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, 1999
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 1-1414
PACIFIC BELL
Incorporated under the laws of the State of California
I.R.S. Employer Identification Number 94-0745535
140 New Montgomery Street, San Francisco, California 94105-3705
Telephone Number: (415) 542-9000
THE REGISTRANT, AN INDIRECTLY HELD WHOLLY-OWNED SUBSIDIARY OF SBC COMMUNICATIONS
INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF
FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H(2).
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PACIFIC BELL
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CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Operating Revenues
Local service $ 1,242 $ 1,220 $ 2,461 $ 2,386
Network access:
Interstate 525 484 1,038 963
Intrastate 189 189 375 369
Long distance service 275 306 544 612
Other 196 124 372 265
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Total operating revenues 2,427 2,323 4,790 4,595
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Operating Expenses
Operations and support 1,318 1,224 2,625 2,524
Depreciation and amortization 475 463 943 914
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Total operating expenses 1,793 1,687 3,568 3,438
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Operating Income 634 636 1,222 1,157
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Other Income (Expense)
Interest expense (100) (110) (203) (216)
Other income (expense) - net 3 2 31 -
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Total other income (expense) (97) (108) (172) (216)
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Income Before Income Taxes 537 528 1,050 941
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Income Taxes 212 207 415 368
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Net Income $ 325 $ 321 $ 635 $ 573
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See Notes to Consolidated Financial Statements.
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<TABLE>
PACIFIC BELL
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CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
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<CAPTION>
June 30, December 31,
------------------------------
1999 1998
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<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 12 $ 15
Accounts receivable - net of allowances for
uncollectibles of $149 and $161 1,860 2,015
Prepaid expenses 250 90
Deferred income taxes 438 280
Other current assets 32 31
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Total current assets 2,592 2,431
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Property, Plant and Equipment - at cost 30,475 29,871
Less: Accumulated depreciation and amortization 18,803 18,272
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Property, Plant and Equipment - Net 11,672 11,599
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Other Assets 1,269 1,063
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Total Assets $ 15,533 $ 15,093
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Liabilities and Shareowner's Equity
Current Liabilities
Intercompany loans $ 1,319 $ 1,551
Current portion of long-term obligations 127 103
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Total debt maturing within one year 1,446 1,654
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Accrued taxes 532 122
Accounts payable and accrued liabilities 2,393 2,669
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Total current liabilities 4,371 4,445
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Long-Term Debt 4,490 4,614
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Deferred Credits and Other Noncurrent
Liabilities
Deferred income taxes 1,290 1,082
Postemployment benefit obligation 883 894
Unamortized investment tax credits 133 149
Other noncurrent liabilities 646 649
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Total deferred credits and other noncurrent
liabilities 2,952 2,774
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Shareowner's Equity
Common shares ($1 par value) 225 225
Capital in excess of par value 4,035 4,210
Retained earnings (deficit) (540) (1,175)
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Total shareowner's equity 3,720 3,260
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Total Liabilities and Shareowner's Equity $ 15,533 $ 15,093
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See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PACIFIC BELL
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
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<CAPTION>
Six months ended
June 30,
---------------------------
1999 1998
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<S> <C> <C>
Operating Activities
Net income $ 635 $ 573
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 943 914
Provision for uncollectible accounts 67 79
Amortization of investment tax credits (16) (20)
Deferred income tax expense 98 90
Other - net (185) (476)
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Total adjustments 907 587
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Net Cash Provided by Operating Activities 1,542 1,160
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Investing Activities
Construction and capital expenditures (1,038) (957)
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Net Cash Used in Investing Activities (1,038) (957)
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Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (231) 17
Issuance of long-term debt - 198
Repayment of long-term debt (101) (178)
Net equity from parent 8 164
Dividends paid (183) (388)
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Net Cash Used in Financing Activities (507) (187)
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Net increase (decrease) in cash and cash equivalents (3) 16
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Cash and cash equivalents beginning of year 15 43
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Cash and Cash Equivalents End of Period $ 12 $ 59
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<FN>
Cash paid during the six months ended June 30 for:
Interest $ 204 $ 213
Income taxes, net of refunds $ ( 81) $ 94
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC BELL
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STATEMENT OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
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<CAPTION>
Capital in Retained
Common Excess of Earnings
Shares Par Value (Deficit)
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<S> <C> <C> <C>
Balance, December 31, 1998 $ 225 $ 4,210 $ (1,175)
Net income - - 635
Dividends to shareowner - (183) -
Net equity from parent - 8 -
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Balance, June 30, 1999 $ 225 $ 4,035 $ (540)
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See Notes to Consolidated Financial Statements.
</TABLE>
* * * *
SELECTED FINANCIAL AND OPERATING DATA
At June 30, or for the six months then ended: 1999 1998
----------- ----------
Debt ratio................................. 61.48% 65.44%
Network access lines in service (000)...... 18,312 17,730
Access minutes of use (000,000)*........... 37,944 36,026
Resold lines (000)......................... 270 251
Number of employees........................ 48,320 45,800
*1998 amounts have been restated.
<PAGE>
PACIFIC BELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions
1. BASIS OF PRESENTATION The consolidated financial statements have been
prepared by Pacific Bell (PacBell, which also includes its subsidiary Pacific
Bell Information Services) 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.
PacBell is a wholly-owned subsidiary of Pacific Telesis Group (PAC), a
wholly-owned subsidiary of SBC Communications Inc. (SBC).
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 SEC rules and
regulations. Certain reclassifications have been made to the 1998
consolidated financial statements to conform with the 1999 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 PacBell's 1998 Annual Report on Form 10-K filed with the
SEC. Comprehensive income for PacBell is the same as net income for all
periods presented. As PacBell operates in only one of SBC's segments,
wireline telecommunications services, separate segment reporting is not
applicable to PacBell.
2. CONSOLIDATION The consolidated financial statements include the accounts of
PacBell. All significant intercompany transactions within PacBell are
eliminated in the consolidation process.
3. COMPLETION OF MERGERS 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). 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.
On October 26, 1998, SBC and Southern New England Telecommunications
Corporation (SNET) completed the merger of an SBC subsidiary with SNET, in a
transaction in which each share of SNET common stock was exchanged for 1.7568
shares of SBC common stock (equivalent to approximately 120 million shares).
SNET became a wholly-owned subsidiary of SBC effective with the merger and
the transaction has been accounted for by SBC as a pooling of interests and a
tax-free reorganization.
Post-merger initiatives
During the second quarter of 1997, SBC announced PacBell had incurred
after-tax charges of $883 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 $107 ($65 after tax) of charges
related to several regulatory rulings during the second quarter of 1997 and
$276 ($173 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.
One-time charges related to the strategic decisions reached by the review
teams totaled $1 billion ($645 after tax) in the second quarter of 1997.
During the fourth quarter of 1998, SBC again performed a complete review of
all operations affected by the merger with SNET to determine the impact on
ongoing merger integration processes. This review resulted in no significant
additional financial effect
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PACIFIC BELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions
on PacBell. At June 30, 1999 and December 31, 1998, remaining accruals for
anticipated cash expenditures related to these decisions were approximately
$34 and $61.
4. SOFTWARE COSTS The American Institute of Certified Public Accountants issued
a Statement of Position (SOP) that requires capitalization of certain
computer software expenditures beginning in 1999. The SOP, which has been
adopted prospectively as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining internal
use software. Prior to the adoption of the SOP, the costs of computer
software purchased or developed for internal use were expensed as incurred.
However, initial operating system software costs were, and continue to be,
capitalized.
With comparable levels of software expenditures, the SOP would tend to
increase net income in comparison with PacBell's former method of accounting
for software costs. However, the increases would be largest in the year of
adoption with diminishing levels of increases compared with current
accounting throughout the amortization period. Consequently, given otherwise
comparable income levels excluding software, and otherwise comparable
software expenditures, the effect of the SOP would be to increase income in
the first year and decrease income in each subsequent year until the number
of years affected by the SOP equals the amortization period. The effect of
adopting the SOP was to increase net income by approximately $17 for the
second quarter and $24 for the first six months of 1999.
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis
Dollars in millions
RESULTS OF OPERATIONS
Overview Financial results for Pacific Bell (PacBell, which includes its
subsidiary) for the first six months of 1999 and 1998 are summarized as follows:
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Six-Month Period
-----------------------------
Percent
1999 1998 Change
- ---------------------------------------------------------------------------
Operating revenues $ 4,790 $ 4,595 4.2%
Operating expenses $ 3,568 $ 3,438 3.8%
Net income $ 635 $ 573 10.8%
===========================================================================
PacBell reported net income of $635 for the first six months of 1999 and $573
for the first six months of 1998. The primary factor contributing to this
increase was growth in demand for services and products and a slowing of growth
in operating expenses due to merger related initiatives and benefits.
Operating Revenues PacBell's operating revenues increased $195, or 4.2%, in the
first six months of 1999. Components of operating revenues for the first six
months of 1999 and 1998 are as follows:
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Six-Month Period
------------------------------
Percent
1999 1998 Change
- ----------------------------------------------------------------------------
Local service $ 2,461 $ 2,386 3.1%
Network access:
Interstate 1,038 963 7.8
Intrastate 375 369 1.6
Long distance service 544 612 (11.1)
Other 372 265 40.4
- ----------------------------------------------------------------------------
Total $ 4,790 $ 4,595 4.2%
============================================================================
Local service revenues increased for the first six months of 1999 by $75,
or 3.1%, due primarily to increases in demand totaling approximately $139,
including increases in access lines, data-related and vertical services
revenues. The number of access lines increased by approximately 3.3% since
June 30, 1998, with approximately 45% of access line growth due to the
sales of additional access lines to existing residential customers.
Vertical services revenues, which include custom calling services such as
Caller ID, Call Waiting, voice mail and other enhanced services, increased
by approximately 20% and totaled approximately $410 for the first six
months of 1999. This increase in demand was partially offset by a decline
in the public telephone business totaling nearly $40.
Additionally, local service revenues increased as a result of the
California High Cost Fund (CHCFB) which also had the effect of decreasing
two other types of operating revenues. In the first six months of 1999,
the CHCFB increased local service revenues by approximately $51 and
decreased long distance revenues by approximately $43 and intrastate
network access revenues by approximately $25. The net effect on total
operating revenues for the CHCFB was a decrease of $17. The California
Public Utilities Commission (CPUC) has stated that the CHCFB is
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis
Dollars in millions
RESULTS OF OPERATIONS - Continued
intended to directly subsidize the provision of service to high cost
areas and allow PacBell to set competitive rates for other services. The
increase in local service revenues was partially offset by decreases of
approximately $59 resulting from rate reductions under CPUC price cap
orders and approximately $23 related to the deregulation of 911 revenues
that were shifted to other revenues.
Network access Interstate network access revenues increased $75, or 7.8%,
in the first six months of 1999 due primarily to increased demand for
access services by interexchange carriers, special access, and growth in
end-user charges attributable to an increasing access line base, which
collectively resulted in an increase of approximately $99. In addition,
customer number portability cost recovery, net of a Federal Communications
Commission (FCC) retroactive rate decrease implemented in the second
quarter of 1999, effective February 1999, contributed approximately $28 to
the increase. Partially offsetting these increases were the effects of
PacBell's rate reduction of approximately $55 related to the FCC's
productivity factor adjustment.
Intrastate network access revenues increased $6, or 1.6%, in the first six
months of 1999 attributable to increased demand of $48, offset in part by
the effect of the CHCFB described above in local service of approximately
$25, by CPUC rate reductions of approximately $8 and by a reduction in
contract settlements in comparison to the prior year of approximately $4.
Long distance service decreased $68, or 11.1%, in the first six months of
1999 due to the effect of the CHCFB noted in local service of
approximately $43 and by CPUC rate reductions of approximately $15.
Other operating revenues increased $107, or 40.4%, in the first six months
of 1999 due primarily to increased sales from nonregulated products and
services totaling approximately $33, increased equipment sales, primarily
consumer equipment, of approximately $51 and the deregulation of 911
revenues shifted to other revenues noted in local service above of
approximately $23.
Operating Expenses PacBell's operating expenses increased $130, or 3.8%, in the
first six months of 1999. Components of total operating expenses for the first
six months of 1999 and 1998 are as follows:
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Six-Month Period
-----------------------------
Percent
1999 1998 Change
- ---------------------------------------------------------------------------
Operations and support $ 2,625 $ 2,524 4.0%
Depreciation and amortization 943 914 3.2
- ------------------------------------------------------------------
Total operating expenses $ 3,568 $ 3,438 3.8%
===========================================================================
Operations and support increased $101, or 4.0%, in the first six months of
1999. The increase includes costs of approximately $120 related to
progression in the merger implementation process including charges from
centralized support functions throughout SBC Communications Inc. (SBC) and
other merger initiatives and increased expenditures related to
implementation of
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis
Dollars in millions
RESULTS OF OPERATIONS - Continued
PacBell's Asymmetrical Digital Subscriber Line (ADSL) product of
approximately $61. Operations and support also increased due to
increased costs for materials, wages and salaries, and other costs of
approximately $117. In addition, costs associated with reciprocal
compensation for the termination of Internet traffic increased
approximately $22 and costs associated with intraLATA presubscription,
(where a customer is able to subscribe to an intraLATA toll carrier just
as they do for long distance service), were approximately $8. These
increases were partially offset by reductions in contract labor,
benefits, contract fees and employee training and development of
approximately $52 and a reduction in other non-labor costs of
approximately $68 due in part to merger initiative benefits and higher
first quarter 1998 storm related costs. In addition, expenditures
for interconnection, customer number portability and local
competition initiatives decreased approximately $66. Also offsetting
the increase in operations and support expense was the change in
accounting for software costs (see Note 4 of Notes to Consolidated
Financial Statements), which resulted in approximately $41 of such
costs being capitalized rather than expensed at June 30, 1999.
Depreciation and amortization expense increased $29, or 3.2%, in the first
six months of 1999. The increase was due primarily to overall higher plant
levels of approximately $32.
Interest expense decreased $13, or 6.0%, in the first six months of 1999 due to
lower average debt levels.
Other income (expense) - net was income of $31 in the first six months of 1999
due primarily to a gain recognized from the sale of PacBell's interest in
Advanced Communications Network (ACN) of $24. In 1997, ACN was written down as
an impairment in conjunction with the merger with Pacific Telesis Group.
Income Taxes increased $47, or 12.8%, in the first six months of 1999 primarily
due to higher income before income taxes.
COMPETITIVE AND REGULATORY ENVIRONMENT
Reciprocal Compensation is billed to PacBell 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 (Telecom
Act) the state commissions have authority to order reciprocal compensation only
for intrastate or local traffic, while the FCC has authority over interstate and
interexchange traffic. SBC believes most Internet traffic is interexchange and
interstate. In February 1999, the FCC declared that Internet traffic is not
intrastate or local traffic but instead is primarily interstate, subject to
interstate jurisdiction. However, the FCC added that state commissions,
interpreting existing contracts and consistent with federal law, might
nevertheless order payment of reciprocal compensation for Internet traffic in
certain circumstances. In March 1999, MCI WorldCom filed an appeal of the FCC
ruling and certain local exchange carriers also appealed; the outcome of these
appeals is pending.
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis
Dollars in millions
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
In June 1999, the CPUC in arbitration between PacBell and a CLEC customer voted
to treat Internet traffic as local pending a further CPUC proceeding to examine
the issue. The CPUC also approved a reduction in the reciprocal compensation
rate between PacBell and the CLEC customer beginning June 29, 1999. In July
1999, the CPUC issued a draft decision in another arbitration between PacBell
and a CLEC customer upholding reciprocal compensation fees. The final decision
is expected to result in a reduction of the reciprocal compensation rate paid by
PacBell to the CLEC customer beginning in the fourth quarter of 1999. In July
1999, the CPUC also affirmed an order that had concluded that Internet traffic
is local. PacBell is currently evaluating the impact of this order.
PacBell has been recording expense for amounts sought by certain CLECs for the
termination of Internet traffic to Internet Service Providers.
Customer Local Number Portability Long-term customer local number portability
(LNP) allows customers to change local exchange carriers while maintaining their
existing telephone numbers. In December 1998, the FCC issued an order on
recovery of costs incurred for LNP by local exchange carriers. This order
provides for the levying of federally tariffed LNP monthly end-user charges for
a five-year period, beginning in February 1999. PacBell began recovering LNP
costs at the rate of 50 cents per access line per month. In July 1999, the FCC
issued an order on PacBell's rate, revising the rate to 34 cents, with a refund
obligation for the period of February through July 1999. PacBell recorded $13 in
the second quarter of 1999 related to the rate reduction.
Federal Access Rates In May 1999, the United States Court of Appeals for the
District of Columbia Circuit (Court of Appeals) ruled that the FCC failed to
adequately explain certain changes to part of the formula used to calculate the
access rates local carriers, such as PacBell, charge long distance carriers.
Specifically, the Court of Appeals disagreed with the FCC's rationale for making
certain changes to the "X factor" adjustment, the purpose of which is to ensure
that access rates decrease as local phone company productivity increases, and
ordered the FCC to reevaluate the formula. The Court of Appeals did not state
whether the FCC should have made specific adjustments that would have resulted
in either higher or lower access rates. In a subsequent order, the Court of
Appeals stayed the mandate of this decision until April 1, 2000. The effect of
the Court of Appeal's decision on PacBell's results of operations and financial
position cannot be determined at this time.
Shared Transport In June 1999, the United States Supreme Court (Supreme Court)
set aside an August 1998 United States Court of Appeals for the Eighth Circuit
(8th Circuit) ruling that major carriers, such as PacBell, could be forced to
lease, at a discount, shared transport service for carrying phone calls among
telephone company central switching offices. The 8th Circuit had held that such
shared transport was subject to mandatory leasing under the Telecom Act. The
Supreme Court previously ruled that the FCC ignored some limits in the Telecom
Act when it drew up rules for mandatory leasing and in light of that prior
ruling, ordered the 8th Circuit to reconsider the shared transport ruling. The
effect of this ruling on PacBell cannot be determined at this time.
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis
Dollars in millions
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
California Rate Ruling In June 1999, the CPUC issued a ruling recategorizing
certain of PacBell's services, including the maintenance of inside wiring,
collect, calling card and person to person calls and the provisioning of
directory assistance to interexchange carriers, as competitive products. In its
ruling, the CPUC approved an increase in the ceiling price for both inside wire
repair services and interexchange directory assistance. Although the effect of
this ruling on PacBell's results of operations and financial position cannot be
determined at this time, it is expected to be favorable.
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), which will require all derivatives to be recorded
on the balance sheet at fair value and changes in the fair value of the
derivatives to be recorded in net income or comprehensive income. In June 1999,
the FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of the FASB Statement No. 133"
(FAS 137), that among other items, defers the date that FAS 133 must be adopted
to years beginning after June 15, 2000. Earlier adoption is permitted. SBC is
currently evaluating the impact of the change in accounting required by FAS 133
and FAS 137, but is not able to quantify the effect at this time.
See Note 4 of Notes to Consolidated Financial Statements for a discussion of the
new accounting standard on software costs.
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. Company-wide teams are in place to address and resolve Year 2000
issues and processes are under way to evaluate and manage the risks and costs
associated with preparing SBC's date-impacted systems and networks for the new
century.
SBC is using a four-step methodology to address the issue. The methodology
consists of inventory and assessment, hardware and software fixes, testing and
deployment. SBC measures its progress by tracking the number of completed
hardware and software applications, network components, personal computers and
building facilities that can correctly process Year 2000 dates.
The inventory and assessment phase was estimated to require 20% of the overall
effort and included the identification and prioritization of items that could be
impacted by the Year 2000 and the determination of the work effort required to
ensure compliance. The inventory and assessment phase was completed in 1998.
This process involved reviewing over 340 million lines of software code, 1,200
central office switches, 7,000 company buildings, conducting an inventory and
assessment of 124,000 personal computers and coordinating with 1,500 suppliers.
SBC must obtain adequate assurance that the 15,000 products they provide will be
Year 2000 compliant or determine and address any appropriate contingency plans
or backup systems.
Making the hardware and software fixes was the second phase of the process and
was estimated to require 25% of the overall effort. This activity involved
modifying program code, upgrading computer
<PAGE>
PACIFIC BELL
Item 2. Management's Discussion and Analysis
Dollars in millions
OTHER BUSINESS MATTERS - Continued
software and upgrading or replacing hardware. The hardware and software fixes
were completed as of June 30, 1999.
Testing involves ensuring that hardware and software fixes will work properly in
1999 and beyond and occurs both before and after deployment. Testing is
estimated to comprise 45% of the overall effort. Testing began early in 1998 and
is substantially complete. Contingency plans have been written and will be
finalized by August 31, 1999.
Deployment involves placing the "fixed" systems into a live environment to
ensure they are working properly. Additional testing is done after deployment as
well. Deployment is estimated to require 10% of the overall effort. Ninety-eight
percent of the deployment phase was completed as of June 30, 1999.
SBC has budgeted $265 on the entire project, with approximately $197 spent
through June 30, 1999.
The activities involved in SBC's Year 2000 project require 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.
<PAGE>
PACIFIC BELL
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions
There has been no material change in PacBell's market risks since December 31,
1998.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this form contains forward-looking statements that are
subject to risks and uncertainties. PacBell claims the protection of the safe
harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
The following factors could cause PacBell's future results to differ materially
from those expressed in the forward-looking statements: (1) adverse economic
changes in the markets served by PacBell or changes in available technology; (2)
the final outcome of various FCC rulemakings and judicial review, if any, of
such rulemakings; (3) the final outcome of various CPUC proceedings, and
judicial review, if any, of such proceedings; and (4) the timing of entry and
the extent of competition in the local and intraLATA toll markets in California.
Readers are cautioned that other factors discussed in this form, although not
enumerated here, also could materially impact PacBell's future earnings.
<PAGE>
PACIFIC BELL
PART II - OTHER INFORMATION
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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June 30,
1999.
<PAGE>
SIGNATURE
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.
PACIFIC BELL
August 6, 1999 /s/ Robert B. Pickering
Robert B. Pickering
Vice President and Chief Financial Officer
<TABLE>
EXHIBIT 12
PACIFIC BELL
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes, Extraordinary Loss
and Cumulative Effect of Accounting Changes $ 1,050 $ 941 $ 1,871 $ 34 $ 1,568 $ 1,161 $ 1,276
Add:Interest Expense 203 216 426 460 379 420 437
1/3 Rental Expense 18 19 39 41 47 29 22
--------- -------- --------- --------- --------- --------- ----------
Adjusted Earnings $ 1,271 $ 1,176 $ 2,336 $ 535 $ 1,994 $ 1,610 $ 1,735
========= ======== ========= ========= ========= ========= ==========
Total Interest Charges $ 220 $ 233 $ 461 $ 497 $ 412 $ 420 $ 437
1/3 Rental Expense 18 19 39 41 47 29 22
--------- -------- --------- --------- --------- --------- ----------
Adjusted Fixed Charges $ 238 $ 252 $ 500 $ 538 $ 459 $ 449 $ 459
========= ======== ========= ========= ========= ========= ==========
Ratio of Earnings to Fixed Charges 5.34 4.67 4.67 0.99* 4.34 3.59 3.78
<FN>
* As defined within the computation of earnings to fixed charges, earnings are
$3 less than fixed charges for 1997. See Management's Discussion and Analysis
of Results of Operations in Pacific Bell's 1997 Annual Report on Form 10-K
for a discussion of merger-related and other unusual items that reduced
earnings for 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC
BELL'S JUNE 30, 1999 CONSOLIDATED FINANCIAL STATEMENTS, AS
RESTATED, 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 2,009
<ALLOWANCES> 149
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,592
<PP&E> 30,475
<DEPRECIATION> 18,803
<TOTAL-ASSETS> 15,533
<CURRENT-LIABILITIES> 4,371
<BONDS> 4,490
0
0
<COMMON> 225
<OTHER-SE> 3,495
<TOTAL-LIABILITY-AND-EQUITY> 15,533
<SALES> 0<F2>
<TOTAL-REVENUES> 4,790
<CGS> 0<F3>
<TOTAL-COSTS> 1,794
<OTHER-EXPENSES> 943
<LOSS-PROVISION> 67
<INTEREST-EXPENSE> 203
<INCOME-PRETAX> 1,050
<INCOME-TAX> 415
<INCOME-CONTINUING> 635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635
<EPS-BASIC> 0
<EPS-DILUTED> 0
<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>
