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Business Context and Reporting Period

Company: SBC Communications Inc. (Note: Filing header lists "AT&T INC." but content confirms SBC Communications Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: SBC operates in the communications services industry, providing wireline and wireless telecommunications services, directory advertising, and publishing services. The company holds a 60% interest in Cingular Wireless and significant international holdings, including Bell Canada.

Key Financial Metrics

Per Share Data: Net loss of $(0.02) per share (diluted) for Q1 2002 compared to $0.54 per share in Q1 2001. Income before extraordinary items and accounting changes was $0.51 per share.

Material Changes vs. Prior Period

• Accounting Change (FAS 142): The primary driver of the reported net loss was a $1,791 million cumulative effect of accounting change due to the adoption of FAS 142 ("Goodwill and Other Intangible Assets"). This resulted in a goodwill impairment charge related to Sterling Commerce Inc.
• Revenue Decline: Total operating revenues decreased 6.0% year-over-year. Wireline local service revenues dropped 2.5% due to competition and economic weakness. Directory advertising revenues fell 15.2%, largely due to timing shifts in publication schedules.
• Wireless Growth: The Wireless segment (including Cingular) saw subscriber revenues increase 10.7% to $1,868 million, driven by digital customer growth. Cingular added approximately 234,000 net customers.
• Expense Management: Operating expenses decreased 3.7% to $8,216 million. This was aided by workforce reductions and lower equipment sales costs, partially offset by higher provisions for uncollectible accounts.
• Debt and Liquidity: Long-term debt increased to $19,062 million from $17,133 million. Cash and cash equivalents increased to $830 million, supported by strong operating cash flow of $2,262 million.

Guidance, Outlook, and Risks

• Capital Spending Guidance: SBC expects 2002 capital spending to be between $8,000 and $9,000 million, a reduction from prior expectations to align with lower revenue forecasts and economic conditions.
• Dividends: The company announced a 5.4% increase in dividends in March 2002, with cash paid for dividends expected to increase in 2002.
• Regulatory Risks: The company faces ongoing challenges from the FCC and state commissions regarding interconnection terms, access charges, and unbundled network elements. Failure to meet FCC merger conditions in 14 markets could result in penalties up to $36 million per market.
• Subsequent Event (Teleglobe): In April 2002, BCE Inc. (80% owner of Bell Canada) announced it would cease long-term funding to Teleglobe Inc. SBC holds a minority interest in Teleglobe via Bell Canada. The value of this investment may decline significantly, though the exact amount was not finalized at the time of filing.
• Goodwill Testing: SBC is still conducting FAS 142 impairment analyses for its international holdings and Cingular. Any resulting impairments will be recorded as a cumulative effect of accounting change and may require restatement of Q1 2002 results.

Investor Verification Checklist

• FAS 142 Impact: Verify the final outcome of goodwill impairment tests for Cingular and international holdings, which could trigger further restatements of Q1 2002 results.
• Teleglobe Exposure: Monitor the quantification of the decline in Teleglobe's value and its impact on SBC's equity in net income of affiliates.
• Wireline Line Losses: Track the trend of access-line declines (3.6% in Q1 2002) and the effectiveness of DSL and data services in offsetting traditional voice revenue losses.
• Regulatory Compliance: Confirm SBC's ability to meet remaining FCC merger conditions in the 14 specified markets to avoid potential penalties.
• Capital Allocation: Review the execution of the reduced capital spending plan ($8B-$9B) and its impact on network deployment and competitive positioning.