaag_.dal,managerial, andand, 5mncialfinancial abilhyability to providepxoMdc t¢lccommtmicafionstclccoELxnunLcattbns servicesservtces inLrt South Carolina;CMo184g he isLs th=the rcgu/atoryregu18tbgl' andand, fiu_ialggaxtctal contactcbnkact p_ouperson for th_the Company. He _stated thatthat whilevrhile _BCSBCTclccomTelecorrL is not yet opm-_thgbycxatn1g {nin any jmisdictio.,jurisdictiorL, itit does int_dintend, toto staztstart offcdnofFerings s_rvir.=services in O_tobcr,October, 2000, in Miami,Mami, Florida,Horida, Boston, Massa_m¢_,MaSSachuSettS, and Scarde.Seattle, Washin_on.VaSbhgron. HeHC __¢dibrtlLcr Stated SBC TdecomTelecbm doesdceS notnbt pl_aplan totO install its ownburn fibc_,ibex; it will lease loops f_omGexrt ILECs aadarLC will collocamcollocate inixL a ntm_¢rnumber ofILECofILEcwL_wire c¢_at_cs.centers. As of thethe da_Cate of thethe htm'i_hearing, SBC Tcl_comTclecbm w_wis negotiating an h_muonnectiouxtttexcortnection agrectncxLtagrccmcm_ with BdISouth.BC118outh. Th¢The rcoordrecord alsoaho rew_srcvcah SBC Td_omTelccom will o,lyonly utiliz_utiTize _d=lyiagunderlying earri=searners prop,aiyproperly VVI, LV, LVV'T I .Ljnl_l DOCKET NO. 2000-00,,,PC2000-00~ -—ORDER NO.NQ. 2000-0446 MAY 23, 2000 PAGE 5...... _ _. l...... = cert_cdcediGcd by the South Carolina Public Service Commission.CommissiotL The Company's customereustoxner service department will be locatedlocated inin Tampa, Florida,Horida, andand. will be in operation tweed-fourtartly-four hourshcavy aa.dsy_day, seven c_ysdays a week.week English speakings_king customerscustonters can callcaH toiltoH freeSee 1-877-430-SBCTl-877430-89CT (1'8'/7-430-(1-g'@gal&0- iI 7228) and SpanishSpani4 speaking customers can callcaH tolltoll fleeSee 1.877-418-SBCT1 8'IV%13-SBCf(1.,8T/-418-7228).(1-877%18-7228).The customer service contact person's name willwiH be mad=made available toto thethe CommissionComrniss&on inin the Qgg TarJfETariK SBC TelccomTelecorn also intcttdsintends toto billbH1 its customersutstornera d/r=flydirectly for locallocal exchange andand, Ionglong distsucedistance service.s,services. Its name, address, and tolltoll fz_free telephoneteleyhone numbers for English and Spanish @cakingspeaking customers will appear on thethe bilLbiK The CompanyComyany does not planylan to offer a prepaid debit card at thisthis time. As to repairs,repairs, thethe Company intendsintends to maintain a _pairreyair force thatthat it viHwill dispatch in South Carolina to resolve thosethose problems. Accordin_According to thethe record, the Company's mazmgerialmanagerial staffhasstaff has extensive experience in both the telecommunicationstelecommunications industry and in a'widea wide variety of other businesses. The semorsenior management team ofthethe Company consists oftheofthe followingfollowing persons: RonaldRor3aM L.L, Blake (President), Pa_ciaPatricia Diaz Dennis (Senior(Senior Vice President-Regulatory andaud, PublicPgbllc Affairs), Timothy Harden (Vice President-Operations), Paul R. Ro_Roth (Vice President), andaud 1amesJames D_ri_Devries (Vice t_identPresident ofHumanofHuman Resources).Resoumcs). Re_,theRess~ the Company'sCompany'a fiua_alSnmcial _ifityabihty to offero6er its sesvicesservices inin South Caroli_,Caro~ the testimonytestunony reveals SBC Telecom has the fiuancialfguueial supportsupport of its parent companyconrpany SBC Communications. The panmtparent company'scompany'a _6nancial statem=itsstatements were submittedsubmitted, with SBC Telecom's Application.AyyHcation. In itsits 1999 AntmalAnnual Repozt,Report, SBC Communications reported atmtmlannttal revenue iniu excess of $49 bilIJonbillion with a net income of over S8.1$8.1 Mlion.billion. C. V LVV [ i L fllltl VVV I VII'M II JV I tll ~ Vl DOCKETDOCKETING.NO, 2000-004-,2000-00mC '-ORDERNO.- ORDI!R NO. 2000-0445200M446 MAYMAY23,23,20002000 PAGE 6 ._ ...... \ InInaddition,addition, thetileCompanyCompany rcquestcctrerluested, the.Commission'sthe CpxtHDh siM, 'swaivervraxv'cr ofbf262!$8.S,C.Q.CodeQp JeAnn.Aun. I Kegs.Regs.103-610l, 03410audand 103-631l03-631(1976(19Mandand Supp,Supp. 1999),1999}.MoreMore specifically,speciBcaHy, SBC88CTelecomTeiecorn xcquc_srequests permissionpermission forforitsitsrecordsrecords totobebephydcallyphysically kc'ptkept'inin SanSanAntonio,Antonio, Texas.Texas Th_TheCompanyCompany socksseefggtoto contractcontract with~th theQeappropria_appropriate incumbentincLunbent locallocal excha_eexchal1Eecardercarrier (ILEC)(KBC)forfol1h¢tileILECK ECtotoIn.videprovide SBCSBCT¢lecomTelecom withv/lth directorydirectory listingslistings asaswellweH as_toas totmdcrtak¢QN)ertttke thethe distr2mtmndistflbutlon of_dcs,ofdizectorleL AfterAfter fullSxHconsi&rationconsideration ofofthethe applicabIeapplicable law,lavr, thethe Company'sCompany's Application,Ayplicatibn, anduzithethe evidenceevidence presqmtcdpresented. atatth©the h_adng,hearing, thethe Comm_onCommission he,herebyby i_su_sissues itsits _dings~gs ofoffactfact andand conclusionsconclusions ofoflaw:lair; 1,1. SBCSM'.T¢IccomTelecom isis organiz_torgaxuzed as a corporationcorporation underunder diethe l_wslavIrs of thethe $t_State ofof DelawareDelwrare andand, isis aw.bofizcdautho~ toto do businessbusiness as a!fordgna'foreign corporation inin thethe Stat_State ofofSouthSouth CarolinaQarollna, by thethe S_'eL_ySecretary of State. 2. SBC TekcomTelecorn intendsimcnd.s to be a provider of local exch3nseexchaug¢ _mdand. intcrcxchang¢interexchange telecotntnunicationstelccommuni_fions servicess_rviccs and wishes to_o provideprovid_ its services in South Carolina.CaroiinL 3. SBCTeiecozrLTel_com has thethe rrutuagerial,managerial, technical,tcchulcal, and fi_cialSn3ncial resources tom provide the servicesservices as describedd_scdbcd 4in itsits AppBcation.AppUcation, 4. TheTi_ CommissionCommis_'on Gadsfinch thatthat SBCSBC Yelecorn'sTdccom's "provisien"provision ofof servicesccv[ce wiJIwill not adverselyadversely imyactimpact thethe availsbihtyavailability ofofaff'ord,_leaffordable'locallocal exchangecxchang_ service.sccvic,." "S.S.C.C. CodeCode Ann.Ann. SectionScction $8-9-28058_.9-280 (8)(3)(B)(3) (Supp,(Supp. 1999}.1999). $.5, The1_ CojnnrissionCommission Gndsfinds thattha_ SBCb"B_ TelecotrtT¢Icoom willv,'iU supportsupport universallyunlvcr_ly availaMeavail_l_ telephonetelephone serviceservice atat aQordableaffordable rates.r_cs. VV'VV 1,I. LV,LV LVV'TLVV't I,I LT"nlYIL TAi&l VVV I 'VIIV I/ I V I flllVL ilv, 7"ut' DOCKET NO. 2000-00_-C2000-0~ -—ORDER NO.NQ. 2000-04452000-0446 MAYM'AV' 23,2S, 2000 um n._ 6. The CommissionConuuission FindsBuds thatSBC Tol_omTelecom willwil1 provid¢provide servicess_i_ whichvrhichwig,willm_tzest the scrvlcesnvice stan_stands' of_hvofthe Commission. 7.7 The CommissionCoaunission finds6ruh that _the provision oflocatoflocal exchange s_'viceservice by SQQSBC " TelecomT¢lccom "does not othcrwis=otherwise adv_elyadversely impact thethe public intorest"interest. S.C,S.C. Code Ann.AtuL, Section 58-58 9-2809-2so (B)(9))CS)(Sum.(Supp. t999).1999). CONCh...USIONS_OELAW 1.l. Bas_lBased on the abowabove iindings6mhngs of_t,offact, th=the Commi_onCommission dotcnnin_sdetenuines flintthat a Ccrtifi_t¢Certijcate ofPubli¢ofPublic Conveni_ac¢Convenience andmal N_¢ssityNecessity should b_be grant_granted to SBC Telc_omTelecotn toto provide competitivecompetitive intrastat=intrastate non-zmallocalnod.-rural local exchange sc,85PQcewice in111South809th Ca.mlina.Catoliua. TheTile t='mstelins of the StipzdationSbpUllatipn b_w_enbetween SBCSEC Tel_omTelecorn and SCTC amare approve,approved, _dand, adop_dadopted as aa, part of thisthis Order,Order. Any proposal totg provide suchslick s_ceservice toto rum[rural svrvlc¢service az_sareas isls subjectsub) ect tofo thetl1e t_msterms ofoML5the Stipulation. InIq, addition,addition, SBC TeI_omTelecomisis granted authority to provide _~tate intorLATAinterLATA serviceservice and to originate and tvrminateterminate tolltoH tmfHctra6ic withinwittun thethe same LATA, as s_set forth h_'_in,herein, through the r_atoresale ofqf _trastateintrastate Wido%'ide Area Tel_onlmuni_afionsTelecotnmuuications Scrvic_Services (WATS), Mvssag¢Message TelvcommtmicafionsTelecotnmunjcations S=_ccSetvice (MRS),(MTS), dir_orydirectory assistance, travel card,card scrvi¢_service oroL any oth=other services authorizerauthorized, for tesaleresale by tadffstarias of c'_ierscamera approved by thcthe Commission. 2. SBCSM TclccomTelecom shallshall file,51e, prior to offeringoFering locallocal cxchangeexchange $ervicc_services in South Carolina, itsits _Gnd tariffofitstariff ofits loca1local servicesetvice o_offeiings _nfonmgconforming to allaH matt=rstrltters discussed withmth Staff az_tand, comportingconxporting withvrith South CarolinaCamlina law in all malZ_T_.matters. SBC Telacom'sTelecom" s localloca} telecommunicationstelecomnxunications servicesservices shall be r_gul_regulated in acco_anv_acconhnce withmth the principlespmgip1es andaud, procedur_procedures cs_blish_established forfor flc_bl¢flexible r_gulationregulation firstSr' granted to NewSouthNew8outh Commtmic_on_Communications by Order No. 98- 16515$ in Docket No. 97-467.0.97WV-e. Spen6ca1ly,SpcoificalIy, th¢'Conm_onthe'Connnission adopts for SBC Telecom's uvl.VV I ~ LV. LVV_I VV't !/ , 1.L'_nm't&l&l VVV LVI'IU IllVIAllVL DOCKET NO. 2OOO<20004 _C4C -—ORDF.._ORDER NO.NO- 2000-0446 MAY 23, 2000 P&GEg . [ i compstitivocompetitive intrastate locallocal exchangeexchaage servicesa rate structureincorpora_incoxpo~ maximam ra_ levels with the flexibilityQexibility for adjustment below th_the maximummaxixauxn raterate levels thatthat willvillhavehave been prtviot_ypreviously approved by the Commission. Further, SBC Tel_com'sTelecom's local exchange stcviceservice tm-iff_iIio_tsrHMRrqy arcare presumed valid upon filing,Sling, subject to the Commission'sCommission s fightxight within thirty~(30)00) daysday@ to instiu_institute an investigationinvestigahog of thetlat tarifffuff filing,6IHlg, inln which case thetbe tariffCATHE filingBlhlg would be suspendedsuspended pending furtherfisher Order of the Commission.CoxnxnissioxL Fmher,Further, any suchsuch tadfffilings5868'81Hlgs will beSe subject to the samezaxne monitoringmonitormg process as similarlysKnilariy situatedsltusted compttitiv¢colnpetltive local ¢.xchaugeexchange carricz¢carriers. 3. The Commission adopts a rate design forfor thethe longlonE distance s_tvicesservices of SBC3HC TelccomTelecoxa whichvrhich arcare consistent withuvith the principles and procedurespxocehues establishedestab~ for alternative regulation ofofbusinessbusinessscrvic_service offeringsset out in Order Nos. 95-17349$-1734audand 96-5596-$$ inin Docket No. • . 95-661-C,9$-661-C, Underader th_the CommissionCornmimion @provedapproved alternadvealternative regulation,reflation, the business service offerings of SBC TclecomTelecom including consumercardcaxd services,andand. optratoroperator s_rica_services, arearc subject toto a relaxed regulatory schemeidentical to that grautedgranted to AT&T Communications inm Order Nos. 95-17349$-1734andand, 96-55 inin Docket No.Ho. 95-661-C.9MIZ. Under this relaxed regulatoryrectory schem%scheme, tarifffilingstarHFQlings for businessbusmesa _ervicesservices shallshall be presumed validvaM ttponupon filing,filing. The CommissionCommission@rillwilI have seven (7) days ininehichwhich to instituteinstitute an investigationinvestigation of anyaxLy tariff_g.lsriEBliag. IfthoJfthe CommissionCoxxunission institutesinstitates artaa invcsdgadoninvestigatioxL ofa partictdarparticular tarifftsxiKGhngfi]iul_ within the seven days, the tawNIHngtariff filing willwBI then bebe susptmdedsuspended until furrierfurther Order of the Commission.Coxrumssion. Any relaxation inin the future8xtme reporting requirmn_tsxeqnirnnents that may be adoptedadopted, for AT&TATES shallshaH apply tot'o SBC Telecom also. 4. With%ith regard to the residentialresident ihter_changeinterexcbange service offerings ofSBCofSBCTelecom,TelecoxxL, thethe Commission adopts a racerate design wl_chwhich includmiriciudes only maximummaxixnum rate levels for each tar_tariK VV S. &U° LVV'T f , L'_UTI DOCKET NO.NO 200946,2000-06-, _-C-c C —ORDERQQDEL NO.NQ. 2000-0446 MAY 23, 2000 PAGE9 ...... charge. A rate slzuctm'¢structtxre incorporatingmaximumxnaximuxu raterate levels has beenpreviouslybeeuyrevioua}y adopted by the Commission.CpmxmsslpxL _ Re._Applicat_on of GTE _Sp__ntCornm_tmications_C_ou. etc.. Order No. 84.622,84622, isledissued inin Docket No. 84-10-C (August(Au~ 2, 1984). 5.$. SBCSQQ TcleoomTelecom shall not adjust itsits reddemialresidential intemxchangeinly%(change ratesTates below the approved maximmnxuaxixnuxn lwdJevel without notice totp thethe Conm_sionCommission andand, toto the public. SBC Telecom shallshaH fileKe itsits proposedpmposed rate changes,chang=, publish its notice of such changes, midaud fileaxle affidavits ofpf publicationwith the CommissionComxnission twobvo weeks prior to the effectiveeQective date ofpf the changes. Howm_c,However, the public notice xcquir_cntrequirement is waiv_l,vraived, andand, therefore notnpt rcq_required, for reductionsreductions belowbeIovr the msximumxxtaxixxtuxn cap inin instances which do not affectaQbct the general body of subscriber_subscribers or do not constituteco11stltute aa, general rate rcd_'_ion.reductipn. _ Re: A_ub'licatlon oF_GTESorint Communicatlons._e_.. OntcrOrder No. 93-638,93438, issuedin DocketDocket. No. 84-10-C84-l0% (July{July 16, 1993).1993}.Any pmposcdh2crcas¢proposedixa~se in the % • I _-r-" maximumxn57Qxnuxxt r_terate levelforfor residcatialresidential intm_xclumgeintexexchauge services reflc'cmdre6ected inin the t_zlf£tariff which would be applicable toto the general body of the Company'sCpxupauy's subscribers shallSM1 co_mteconstitute a genccalgeneral ratcmaId_ratemaking proceeding andand. wiUvri H be treated in accordance with the notice and hcadugheaxiug provisions of S.C.S.C. Code Ann. §58-9-540(S8-9-$40 (Supp.1999). 6. If itit has notnpt already done so by the date oflasuanceofissuance ofthisofthis Order, SBCTelecom shallsha11 file51e its rcv/svdrevised. maximummaxixnum long1ong distance_andtaxiiKand an aocompanyingaccompanying pricepxice listlist withinvrithin thirty (30) daysofrcceip:ofreceipt ofthisofthis Order. The revisedtadffshaUtariff shall be condstemcpnshtent with the findingsgangs oft_ofthis Order and _SM1bebe comisten_consistent witharith thethe Commission'sCommon's Rules and Regulations. 7. SBC TelecomTeleconl isis subjecttoaccesschm-gvscharges pursuantto Co--ionCpxuxnission OrderNo. 86-M- 584$84 inwhich the CommissionCommhsipn determinedthat for accesspurposespuxppsea rcsellvrsresel1ers _muldshould. be treated similarlyto facilitles.based5tcilities+ased interexchang=interexchange ¢an_c_s.caxriers. _,,,'_V'V I.I, LV.pig, £vv'rLVV'T !I,, £-TnmL T&lll VVV LVI1U ll 1V I Ill'IVL DOCKET NO.No. 2000-t,w2000-v -A-C_,4.-C--ORDERORDER NO. 2000-04462000-044» MAY 23, 2000 PA__I0 _ .... .i i 8. With rega_iregard totheCompany'sCODlpaxly s' resaleTcs81e intm'exch,_gemterer~ge service.,service an end-us=shouldend user should be able totp access auotheranother intm'cxchangointerexchmge carriercarder or operatoroperatpr service provider if thethe end-useren4~er so desires~ 9. b'_BCSBCTdccomTelecom shallresellthe s=vic,servicescsofonlyofonly fltosethose intm_xcJumgeinterexohange cmie_caxxhm or LECsLBCs authorizedautho~ to do business in South C_'ol/naCarolina by _this Commission.Comtrussion. I.fSBCIfSBCTelecomTelecprn changes tmderlylngunderlying cm'ders,carriers, kit shallshaH nodfynatUy th_the CommiSsionCommission inwriting.vrrittng. 10,10. With%Pith regard to thethe origimuioaorigmanpn andand, _tlontermination of rolltoll csllscalls withinvrithin the samesame LATA,~TA„ SBC Tclecom shallshall comply withthetermsofOrd=Order No.No 93-462,OrderApprovingStipulationStipuMon andAgreement,inDocketNos.Nps, 92-182-C.9M82-C, 92-183-C,92'-183-C, and 92-200-C9~-200-C (June(?une 3,1993),19933,withthe exceptionofthe IO-XXX16-XXXintmLATAjntxaEATA dialingdialtng _ent,requMrcrnent, which has been_rendered obsoleteby thetolldialingparityrules establishedestab~ by theFederalCommunicationsCommission,pursuantto thethe Telecommunications1elecpmmunications AftAct of 1996199t» (_~474'l CFRCPR 51,209).$l209)- Ill.I. SBC Tclccom shallshaH fileille sun,_c¢surveiLtnce reports on a cale_d_calendar or fiscal y_year basis with theCommissionComznission asrequiredby Order No. 88-178in DocketNo,No. 87-483-C.87-483-Q. The prop=proper form for thesereportsisindicamdindicated onpn AttachmentA. 12. The Company shall,~inh compi_n¢.¢cpmpRum with CommissionCoaunhsipn rcgul_ons,regulations, designate and -,._-t,_-maintain an mshorlzedanthoeged utility r,-'l_mmta_iverepresentative whovrho is prcpmcdprepared, to d_cuss,discuss, on a retryrebury level, customer r_lstionsrelations (complaint)(coaxpiaiat) mutters,matters, ¢nglnem'_engmeenng operations,operatrons, testsandand, repairs. In addition, thethe Company~any shellshaH provid_provide tothetl_CommissionCox55lIssion in wrlt_writing the nmm_name ofthepf the autho2fx04authodz_ repres_tativerepresentative totp be contactedcon~d, inin co_nconnection withvtith g_ncralgeneral nmnagemm_msnng~ dudesduties as well as emc_nciesemergencies which o_uroccUr duringdMng non=of_enon-Ofhce hours.hpurs. ,.,._J VVl, LV, Z.VV_ DOCKETDGCKPT NO.NQ, 2900-Qf2000-0t, . _Z -—ORDER NO. 2000-04_2000-0446 MAY 23, 20002009 PAG]_.I i ...... tm i . SBC8BCTolccomTelecom shallshaH fileBle the names,naxnes, add_ss_addresses and tcl_honetelephone numbc_-snumbers ofthese 'I _e_ent_vearepresses with thethe Co--ionConnninion wi&tnwithin thirty~(30)daysofrocdptofreceipt ofO_isofthis Ord=.Order. _mt~tunent B8 shall bcbe ufiliz_lutilized for thethe provision of thisthis informationinfozmarion toto thethe CormCozttznission. F_,Further, the Company shall promptlyproznptly notify the Commission in writingmiting if the _cmtafivesrepresentatives axeare replaced.rc,placect 13. SBC33C TelecomTclccom shallshag, conduct its business inin compJiancccompte with Commls_onCotnztnssjort decisions and Orders, both pastyast andaud _tu_&tete, including but not limitediinnted to, anyany andaud all Commis_onCotzunissiog, dccislonsdecisions which m_ymay be renderedrendered inm Docket No. 96-018-CN418-C tega..'dingregarding Iocaliocsi compedtlon.cornperttion 14. With rcgarclregard to th=the provision ofinmamofinmate callingcalljtng s_cc_services forfor locallocal andand, tntraLATAintrgLATA. toll oall/ng,caHing, SBC shall not chargec]=rgc zut¢_rates anyarty greater Thanthan thethe rates dnrged~ed. by the local exclmu_cexchange caxzi¢.ccazzier _at th_the _metune a callcaH isis placed. For interLATA toll calls, SBC sha_shall no_not clm_echarge rates greater than thethe razcsrates chscsedcharged by AT&TAT8cT CommunicationsComlnunicati'ons - South Carolina.Caro~ Additionally,AcbMonally, a__auto~ col1¢c¢collect calls shallshall only bcbe completed with thothe _m_tiveaSzznative Bcc_pmnccacceptance by thethe c_dledcalled party.party„TheThe Company drollshall not impos_impose _nyany property-impos_property-imposed £e:fee on callseaHs od&in_dngoriainating _Trom/nnmtefrozn izunate /confinomentlcon8aemeut fi_cilides.facilities. For inm_oimnate calling services, callcaH detail h_onn_oninfozznation submittalsubmitted to the locallocal cx_oexchange company forfor billingbiHiiug purposes mustmusE includeinclude the tclc'phonetelephone numb¢_ntnnber _soci_todassociated with th_the Pay Telcphon_Telephone Access LineLiae _sss ;_signcdassigned, by thethe local exchange company'.coznpany. For intrastateintrastate O+0+operator assistedassisted, and calling cardcszd. callscal1s oxisinnt=toriginated fromfNtn p_ypay telephones outside confinementcon6nemeut facilitiesfaeiTities andaud, aggceg_oraggregator locations, SBC may not. imposeimpose an operator service charge gyvergreater than the intrastateiutrastsze charsescharges th_then _ycurrently approved for AT&T.ATILT. ForPor thethe usage portion of'theofthe call, SBC may not cha_echarge morem.ore than the intrastateintrastate ratesrates chargedcharged, by AT&TATILT CommunicationsComznugications or BellSouth at the time the call is completed.cotnpleted. V_VVII, LV.LV LVV_IVV't II , LJn;wLJ&~&~ V VV L'Vl'I'lA Ll 1 V I f1l'IV L DOCKET NO. 2000-_ . ._ -—ORDER NO. 2000-0446 DOCKET No. 20004 . . ~ ORDER NO. 2000-0446 MAY 23, 2000 PAGE ...... ¢ \ .,_@_-" SBC should be allowedaHwveC toto incorporam'inincorporate'in its tarifftax' a s_surcharge (property imposedimposed f'_)fee) on oper_r-_ssistedo~r-assisted andaxial calling card callscaHs not to exceedexceed, $1,00$1.00 for c_caQs orientedoriginated fi'om&am payphoaepayphone (excluding(excluding pay telephones associatedassociated, with imaminmate call_csHing service)service) _mdand fromGem agEreE_raggregator locatkmslocations only ifth_ifthe property own=owner has not added a s__surcharge alremiy.already. ThatThai £%is, SBC8BC may not impose _-an additional surcharge to calls originating from&em payphon_payphones and from&em aggregator locationslocations iraifa propertyowner ]mshhs alre_yalready imposedimposed, such sa, s_u'chargo,surcharge. IfKsuohsuch a s_surclxarge isis applied on brha_ofbehaKof a propcrtyproperty owner, the CompanyCotrtyany shouldshouM pay th_thi surcl_gcsuxcharge iniKl its entiretyentirety to the property owner. Froth=,Further, if the surcharge is applied, _ethe user slfouldshould be notifiednotiBed of thethe impositionitnpositipn ofthoofthe surcharge,surcharge. This notificationnpgjcatjpn should bobe includedincMed inin thetile informationinformationpiecespi_es identifyingidentifying thetbe CompanyConxpany as the operator s_-riceservice provider. SBC8BC is required to provide in/onna_ionmfoxmation pieces to pay telephonetelephone service providersprovi4ers or property owners identifyingidentifying thethe Company as ti_the provider ofofoptmmroperator service forfor authorizedautho~ callsoaHs originatedoriginated, fromfmm thethe location.location. SBCSEC isis requiredreq~ toto bmmlbrand all calls identifyingidenti~ itself as the carrier.cazxier. The informationinfozzuation pieces shallshaH be consistent with the format approved by th_the CommissionComxnission inm, Order No. 93-811, issued in Docket No. 92-557-C.92-27-C. For tlwthe provisionofopmatorofoperator s_ic_s,services, SBC shallshaQ comply with thethe Operator Service Provid=Provider Guidelines approved in OrdorOrder No. 93-534, issued in Docket No. 93-026-C.93426-C. I15.$. BySy its Application, SBC TelecomYelerom OfficeOEce requested a waiv=waiver of 26 S.C.S.C.Code Ann. Regs. 103-610103%10and 103-631 (1976{1976and Supp. 1999). The CompanyConxpany requestsreques_ a walverwaiver of2t;of26 S,C,S.C. Code Ann.Anu. Pegs.Regs. 103-610 (1976)(1975) so it may _.¢.t._.minntain itsits recordsrecords _reqaind. by the Public Se_,'iceService CommissionComxmssioa ruI_rtx/es or necessary for th¢the sdmlnis_tionadministtation thereof,thereof, to b_be kept in San Antonio, Texas. o. The Company also requests a walverwaiver of 2_;26 S,C,S.C.Code Ann, Ress.Regs. 103-631103431(Supp,(Supp. 1999) so that VVI, LV, LUU'T DOCKET NO. 2000-.0,.2000-6 J_C.~-—ORDER NG.NO. 2000-0446 .,MAYMAY' 23, 2000 PAGEI3 ___ =l . ! = the Companycoxnpany maytnay contza_contract with the ILECsKEYS to ?rovid_provide itsim customerscustotners withwi@directory listingshstutgs as J wellweH as tota undertake the distribution of di_tmtoriea.directories. We%e grant a waiver ofof2526 S.C.S.C. Cod_Code Ann.Axtn. Rega 103-610l03-6Ã andand, 103-631103431(1976 andaxtd Supp. t999),f999),The CompanyCoxnpany isis directeddixectol to ¢omplywithcoxnply with allalI Rules andand. Regulations of the Commission, unlmsunlesa a re#onreguMon. isis spryspeciScally waived byky timthe Commission.Coauahsion. Additionally,AdditibasHy, SBC requestedrequested. lhstthat itlt be exemptflora$Ãn myany record-keepingrecord-keephlg rulesthatmight requireroIIuire ittomaintainitsfutmcialfinancial _:cordsrecords in ¢6uformanc¢coxlforrnance withthe Uniform SystemSystexn ofofAccounts. SBC offcr_offered thatthat it maintain_main~ its book of ac_untsaccounts in accordance with Gcn=zttyGenexaHy Accepted AccountingPrincipals("GAAP"). SBC assetsasserts that theCommission willhav¢will have a rellablereHablexneauame-asstotb ¢valuat_evaluate SBC's op=ationsoperations und=~GA,_.GAAP. Th_The CommissionConuxnssion grants SBCsSBC'8requestrequest to m_nt_,rrt~dn its books'books and records using GAAP. 16. Title 23, Chapter 47,4V) South Camiin_C~hna Code of L_wsLaws Ann.,Ann. , governs the ¢stablishmon¢establishment andaud implementation of a "Public Safety CommtmieationsCommunications Ccnmr,"Center, "which is morentbxe commonlyconunonly known as _a "911"9l,1 system"systexn" or "911 service."service. " Services available through a 911 system include tawlaw ¢nforcmn_t,enforcement, fire,Gte, amiazd ¢metgcncy.medic',dernet~ncymeHcal sertdces.services Inh. recognition oftlmofthe necessity of quality 911s_dccsservices being providedprovided, to the _tlzmmcitixeni of SomhSouth Carolina,Caro~ the CommOtionCoxnxnissibn hereby imu'ucminstructs SBC Tclc¢omTeiecoxn toto contact thetheajpropdate=ppmpriat¢ authorhicsauthorities rcgm-d.i_regarding 911 service inindethe counties am[aml tidescities wh¢_¢where th=the Company wigwiH be op='ati_.operating. Contact with tl_the appropriate suth0dd_sauthorities isis tobemade beforebeginnin[_beginning tcl_honetelephone serviceinSouth CamlimuCaroiiua. Accompanying thisthis Orderis an blformadoninformation packet from6am thethe SOuthS'outh CarolinaCaxoliNL ChapmrChapter of the National Emc_cncyEmergency Numb_Hutnber Association("ScAssociation CSC NENA")MECCA'") with contactcoxLtact informationioforxnation andanxi samplesatnp1e forms.loans. The CompmyCompany may also obtain information by contacting thethel F._IE9111 Coordinator at thethe OfficeGKce of r___rm_onTa@xxnation DOCKET NO.No. 2000-00-,_C200am~~ --ORDERORDF-_tNO. :2000-04462000-0446 MAY 23,2000 PAGE 14 ...... - P,_m'c_sResources of thetbe South CamtinaCarolina Budg_Budget and Control Bored.BoarrL By tl_this Ord_Grdce _laud ye|orprior to B providing sctwiccsservices within South Carolina,Caroliina, $BCSBCTolccomTelecom strollshall conmr.tcotmact, th_the 911 Coordinator inirr each counW,county, aswellvreH@sasthe 911 Cooniin_orCoo~or min casheach city wh_r_where _othe cityhasits ownmni 911 gygteur, andIn'. _shaH provide infommtioninformation r_gat'dingregarding th_the Company's operations as mquit_required by th_the 911el' system-systerrL 17. SBC T¢le_omTeleoora shallshall ftlo51eannualannua1 _~ial infonn_oninfo~on inm the fom_form ofofmmualatutual t_reports andaud grosspass receipts r_ponsreports as reqtth'_rcquhe6 by timthe Commission.Cozrumssion. The mmu_aralu'el t_crrtreport and.and timthe grossgrgss r_eiptreceipt x_ortreport will n_cssitat_necessitate the Rllngfiling ofintrasta_ofintmstate info_-mation.iatorrnation. Th_,e,Therefore,for_SBCBBCTcl_omTelecom shallshaH kccpkeep financialBnsaqial recordson anaa intmstamintestate basisforSouthSou,th CarolinaCarofina mto complycoarply withwitb tl_tbe annualrepor_annual report _mlaud grossreceiptsr_ipts filings.BHngs. iS.18, This OrderOghxshmllshall remain in full5dl fom_force mdaud effect until Rmh_furtber Ord_Order ofth_ofthe Commission. BY ORDERQRQER OFOP THE COMMISSION:COMN851QN! .JR._ I |l ATTEST: Exhibit 5 Subscriber Notice Billing Name Billing Address Billing City, ST Zip Re: Service Address Service City, State Dear Valued (Business) Customer: As you know, SBC Telecom, Inc.Inc. ("Telecom")("Telecom") has been your provider for local telephonetelephone service. Recently, Telecom announced itsits intentionintention to combine business operations with its affiliateaffiliate SBC Long Distance. Under the termsterms of the agreement, effective on or about March 31, 2005, thethe anticipated closing date of the transaction, SBC Long Distance will replace Telecom as your locallocal service provider. This transactiontransaction isis subject to obtaining all required regulatoryregulatory approvals,approvals, and thethe filing of all appropriate documents with state agencies. Please rest assured that the transitiontransition of your service toto SBC LongI ong Distance will not affect the services you currently receive from Telecom. As a customer of SBC Long Distance, you will continuecontinue toto receive local services with thethe same rates, features,features, termsterms and conditions as you currently enjoy. You will be transferredtransferred to SBC Longlung Distance, unless you have selected a different carrier before the transfer date; existing preferred carrier.carder freezes on the services(s) involvedinvolved inin the transfer will be lifted;lifted; and you must contact your locallocal serviceservice provider to arrange a new freeze. Additionally, you will continue to receive top quality with performance which meets or exceeds that of what you currently receive from Telecom. This change in providers will be beneficial and virtually seamless forfor you. Please also be assured that you will not incur charges related to the transfertransfer of your servicesservices to SBC Long Distance. SBC Long Distance will be responsible for handling any complaints filed or otherwise raised by you prior to or during thethe transfer to SBC Long Distance. There isis no action required on your part. You may, of course, choose another provider forfor your local telephone service,service, subject toto any termination restrictions inin your serviceservice arrangement with Telecom. Unless you choose another service provider, you will automatically become a customer of SBCSHC Long Distance. We in the SBC family looklook forward toto serving you and appreciate your continued business. In the meantime, if you have specific questions about thisthis notice, please contact us at 1-877-430- 7228. (Business(Business #0 is 1-877-430-7228) Sincerely, SBC Telecom, Inc. SBC Long Distance 9