FORM 10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8610
SBC COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At July 31, 1998, 1,837,287,669 common shares were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Operating Revenues
Local service:
Landline $ 2,566 $ 2,371 $ 5,046 $ 4,650
Wireless 844 756 1,620 1,448
Network access:
Interstate 1,122 871 2,216 1,909
Intrastate 470 489 924 945
Long-distance service 550 530 1,085 1,071
Directory advertising 388 372 881 842
Other 651 532 1,243 1,029
- --------------------------------------------------------------------------------
Total operating revenues 6,591 5,921 13,015 11,894
- --------------------------------------------------------------------------------
Operating Expenses
Cost of services and products 2,330 2,223 4,636 4,396
Selling, general and administrative 1,413 2,985 2,766 4,131
Depreciation and amortization 1,139 1,646 2,245 2,714
- --------------------------------------------------------------------------------
Total operating expenses 4,882 6,854 9,647 11,241
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Operating Income (Loss) 1,709 (933) 3,368 653
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Other Income (Expense)
Interest expense (238) (245) (471) (453)
Equity in net income of affiliates 73 55 126 82
Other income (expense) - net (39) (64) (77) (84)
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Total other income (expense) (204) (254) (422) (455)
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Income (Loss) Before Income Taxes 1,505 (1,187) 2,946 198
- --------------------------------------------------------------------------------
Income Taxes 539 (400) 1,068 128
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Net Income (Loss) $ 966 $ (787) $ 1,878 $ 70
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Earnings (Loss) Per Common Share $ 0.53 $ (0.43) $ 1.02 $ 0.04
- --------------------------------------------------------------------------------
Earnings (Loss) Per Common Share-
Assuming Dilution $ 0.52 $ (0.43) $ 1.01 $ 0.04
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Weighted Average Number of Common
Shares Outstanding (in millions) 1,839 1,826 1,839 1,825
- --------------------------------------------------------------------------------
Dividends Declared Per Common Share $ 0.23375 $ 0.22375$0.4675 $ 0.4475
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
SBC COMMUNICATIONS INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
- --------------------------------------------------------------------------------
June 30, December 31,
------------- -------------
1998 1997
- --------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 615 $ 398
Short-term cash investments 91 320
Accounts receivable - net of allowances for
uncollectibles of $404 and $395 4,847 5,015
Prepaid expenses 485 349
Deferred income taxes 678 622
Deferred charges 77 82
Other current assets 242 276
- --------------------------------------------------------------------------------
Total current assets 7,035 7,062
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Property, Plant and Equipment - at cost 67,149 65,286
Less: Accumulated depreciation and amortization 39,391 37,947
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Property, Plant and Equipment - Net 27,758 27,339
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Intangible Assets - Net of Accumulated
Amortization of $1,071 and $1,002 3,208 3,269
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Investments in Equity Affiliates 2,484 2,740
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Other Assets 2,115 1,722
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Total Assets $ 42,600 $ 42,132
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Liabilities and Shareowners' Equity
Current Liabilities
Debt maturing within one year $ 2,211 $ 1,953
Accounts payable and accrued liabilities 5,919 6,780
Accrued taxes 1,464 1,108
Dividends payable 430 411
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Total current liabilities 10,024 10,252
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Long-Term Debt 11,547 12,019
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Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 1,885 1,639
Postemployment benefit obligation 4,882 4,929
Unamortized investment tax credits 381 417
Other noncurrent liabilities 2,016 1,984
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Total deferred credits and other noncurrent
liabilities 9,164 8,969
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Corporation-obligated mandatorily redeemable
preferred securities of subsidiary trusts* 1,000 1,000
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Shareowners' Equity
Common shares issued ($1 par value) 1,867 934
Capital in excess of par value 8,495 9,418
Retained earnings 2,167 1,146
Guaranteed obligations of employee stock
ownership plans (155) (183)
Deferred compensation - LESOP (86) (119)
Foreign currency translation adjustment (650) (574)
Treasury shares (at cost) (773) (730)
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Total shareowners' equity 10,865 9,892
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Total Liabilities and Shareowners' Equity $ 42,600 $ 42,132
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* The trusts contain $1,030 in principal amount of the Subordinated Debentures
of Pacific Telesis Group.
See Notes to Consolidated Financial Statements.
<PAGE>
SBC COMMUNICATIONS INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
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Six months ended
June 30,
------------------------
1998 1997
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Operating Activities
Net income $ 1,878 $ 70
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,245 2,714
Undistributed earnings from investments in
equity affiliates (4) (31)
Provision for uncollectible accounts 230 265
Amortization of investment tax credits (36) (39)
Deferred income tax expense 92 (499)
Other - net (896) 177
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Total adjustments 1,631 2,587
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Net Cash Provided by Operating Activities 3,509 2,657
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Investing Activities
Construction and capital expenditures (2,503) (2,771)
Investments in affiliates - (14)
Purchase of short-term investments (41) (326)
Proceeds from short-term investments 269 517
Dispositions 108 346
Acquisitions (20) (797)
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Net Cash Used in Investing Activities (2,187) (3,045)
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Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 240 1,449
Issuance of other short-term borrowings 2 120
Repayment of other short-term borrowings (8) (195)
Issuance of long-term debt 393 407
Repayment of long-term debt (821) (140)
Purchase of fractional shares - (15)
Purchase of treasury shares (168) (80)
Issuance of treasury shares 99 81
Dividends paid (842) (802)
Other - (7)
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Net Cash Provided by (Used in) Financing
Activities (1,105) 818
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Net increase in cash and cash equivalents 217 430
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Cash and cash equivalents beginning of year 398 314
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Cash and Cash Equivalents End of Period $ 615 $ 744
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Cash paid during the six months ended June 30 for:
Interest $ 525 $ 461
Income taxes, net of refunds $ 574 $ 421
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
SBC COMMUNICATIONS INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
Guaranteed
Obligations of Foreign
Capital in Employee Stock Deferred Currency
Common Excess of Retained Ownership Compensation Translation Treasury
Shares Par Value Earnings Plans* - LESOP* Adjustment Shares
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 934 $ 9,418 $ 1,146 $ (183) $ (119) $ (574) $ (730)
Net income - - 1,878 - - - -
Dividends to shareowners - - (860) - - - -
Two-for-one stock split 933 (933) - - - - -
Reduction of debt associated with
Employee Stock Ownership Plans - - - 28 - - -
Cost of LESOP trust shares
allocated to employee accounts - - - - 33 - -
Foreign currency translation
adjustment - - - - - (76) -
Purchase of treasury shares - - - - - - (168)
Issuance of treasury shares - (22) - - - - 125
Other - 32 3 - - - -
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 1,867 $ 8,495 $ 2,167 $(155) $(86) $ (650) $ (773)
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<FN>
* March 31, 1998 balances have been revised as follows: Guaranteed Obligations
of Employee Stock Ownership Plans, $(169); Deferred Compensation - LESOP, $(97).
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA#
<CAPTION>
At June 30, or for the six months then ended: 1998 1997
<S> <C> <C>
-------------------------
Return on weighted average shareowners' equity........... 35.22% 1.36%
Debt ratio............................................... 53.69% 59.65%
Network access lines in service (000).................... 34,210 32,606
Cellular customers (000)................................. 5,831 4,960
Number of employees......................................119,460 118,240
<FN>
# SBC is in the process of revalidating the access minutes of use for Pacific
Bell. While this process may result in a change in the growth trends of the
quarterly minutes of use, SBC does not expect that the previously disclosed
year-to-date growth trends will be materially affected.
</FN>
</TABLE>
<PAGE>
SBC COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
1. BASIS OF PRESENTATION The consolidated financial statements have been
prepared by SBC Communications Inc. (SBC) pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the
opinion of management, include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the results for the interim
periods shown. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to
such SEC rules and regulations. Certain reclassifications have been made to
the 1997 consolidated financial statements to conform with the 1998
presentation. The results for the interim periods are not necessarily
indicative of results for the full year. The consolidated financial
statements contained herein should be read in conjunction with the
consolidated financial statements and notes thereto included in SBC's 1997
Annual Report to Shareowners.
2. CONSOLIDATION The consolidated financial statements include the accounts of
SBC and its majority-owned subsidiaries. SBC's largest subsidiaries are
Southwestern Bell Telephone Company (SWBell), providing telecommunications
services in Texas, Missouri, Oklahoma, Kansas and Arkansas, and Pacific
Telesis Group (PAC), providing telecommunications services in California and
Nevada. PAC's subsidiaries include Pacific Bell (PacBell, which also includes
its subsidiaries) and Nevada Bell. (SWBell, PacBell and Nevada Bell are
collectively referred to as the Telephone Companies.) All significant
intercompany transactions are eliminated in the consolidation process.
Investments in partnerships, joint ventures and less than majority-owned
subsidiaries are principally accounted for under the equity method. Earnings
from foreign investments accounted for under the equity method are included
for periods ended within three months of the date of SBC's Consolidated
Statements of Income.
3. COMPREHENSIVE INCOME Effective with the first quarter of 1998, SBC is
reporting comprehensive income (loss) for the second quarter and six months
ended June 30, 1998 and 1997. The components of SBC's comprehensive income
(loss) for each period presented include net income (loss) and the adjustment
to shareowners' equity for currency translation adjustments.
Following is SBC's comprehensive income (loss):
---------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-----------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------------------
Net income (loss) $ 966 $ (787) $ 1,878 $ 70
Foreign currency translation
adjustment (68) (17) (76) 82
---------------------------------------------------------------------------
Total comprehensive income (loss) $ 898 $ (804) $ 1,802 $ 152
---------------------------------------------------------------------------
4. MERGER AGREEMENT WITH AMERITECH CORPORATION As disclosed in the Form 8-K
filed on May 11, 1998, SBC announced a definitive agreement to merge an SBC
subsidiary with Ameritech Corporation (Ameritech) in a transaction in which
each share of Ameritech common stock will be converted into and exchanged for
1.316 shares of SBC common stock. After the merger, Ameritech will be a
wholly-owned subsidiary of SBC. The transaction, which has been approved by
the board of directors of each company, is intended to be accounted for as a
pooling of interests and to be a tax-free reorganization. The merger is
subject to certain regulatory approvals as well as approval by the
stockholders of each company.
5. MERGER AGREEMENT WITH SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(SNET) On January 5, 1998, SBC and SNET jointly announced a definitive
agreement to merge an SBC subsidiary with SNET, in a transaction in which
each share of SNET common stock will be exchanged for 1.7568 shares of SBC
common stock (equivalent to approximately 120 million shares, or 6.5% of
SBC's outstanding shares at December 31, 1997). After the merger, SNET will
be a wholly-owned subsidiary of SBC. The transaction is intended to be
accounted for as a pooling of interests and to be a tax-free
reorganization. The shareowners of SNET approved the merger on March 27,
1998; however the merger is also subject to certain regulatory approvals.
On August 5, 1998, the Connecticut Department of Public Utility Control
issued a draft order approving the merger with certain conditions that SBC
and SNET are currently evaluating for response. The order is expected in
September 1998. Approval by the Federal Communications Commission (FCC) is
still required. If approvals are granted with acceptable conditions, the
transaction is expected to close by the end of 1998.
6. MERGER WITH PAC On April 1, 1997, SBC and PAC completed the merger of an SBC
subsidiary with PAC, in a transaction in which each outstanding share of PAC
common stock was exchanged for 1.4629 shares of SBC common stock (equivalent
to approximately 626 million shares; both the exchange ratio and shares
issued have been restated to reflect SBC's first quarter 1998 two-for-one
stock split effected in the form of a stock dividend). With the merger, PAC
became a wholly-owned subsidiary of SBC. The transaction has been accounted
for as a pooling of interests and a tax-free reorganization.
Transaction costs and one-time charges relating to the closing of the merger
were $359 ($215 net of tax) including, among other items, the present value
of amounts to be returned to California ratepayers as a condition of the
merger and expenses for investment banker and professional fees. Of this
total, $287 ($180 net of tax) is included in expenses in the first six months
of 1997, $281 of which relates to the second quarter of 1997.
Post-merger initiatives
During the second quarter of 1997, SBC announced after-tax charges of $1.6
billion related to several strategic decisions resulting from the merger
integration process that began with the April 1, 1997 closing of its merger
with PAC, which included $165 ($101 after tax) of charges related to several
regulatory rulings during the second quarter of 1997 and $281 ($176 after
tax) for merger approval costs. The decisions resulted from an extensive
review of operations throughout the merged company and include significant
integration of operations and consolidation of some administrative and
support functions. Following is a discussion of the most significant of these
charges.
Reorganization SBC is centralizing several key functions that will support
the operations of the Telephone Companies, including network planning,
strategic marketing and procurement. It is also consolidating a number of
corporate-wide support activities, including research and development,
information technology, financial transaction processing and real estate
management. The Telephone Companies will continue as separate legal entities.
These initiatives are resulting in the creation of some jobs and the
elimination and realignment of others, with many of the affected employees
changing job responsibilities and in some cases assuming positions in other
locations.
SBC recognized a charge of approximately $338 ($213 net of tax) during the
second quarter of 1997 in connection with these initiatives. This charge was
comprised mainly of postemployment benefits, primarily related to severance,
and costs associated with closing down duplicate operations, primarily
contract cancellations. Other charges arising out of the merger related to
relocation, retraining and other effects of consolidating certain operations
are being recognized in the periods those charges are incurred.
Impairments/asset valuation As a result of SBC's merger integration plans,
strategic review of domestic operations and organizational alignments, SBC
reviewed the carrying values of related long-lived assets. This review
included estimating remaining useful lives and cash flows and identifying
assets to be abandoned. Where this review indicated impairment, discounted
cash flows related to those assets were analyzed to determine the amount of
the impairment. As a result of these reviews, SBC wrote off some assets and
recognized impairments to the value of other assets with a combined charge of
$965 ($667 after tax) recorded in the second quarter of 1997. These
impairments and writeoffs related to the wireless digital TV operations in
southern California, certain analog switching equipment in California,
certain rural and other telecommunications equipment in Nevada, selected
wireless equipment, duplicate or obsolete equipment, cable within commercial
buildings in California, certain nonoperating plant and other assets.
Video curtailment/purchase commitments SBC also announced it was scaling back
its limited direct investment in video services. As a result of this
curtailment, SBC halted construction on the Advanced Communications Network
(ACN) in California. As part of an agreement with the ACN vendor, SBC paid
the liabilities of the ACN trust that owned and financed ACN construction,
incurred costs to shut down all construction previously conducted under the
trust and received certain consideration from the vendor. In the second
quarter of 1997, SBC recognized its net expense of $553 ($346 after tax)
associated with these activities. Additionally, SBC curtailed several other
video-related activities including discontinuing its broadband network video
trials in Richardson, Texas and San Jose, California, substantially scaling
back its involvement in the Tele-TV joint venture and withdrawing from the
Americast venture. Americast partners are disputing the withdrawal in
arbitration and litigation, the outcome of which cannot be predicted, but is
not expected to have a material impact on SBC's financial condition or
results of operations. The collective impact of these decisions resulted in a
charge of $145 ($92 after tax) in the second quarter of 1997.
7. PACIFIC TELESIS GROUP FINANCIAL INFORMATION
The following tables present summarized financial information for PAC:
-------------------------------------------------------------------
June 30, December 31,
1998 1997
-------------------------------------------------------------------
Balance Sheets
Current assets $ 2,982 $ 2,835
Noncurrent assets 15,092 14,041
Current liabilities 4,507 4,513
Noncurrent liabilities 11,031 10,305
-------------------------------------------------------------------
-------------------------------------------------------------------
Six Months Ended June 30, 1998 1997
-------------------------------------------------------------------
Income Statements
Operating revenues $ 5,563 $ 4,928
Operating income (loss) 1,306 (794)
Income (loss) before extraordinary loss and
Cumulative effect of accounting changes 628 (748)
Net income (loss) 628 (426)
-------------------------------------------------------------------
SBC has not provided separate financial statements and other disclosures for
PAC as management has determined that such information is not material to the
holders of the Trust Originated Preferred Securities, which have been
guaranteed by SBC.
8. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic earnings (loss)
per share and diluted earnings (loss) per share for net income (loss) for the
second quarter and six months ended June 30, 1998 and 1997 are shown in the
table below.
<TABLE>
-------------------------------------------------------------------------------------------
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerators
Numerator for basic earnings per share:
Net income (loss) $ 966 $ (787) $ 1,878 $ 70
-------------------------------------------------------------------------------------------
Dilutive potential common shares:
Other stock-based compensation 1 1 2 1
-------------------------------------------------------------------------------------------
Numerator for diluted earnings per share $ 967 $ (786) $ 1,880 $ 71
-------------------------------------------------------------------------------------------
Denominators
Denominator for basic earnings per share:
Weighted average number of common
shares outstanding (000) 1,838,702 1,825,519 1,838,649 1,825,229
-------------------------------------------------------------------------------------------
Dilutive potential common shares (000):
Stock options 19,899 - 19,809 9,548
Other stock-based compensation 5,576 - 5,405 4,007
-------------------------------------------------------------------------------------------
Denominator for diluted earnings per share 1,864,177 1,825,519 1,863,863 1,838,784
-------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.53 $ (0.43) $ 1.02 $ 0.04
-------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.52 $ (0.43) $ 1.01 $ 0.04
-------------------------------------------------------------------------------------------
</TABLE>
9. SOFTWARE COSTS SBC currently expenses costs as incurred for software
purchased or developed for internal use, except for initial operating
software costs, which are capitalized and amortized over the lives of the
associated hardware. The American Institute of Certified Public Accountants
has issued a Statement of Position (SOP) that will require capitalization of
certain computer software expenditures beginning in 1999, with earlier
adoption permitted.
SBC did not elect to early adopt the provisions of the SOP. Management is
currently evaluating the impact of the change in accounting required by the
SOP, but is not able to quantify the effect at this time. The SOP would tend
to cause an increase in net income in the first year of adoption with a
decreasing impact on net income in subsequent years assuming similar levels
of software expenditures.
<PAGE>
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS
Overview Financial results for SBC Communications Inc. (SBC) for the second
quarter and first six months of 1998 and 1997 are summarized as follows:
- --------------------------------------------------------------------------------
Second Quarter Six-Month Period
----------------------------- ----------------------------
Percent Percent
1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Operating revenues $ 6,591 $ 5,921 11.3% $ 13,015 $ 11,894 9.4%
Operating expenses $ 4,882 $ 6,854 (28.8)% $ 9,647 $ 11,241 (14.2)%
Net income (loss) $ 966 $ (787) - $ 1,878 $ 70 -
================================================================================
SBC reported net income for the second quarter of 1998 of $966, or $.52 per
share assuming dilution, and $1,878, or $1.01 per share assuming dilution, for
the first six months of 1998. SBC's second quarter 1997 net loss of $787, or
$.43 per share, and first six months of 1997 net income of $70, or $.04 per
share, include after-tax charges of $1.6 billion related to strategic
initiatives resulting from the merger integration process with Pacific Telesis
Group (PAC) and the impact of several second quarter 1997 regulatory rulings.
The first six months of 1997 also includes the first quarter 1997 settlement
gain at PAC associated with lump-sum pension payments that exceeded the
projected service and interest costs for 1996 retirements. Excluding these 1997
items, SBC reported net income for the second quarter of 1997 of $808, or $.44
per share assuming dilution, and $1,575, or $.86 per share assuming dilution,
for the first six months of 1997.
Excluding these 1997 items, SBC's net income for the second quarter of 1998
increased by $158, or 19.6%, and increased by $303 or 19.2% for the first six
months of 1998. The primary factors contributing to this increase were growth in
demand for services and products at Southwestern Bell Telephone Company
(SWBell), Pacific Bell (PacBell, which also includes its subsidiaries) and
Nevada Bell (collectively referred to as the Telephone Companies) and increased
contribution from Southwestern Bell Mobile Systems (Mobile Systems). These
increases were partially offset by higher levels of expenses associated with
Personal Communications Services (PCS) operations at Pacific Bell Mobile
Services (PBMS) and merger related costs.
Operating Revenues SBC's operating revenues for the second quarter and first six
months of 1997 reflect reductions of $188 related primarily to the impact of
several regulatory rulings during the second quarter of 1997. Excluding these
items, SBC's operating revenues increased $482, or 7.9% and $933, or 7.7% for
the second quarter and first six months of 1998. Components of operating
revenues for the second quarter and first six months of 1998 and 1997 are as
follows:
- --------------------------------------------------------------------------------
Second Quarter Six-Month Period
----------------------------- -------------------------------
Percent Percent
1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Local service:
Landline $ 2,566 $ 2,371 8.2% $ 5,046 $ 4,650 8.5%
Wireless 844 756 11.6 1,620 1,448 11.9
Network access:
Interstate 1,122 871 28.8 2,216 1,909 16.1
Intrastate 470 489 (3.9) 924 945 (2.2)
Long-distance 550 530 3.8 1,085 1,071 1.3
service
Directory 388 372 4.3 881 842 4.6
advertising
Other 651 532 22.4 1,243 1,029 20.8
- -------------------------------------- --------------------
Total $ 6,591 $ 5,921 11.3% $ 13,015 $ 11,894 9.4%
================================================================================
Local service Landline local service revenues increased in the second
quarter and first six months of 1998 due primarily to increases in demand
which total approximately $170 and $317 for the second quarter and first
six months of 1998, including increases in access lines and vertical
services revenues. The number of access lines increased by 4.9% since June
30, 1997, of which 49% was due to growth in California and 34% was due to
growth in Texas. Approximately 35% of SBC's access line growth was due to
sales of additional access lines to existing residential customers.
Vertical services revenues, which include custom calling services, call
control options, Caller ID and other services, increased by more than 19%,
totaling more than $710 for the first six months of 1998. Additionally,
Federal payphone deregulation implemented in April 1997 increased local
service by approximately $42 and $107 for the second quarter and first six
months of 1998 and decreased long-distance service by approximately $1 and
$9 for the second quarter and first six months of 1998, interstate network
access by approximately $2 and $19 for the second quarter and first six
months of 1998 and other operating revenues by approximately $9 and $16
for the second quarter and first six months of 1998; the overall impact
was an increase of approximately $30 and $63 for the second quarter and
first six months of 1998 in total operating revenues. Partially offsetting
the increases in local service revenues were decreases in local service
revenues of $21 and $44 in the second quarter and first six months of 1998
due to cellular interconnection rate reductions in the third quarter of
1997.
Wireless local service revenues increased $88, or 11.6% in the second
quarter and $172, or 11.9% in the first six months of 1998 due primarily
to growth in the number of customers of 17.6%, partially offset by
declines in average revenue per customer for Mobile Systems. Approximately
80% of the second quarter and 75% of the year-to-date increase in wireless
local service revenues were due to the expansion of PCS operations in
California, Nevada and Oklahoma. At June 30, 1998, SBC had 5,188,000
traditional cellular customers, 75,000 resale customers and 568,000 PCS
customers.
Network access Interstate network access revenues increased in the second
quarter and the first six months of 1998 due primarily to June 1997
one-time charges of $187. These one-time charges included billing claim
settlements related to the Percentage Interstate Usage (PIU) factor and
several Federal regulatory issues including end-user charges, recovery of
certain employee-related expenses and the retroactive effect of the
productivity factor adjustment in the Federal price cap filing. While the
change in the PIU factor, which is used to allocate network access
revenues between interstate and intrastate jurisdictions, also had the
effect of increasing intrastate network access usage, it resulted in a
slight decline in total network access revenues due to rate differences
between the two jurisdictions. Without these impacts, interstate access
revenues increased $64 in the second quarter and $120 in the first six
months of 1998 due largely to increases in demand for access services by
interexchange carriers, including special access, and growth in revenues
from end-user charges attributable to an increasing access line base,
which collectively resulted in an increase of more than $96 and $193 for
the second quarter and first six months of 1998. Also contributing to the
increase was the absence of the 1997 revenue offset required for net
payments for long-term support which were designed to subsidize universal
service totaling approximately $23 and $46 for the second quarter and
first six months of 1998. This change is discussed further in Cost of
services and products below. Partially offsetting these increases were the
effects of 1997 rate reductions related to the Federal productivity factor
adjustment, as discussed in SBC's 1997 Annual Report to Shareowners,
totaling approximately $62 and $107 for the second quarter and first six
months of 1998 and payphone deregulation of approximately $2 and $19 for
the second quarter and first six months of 1998 referred to above in Local
service.
Intrastate network access revenues decreased in the second quarter and
first six months of 1998 due to the PIU settlements totaling approximately
$32 described above. Excluding this impact, intrastate network access
revenues increased by $13 and $11 in the second quarter and the first six
months of 1998 due largely to increases in demand totaling approximately
$22 and $26 for the second quarter and first six months of 1998, including
usage by alternative IntraLATA toll carriers. These increases were
partially offset by 1997 state regulatory rate orders and implementation
of the February 1997 California high cost fund.
Long-distance service revenues increased in the second quarter and first
six months of 1998 due to increased toll messages and demand at PacBell
totaling more than $10 and $20 for the second quarter and first six months
of 1998, resulting from the growing California economy and growth in
wireless long-distance revenues of approximately $20 and $36 for the
second quarter and first six months of 1998. These increases were
partially offset by the effect of price competition from alternative
intraLATA toll carriers of approximately $9 and $18 for the second quarter
and first six months of 1998 at SWBell, Federal payphone deregulation of
approximately $1 and $9 for the second quarter and first six months of
1998 referred to in Local service and the introduction and deployment of
extended area local service plans at SWBell of approximately $5 and $9 for
the second quarter and first six months of 1998.
Directory advertising revenues increased $16, or 4.3% in the second
quarter and $39, or 4.6% in the first six months of 1998. Approximately
80% of the second quarter and 90% of the year-to-date increase in
directory advertising revenues occurred at Pacific Bell Directory.
Other operating revenues for 1997 reflect charges of $17 due to the impact
of several regulatory rulings. Excluding these impacts, other operating
revenues increased $102, or 18.6% in the second quarter and $197, or 18.8%
in the first six months of 1998. Other operating revenues increased $34
and $68 in the second quarter and first six months of 1998 due to
increased demand for PacBell and SWBell nonregulated services and
products. Also contributing to the increase in other operating revenues
were increased wireless and other equipment sales of $27 and $44 in the
second quarter and first six months of 1998 and increased revenues from
other business initiatives of $26 and $51, primarily voice messaging
services and Internet services. These increases were slightly offset by
payphone deregulation of $9 and $16 in the second quarter and first six
months of 1998 referred to in Local service.
Operating Expenses SBC's operating expenses in the second quarter and first six
months of 1997 reflect $2,205 of charges related to SBC's strategic initiatives
and a comprehensive review of operations of the merged company and the impact of
several regulatory rulings. In addition, the first six months of 1997 include a
settlement gain of $152 associated with lump-sum pension payments that exceeded
the projected service and interest costs for 1996 retirements. Excluding these
second quarter 1997 charges and settlement gain, SBC's operating expenses
increased $233, or 5.0%, for the second quarter and $459, or 5.0 %, for the
first six months of 1998. Components of operating expenses for the second
quarter and first six months of 1998 and 1997 are as follows:
- --------------------------------------------------------------------------------
Second Quarter Six-Month Period
------------------------- ---------------------------
Percent Percent
1998 1997 Change 1998 1997 Change
- --------------------------------------------------------------------------------
Cost of services and
products $ 2,330 $ 2,223 4.8% $ 4,636 $ 4,396 5.5%
Selling, general and
administrative 1,413 2,985 (52.7) 2,766 4,131 (33.0)
Depreciation and
amortization 1,139 1,646 (30.8) 2,245 2,714 (17.3)
- ------------------------------------------- --------------------
Total $ 4,882 $ 6,854 (28.8) $ 9,647 $ 11,241 (14.2)
================================================================================
Cost of services and products for the second quarter and first six months
of 1997 reflect the second quarter 1997 one-time charges of $36 relating
to SBC's strategic initiatives and operational reviews of the merged
company.
Excluding these charges, costs of services and products increased $143, or
6.5% in the second quarter of 1998 and $276, or 6.3% in the first six
months of 1998. The most significant factor for the increase was higher
levels of expenses associated with PCS operations at PBMS totaling more
than $31 and $85 for the second quarter and first six months of 1998.
Another major factor contributing to the increase was the January 1, 1998
implementation of the Federal universal service fund at the Telephone
Companies totaling approximately $43 and $84 for the second quarter and
first six months of 1998, which replaced the 1997 net payments for
long-term support and were accounted for as an offset against Interstate
Network access revenues. The current system assesses charges, recorded as
expense, and any amounts to be received separately. Previously, a net
payment or receipt for long-term support would be recorded as an offset to
(or an increase in) revenue. Also increasing expenses were the additional
costs associated with reciprocal compensation for the termination of
Internet traffic, increased employee compensation including amounts
associated with weather related damage and merger implementation costs at
the Telephone Companies, collectively totaling approximately $84 and $185
for the second quarter and first six months of 1998. These increases in
costs of services and products were partially offset by net reductions in
costs related to benefits, contract labor, research and development, and
right-to-use fees at the Telephone Companies, which totaled approximately
$29 and $79 for the second quarter and first six months of 1998. Expenses
related to implementing customer number portability were $53 and $26 for
the first six months of June 30, 1998 and 1997.
Selling, general and administrative expense for the second quarter of 1997
and the first six months of 1997 reflects $1,577 of charges relating to
SBC's strategic initiatives and operational reviews. As discussed in Note
6 of Notes to Consolidated Financial Statements, the most significant of
these charges included shut down of the Advanced Communications Network,
regulatory costs related to the approval of the merger with PAC by
California regulators, and reorganization initiatives. In addition, the
six months of 1997 reflect a first quarter $152 PAC settlement gain
associated with lump-sum pension payments that exceeded the projected
service and interest costs for 1996 retirements.
Excluding these one-time charges and settlement gain, selling, general and
administrative expenses increased $5, or .4%, for the second quarter of
1998 and $60, or 2.2%, for the first six months of 1998 due primarily to
costs associated with higher PCS related expenses of approximately $42 and
$93 for the second quarter and first six months of 1998, costs associated
with implementing merger integration plans of approximately $27 and $46 for
the second quarter and first six months of 1998. Also contributing to the
increase were other taxes and second quarter pension settlement gains which
totaled approximately $81 and $94 for the second quarter and first six
months of 1998. These increases were partially offset by a decrease in
contract labor, employee compensation, benefits and sales commissions and
insurance refunds totaling approximately $132 and $186 for the second
quarter and first six months of 1998. A lower level of expenses has
resulted during 1998 from merger initiatives that have already been
implemented.
Depreciation and amortization for the second quarter and first six months
of 1997 reflects charges totaling $592 to record impairment of plant and
intangibles (see Note 6 of Notes to Consolidated Financial Statements).
Excluding these charges, depreciation and amortization increased $85, or
8.1% in the second quarter and $123, or 5.8% in the first six months of
1998. Approximately 65% of the second quarter and 80% of the year-to-date
increases were due to overall higher plant levels at the Telephone
Companies and Mobile Systems. Contributing to 25% and 35% of the increase
in depreciation and amortization was the launch of PCS services in
California and Nevada that resulted in higher plant levels and the
amortization of PCS licenses, as well as slight changes in effective
composite rate of depreciation at SWBell which caused 10% and 15% of the
increase. The increase in depreciation and amortization for the first six
months of 1998 was partially offset by reduced depreciation at PacBell
related to analog switching equipment of $42.
Interest expense for 1997 includes $27 associated with the second quarter 1997
one-time charges, primarily interest on the merger-approval costs. Excluding
these charges, interest expense increased $20 or 9.2% in the second quarter of
1998 and $45 or 10.6% in the first six months of 1998. These increases were due
primarily to lower capitalization of interest during construction.
Equity in net income of affiliates increased $18, or 32.7% in the second quarter
and $44, or 53.7% in the first six months of 1998. Approximately 80% of the
second quarter and 85% of the year-to-date increase was due to SBC's May 1997
investment in Telkom SA Limited (Telkom) of South Africa. Also contributing to
the increases were increased income from Telefonos de Mexico, S.A. de C.V.
(Telmex) and lower losses resulting from reduced involvement in Tele-TV. These
increases were partially offset by expenses in new international investments
including long-distance in Switzerland, Israel and France.
Other income (expense) - net was a net expense of $39 for the second quarter of
1998 and $77 for the first six months of 1998. Other income for the second
quarter of 1997 included $27 in expenses related to SBC's strategic initiatives,
primarily writeoffs of nonoperating plant. Excluding these 1997 expenses, other
income (expense) - net for the second quarter of 1998 was comparable to the
second quarter of 1997. During the first six months of 1998, various offsetting
transactions impacted other income and expense. SBC recognized other expense
related to a write-down of an international investment and a video investment of
$143, call premiums and unamortized discount on early redemption of debt at
SWBell and PacBell and the market valuation adjustment on the SBC debt
redeemable either in cash or Telmex L shares. These were offset by income
related to a special dividend of $158 received in 1998 from a software affiliate
and gains on sales of Telmex L shares. Other income for the first six months of
1997 included $27 in expenses mentioned above. The additional increase in net
other expense primarily resulted from higher minority interest expenses and
lower interest income.
Income taxes for the second quarter of 1997 reflect the tax effect of charges
for strategic initiatives resulting from SBC's comprehensive review of
operations of the merged company and the impact of several regulatory rulings.
Income taxes for the first six months of 1997 also included taxes on the pension
settlement gain discussed in Selling, general and administrative expense. The
net effective tax rate on these items was lower as a result of non-deductible
items included in the charge and valuation adjustments to certain deferred tax
assets which may not be utilized due to restrictions associated with the merger.
Excluding these items, income taxes for the second quarter and first six months
of 1997 would have been $452 and $918. Income taxes for the same periods in 1998
were higher due primarily to higher income before income taxes.
SBC COMMUNICATIONS INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Dollars in millions except per share amounts
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview The telecommunications industry in the United States is in a period of
dynamic change in response to regulatory and technological developments.
Consolidation of companies is occurring both within the marketplace for local
telephone service and across other telecommunications services, such as long
distance, cellular, cable television and Internet and other data transmission
services. Companies operating in some of these markets are also expanding into
others, such as the provision of local service by long-distance companies.
The telecommunications industry is also changing internationally, as
government-owned telephone monopolies are being privatized in many countries and
competitive entrants are authorized. U.S.-controlled companies may acquire or
form investment, joint venture or strategic relationships with these newly
privatized companies or their new competitors involving any or all of the range
of telecommunications services. Foreign-controlled companies may also acquire or
form such relationships with U.S. companies.
SBC has participated in many of the types of transactions described above, both
within the United States and internationally, and expects to continue to do so.
As a result of the industry changes described above, SBC faces not only some
greater opportunities than in the past but also more challenges. Its business
success will be affected by how well it anticipates industry changes and
addresses the opportunities and challenges they present.
Interconnection Reciprocal compensation is billed to SBC by Competitive Local
Exchange Carriers (CLECs) for the termination of certain local exchange traffic
to CLEC customers. SBC believes that under the Telecommunications Act of 1996,
the state commissions only have authority to order reciprocal compensation for
local traffic, while only the Federal Communications Commission (FCC) has
authority over interstate and interexchange traffic, which is where SBC believes
most Internet traffic terminates. The question of whether Internet
communications should be classified as local or interstate traffic for
reciprocal compensation purposes is the subject of a pending FCC proceeding and
the FCC is expected to rule on this issue in the near future
State commissions in Texas, Missouri, and Oklahoma have issued orders finding
that SBC is required to pay CLECs reciprocal compensation for the termination of
Internet traffic to Information Service Providers (i.e. Internet Access Service
Providers). In June 1998, a U.S. District Court in Texas affirmed the Texas
Public Utility Commission's (TPUC) determination, and upheld payment of
reciprocal compensation, holding that the TPUC had jurisdiction over the local
portion of the traffic and the FCC over the Internet component.
Similar treatment of Internet traffic has been applied in Missouri and Oklahoma
with respect to reciprocal compensation arrangements. In Missouri, the Missouri
Public Service Commission has ordered that reciprocal compensation for Internet
traffic should be paid at least until the FCC decides whether such traffic
should be considered local or interstate for purpose of reciprocal compensation.
SBC has sought review or reconsideration of all of these cases.
The issue of payment by PacBell to CLECs of reciprocal compensation for the
termination of Internet traffic to Information Service Providers is also pending
before the California Public Utilities Commission (CPUC).
SBC's subsidiaries have been recording amounts sought by the CLECs for the
termination of Internet traffic to Internet Service Providers as they have been
billed.
Long-distance Application SBC continues to seek entry into interLATA
long-distance by requesting favorable recommendation from state commissions and
approval from the FCC, and as necessary through the courts. In response to July
1998 initial reports, SBC has begun collaborative efforts with the CPUC, TPUC
and competitors to provide additional evidence regarding SBC's checklist
compliance efforts. Final votes by the TPUC and CPUC on whether to recommend
SBC's applications to the FCC are expected by the end of 1998.
Universal Service In July 1998, the CPUC issued a rate rebalancing decision
related to its 1996 order on universal service. The CPUC's decision will be
implemented prospectively beginning September 1, 1998 and will reduce PacBell's
non-basic local service, network access and long-distance rates by $305 annually
to offset the approximately $305 annually that PacBell expects to receive from
the California high cost fund based on CPUC estimates of the cost of providing
universal service.
Beginning in February 1997, PacBell began collecting funds via customer
surcharges and classifying revenues in anticipation of the CPUC's decision,
utilizing a method similar to the July 1998 order. The CPUC has yet to decide on
the refund mechanism for funds collected by PacBell from February 1997 through
August 1998.
OTHER BUSINESS MATTERS
New Accounting Standards In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), that will require all derivatives to be recorded
on the balance sheet at fair value, and will require changes in the fair value
of the derivatives to be recorded in net income or comprehensive income. FAS 133
must be adopted for years beginning after June 15, 1999, with earlier adoption
permitted. Management is currently evaluating the impact of the change in
accounting required by FAS 133, but is not able to quantify the effect at this
time.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information"(FAS 131), which establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. FAS 131 is effective for financial statements
for periods beginning after December 15, 1997, but need not be applied to
interim financial statements in the initial year of its application.
See Note 9 of Notes to Consolidated Financial Statements for a discussion of the
new accounting standard on software costs.
Acquisitions and Dispositions During the third quarter of 1997, SBC reached
agreement to sell its cable television properties in Montgomery County, Maryland
and Arlington, Virginia, as well as its purchase option to invest in cable
television operations in Chicago, Illinois. These transactions will be completed
in the third quarter of 1998 and will not materially affect SBC's financial
position or results of operations.
In April 1998, SBC reached an agreement to sell its interest in MTN, the South
Africa national cellular company, to the remaining shareholders of MTN. SBC is
required to sell its interest because MTN competes with Telkom in wireless
services. The transaction is expected to close in the third quarter of 1998.
Mergers See Notes 4 and 5 of Notes to Consolidated Financial Statements for
discussions of merger agreements with Ameritech Corporation and Southern New
England Telecommunications Corporation.
Employees In May 1998, members of the Communications Workers of America (CWA)
ratified the tentative labor agreements that were reached on April 7, 1998
between the Telephone Companies and the CWA. The new agreements cover
approximately 75,000 employees of the Telephone Companies through April 1, 2001.
Among other items, the agreements specify an 11% increase in wages over the life
of the contracts.
SBC's Year 2000 Project SBC operates numerous date-sensitive computer
applications and systems throughout its businesses. Since 1996, SBC has been
working to upgrade its networks and computer systems to properly recognize the
Year 2000 and continue to process critical operational and financial
information. Companywide teams have been formed to address and resolve Year 2000
issues and processes have been developed to evaluate and manage the risks and
costs associated with preparing its systems and applications for the new
millennium.
SBC is using a four-step methodology for addressing the issue. The methodology
includes inventory and assessment, hardware and software fixes, testing and
deployment. SBC measures its progress by the number of systems addressed.
Inventory and assessment includes the identification of items (i.e.,
line-by-line review of software code, switch generics, etc.) that could be
impacted by the Year 2000 and the determination of the work effort required to
get them ready. These activities are nearly complete. This process involves
reviewing over 300 million lines of software code, 1,100 central office
switches, 6,800 company buildings, conducting an inventory and assessment of
100,000 personal computers, and coordinating with its 900 suppliers of 12,000
products to obtain adequate assurance they will be compliant with the Year 2000
or determine and address any appropriate contingency plans or back-up systems.
Hardware and software fixes are the activities that will be required to modify
program code, upgrade computer software and upgrade or replace hardware. As of
June 30, 1998, nearly half of the systems to be addressed by these activities
were complete.
Testing involves ensuring that hardware and software fixes will work properly in
1999 and beyond and occurs both before and after deployment. Testing began early
in 1998 and will continue through 1999 to allow for thorough testing before the
Year 2000. Any need for contingency plans or back-up systems would be determined
and addressed during the testing phase.
Deployment is the installation of hardware and software components in a live
environment. Nearly half of the systems deployment were completed as of June 30,
1998.
Total expenses for SBC's Year 2000 project have been estimated to be less than
$250, with approximately $60 incurred through June 30, 1998.
The activities involved in SBC's Year 2000 project necessarily involve estimates
and projections, as described above, of activities and resources that will be
required in the future. These estimates and projections could change as work
progresses on the project.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1998, as in 1997, SBC's primary source of funds
continued to be cash provided by operating activities. Additionally, SBC had
$615 in cash and cash equivalents available at June 30, 1998. SBC has entered
into agreements with several banks for lines of credit totaling $2,475, all of
which may be used to support commercial paper borrowings. SBC had no borrowings
outstanding under these lines of credit as of June 30, 1998. Commercial paper
borrowings as of June 30, 1998 totaled $1,508.
SBC's investing activities are mainly related to construction and capital
expenditures, primarily in the Telephone Companies and its wireless operations.
1997 investing activities also reflect the May 1997 investment in Telkom.
In February 1998, SBC called $630 of long-term debt for retirement, including
$175 at PacBell and $425 at SWBell, and issued approximately $200 in debentures
at PacBell due February 2008 and approximately $200 in debentures at SWBell due
March 2048. Cash paid for dividends in the first six months of 1998 was $842, or
5.0% higher than the first six months of 1997.
<PAGE>
SBC COMMUNICATIONS INC.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the first six months of 1998, the Company sold shares of common stock to
non-employee directors pursuant to the Company's Non-Employee Director Stock and
Deferral Plan. Under the plan, a director may make an annual election to receive
all or part of his annual retainer or fees in the form of SBC shares or deferred
stock units (DSUs) that are convertible into SBC shares. During this period, an
aggregate of 9,490 SBC shares and DSUs were purchased by non-employee directors
at prices ranging from $36.625 to $43.25, in each case the fair market value of
the shares on the date of purchase. The issuances of shares and DSUs were exempt
from registration pursuant to Section 4(2) of the Securities Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the reported market risks of financial
instruments since the end of the most recent fiscal year.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule - June 30, 1998
(b) Reports on Form 8-K
On May 11, 1998, SBC filed a report on Form 8-K, reporting Item 5. Other
Events, announcing a definitive agreement to merge an SBC subsidiary with
Ameritech Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBC Communications Inc.
August 13, 1998 /s/ Donald E. Kiernan
-----------------------
Donald E. Kiernan
Senior Vice President, Treasurer
and Chief Financial Officer
<TABLE>
SBC COMMUNICATIONS INC. EXHIBIT 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes, Extraordinary Loss
and Cumulative Effect of Accounting Changes* $ 2,942 $ 167 $ 2,237 $ 4,975 $ 4,383 $ 4,091 $ 2,070
Add: Interest Expense 471 453 947 812 957 935 1,005
Dividends on Preferred Securities 40 40 80 60 - - -
1/3 Rental Expense 65 68 130 108 77 85 81
---------- ---------- --------- -------- --------- --------- ---------
Adjusted Earnings $ 3,518 $ 728 $ 3,394 $ 5,955 $ 5,417 $ 5,111 $ 3,156
========== ========== ========= ======== ========= ========= =========
Total Interest Charges $ 503 $ 530 $ 1,067 $ 947 $ 957 $ 935 $ 1,005
Dividends on Preferred Securities 40 40 80 60 - - -
1/3 Rental Expense 65 68 130 108 77 85 81
---------- ---------- --------- -------- --------- --------- ---------
Adjusted Fixed Charges $ 608 $ 638 $ 1,277 $ 1,115 $ 1,034 $ 1,020 $ 1,086
========== ========== ========= ======== ========= ========= =========
Ratio of Earnings to Fixed Charges 5.79 1.14 2.66 5.34 5.24 5.01 2.91
<FN>
*Undistributed earnings on investments accounted for under the equity method have been excluded
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SBC
COMMUNICATIONS INC.'S JUNE 30, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 615
<SECURITIES> 91
<RECEIVABLES> 5,251
<ALLOWANCES> 404
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 7,035
<PP&E> 67,149
<DEPRECIATION> 39,391
<TOTAL-ASSETS> 42,600
<CURRENT-LIABILITIES> 10,024
<BONDS> 11,547
0
0
<COMMON> 1,867
<OTHER-SE> 8,998
<TOTAL-LIABILITY-AND-EQUITY> 42,600
<SALES> 0<F2>
<TOTAL-REVENUES> 13,015
<CGS> 0<F3>
<TOTAL-COSTS> 4,636
<OTHER-EXPENSES> 2,245
<LOSS-PROVISION> 230
<INTEREST-EXPENSE> 471
<INCOME-PRETAX> 2,946
<INCOME-TAX> 1,068
<INCOME-CONTINUING> 1,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,878
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.01
<FN>
<F1> THIS AMOUNT IS IMMATERIAL.
<F2> NET SALES OF TANGIBLE PRODUCTS IS NOT MORE THAN 10% OF TOTAL OPERATING
REVENUES AND THEREFORE HAS NOT BEEN STATED SEPARATELY IN THE FINANCIAL
STATEMENTS PURSUANT TO REGULATION S-X, RULE 5-03(B). THIS AMOUNT IS
INCLUDED IN THE "TOTAL REVENUES" TAG.
<F3> COST OF TANGIBLE GOODS SOLD IS INCLUDED IN COST OF SERVICES AND PRODUCTS
IN THE FINANCIAL STATEMENTS AND THE "TOTAL-COST" TAG, PURSUANT TO
REGULATION S-X, RULE 5-03(B).
</FN>
</TABLE>
