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 1-2346
SOUTHWESTERN BELL TELEPHONE COMPANY
Incorporated under the laws of the State of Missouri
I.R.S. Employer Identification Number 43-0529710
530 McCullough, San Antonio, Texas 78215
Telephone Number: (210) 821-4105
THE REGISTRANT, A 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>
SOUTHWESTERN BELL TELEPHONE COMPANY
- ------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Local service $ 1,426 $ 1,360 $ 2,819 $ 2,674
Network access:
Interstate 626 579 1,239 1,137
Intrastate 263 280 521 552
Long distance service 185 192 376 381
Other 302 289 623 557
- ------------------------------------------------------------------------------------
Total operating revenues 2,802 2,700 5,578 5,301
- ------------------------------------------------------------------------------------
Operating Expenses
Operations and support 1,465 1,474 2,896 2,857
Depreciation and amortization 532 496 1,047 976
- ------------------------------------------------------------------------------------
Total operating expenses 1,997 1,970 3,943 3,833
- ------------------------------------------------------------------------------------
Operating Income 805 730 1,635 1,468
- ------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense (95) (93) (189) (182)
Other income (expense) - net 3 2 4 (8)
- ------------------------------------------------------------------------------------
Total other income (expense) (92) (91) (185) (190)
- ------------------------------------------------------------------------------------
Income Before Income Taxes 713 639 1,450 1,278
- ------------------------------------------------------------------------------------
Income Taxes 262 237 534 474
- ------------------------------------------------------------------------------------
Net Income $ 451 $ 402 $ 916 $ 804
- ------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- -----------------------------------------------------------------------------------
BALANCE SHEETS
Dollars in millions
<CAPTION>
- -----------------------------------------------------------------------------------
June 30, December 31,
--------------------------
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 67 $ 60
Accounts receivable - net of allowances for
uncollectibles of $61 and $47 1,825 1,953
Prepaid expenses 300 174
Deferred income taxes 102 152
Other current assets 197 199
- -----------------------------------------------------------------------------------
Total current assets 2,491 2,538
- -----------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 33,546 32,602
Less: Accumulated depreciation and amortization 20,031 19,398
- -----------------------------------------------------------------------------------
Property, Plant and Equipment - Net 13,515 13,204
- -----------------------------------------------------------------------------------
Other Assets 107 37
- -----------------------------------------------------------------------------------
Total Assets $ 16,113 $ 15,779
- -----------------------------------------------------------------------------------
Liabilities and Shareowner's Equity
Current Liabilities
Intercompany loans $ 2,051 $ 1,766
Current portion of long-term obligations 204 64
- -----------------------------------------------------------------------------------
Total debt maturing within one year 2,255 1,830
Accrued taxes 743 526
Accounts payable and accrued liabilities 2,178 2,323
- -----------------------------------------------------------------------------------
Total current liabilities 5,176 4,679
- -----------------------------------------------------------------------------------
Long-Term Debt 4,210 4,358
- -----------------------------------------------------------------------------------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 527 461
Postemployment benefit obligation 2,469 2,528
Unamortized investment tax credits 178 193
Other noncurrent liabilities 279 298
- -----------------------------------------------------------------------------------
Total deferred credits and other noncurrent liabilities 3,453 3,480
- -----------------------------------------------------------------------------------
Shareowner's Equity
Common stock - one share, no par value 1 1
Paid-in surplus 2,545 2,545
Retained earnings 728 716
- -----------------------------------------------------------------------------------
Total shareowner's equity 3,274 3,262
- -----------------------------------------------------------------------------------
Total Liabilities and Shareowner's Equity $ 16,113 $ 15,779
- -----------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- ------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------
Six months ended
June 30,
---------------------
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 916 $ 804
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,047 976
Provision for uncollectible accounts 75 63
Amortization of investment tax credits (15) (16)
Deferred income tax expense 117 26
Other - net (139) (486)
- ------------------------------------------------------------------------------------
Total adjustments 1,085 563
- ------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,001 1,367
- ------------------------------------------------------------------------------------
Investing Activities
Construction and capital expenditures (1,365) (1,246)
- ------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,365) (1,246)
- ------------------------------------------------------------------------------------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 285 926
Issuance of long-term debt - 195
Repayment of long-term debt (10) (558)
Dividends paid (904) (798)
Equity received from parent - 100
- ------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (629) (135)
- ------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7 (14)
- ------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 60 79
- ------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 67 $ 65
- ------------------------------------------------------------------------------------
Cash paid during the six months ended June 30 for:
Interest $ 189 $ 194
Income taxes $ 165 $ 151
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- ----------------------------------------------------------------------------
STATEMENT OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
<CAPTION>
- ----------------------------------------------------------------------------
Common Paid-in Retained
Stock Surplus Earnings
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 1 $ 2,545 $ 716
Net income - - 916
Dividends to shareowner - - (904)
- ----------------------------------------------------------------------------
Balance, June 30, 1999 $ 1 $ 2,545 $ 728
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
* * * *
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
At June 30, or for the six months then ended: 1999 1998
-------- -------
<S> <C> <C>
Debt ratio........................................ 66.38% 65.92%
Network access lines in service (000)............. 16,749 16,144
Access minutes of use (000,000)................... 32,407 30,865
Resold lines (000)................................ 617 393
Number of employees............................... 50,360 50,830
</TABLE>
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions
1. BASIS OF PRESENTATION Southwestern Bell Telephone Company (SWBell) is a
wholly-owned subsidiary of SBC Communications Inc. (SBC). The financial
statements have been prepared by SWBell 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 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 financial statements contained herein should be read in
conjunction with the financial statements and notes thereto included in
SWBell's 1998 Annual Report on Form 10-K filed with the SEC. Comprehensive
income for SWBell is the same as net income for all periods presented. As
SWBell operates in only one of SBC's segments, wireline telecommunications
services, separate segment reporting is not applicable to SWBell.
2. COMPLETION OF MERGERS On April 1, 1997, SBC and Pacific Telesis Group (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 by SBC 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 several strategic decisions
resulting from the merger integration process that began with the April 1,
1997 closing of its merger with PAC. 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.
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. Review teams examined operational
functions and evaluated all strategic initiatives.
As a result of these reviews, a benefit of $20 ($13 after tax) in the fourth
quarter of 1998 and charges of $141 ($87 after tax) in the second quarter of
1997 were recognized by SWBell. Remaining accruals for anticipated cash
expenditures related to these decisions were approximately $20 at June 30,
1999 and $27 at December 31, 1998.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions
3. 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 SWBell'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 $26 for the
second quarter of 1999 and by $36 for the first six months of 1999.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS
Overview Financial results for Southwestern Bell Telephone Company (SWBell) for
the first six months of 1999 and 1998 are summarized as follows:
- ---------------------------------------------------------------------------
Six-Month Period
-----------------------------
Percent
1999 1998 Change
- ---------------------------------------------------------------------------
Operating revenues $ 5,578 $ 5,301 5.2%
Operating expenses $ 3,943 $ 3,833 2.9%
Net income $ 916 $ 804 13.9%
===========================================================================
SWBell's net income for the first six months of 1999 increased $112, or 13.9%.
The primary factor contributing to the increase in net income during the first
six months of 1999 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 SWBell's operating revenues increased $277, or 5.2%, in the
first six months of 1999. Components of operating revenues for the first six
months of 1999 and 1998 are as follows:
- -----------------------------------------------------------------------------
Six-Month Period
-------------------------------
Percent
1999 1998 Change
- -----------------------------------------------------------------------------
Local service $ 2,819 $ 2,674 5.4%
Network access:
Interstate 1,239 1,137 9.0
Intrastate 521 552 (5.6)
Long distance service 376 381 (1.3)
Other 623 557 11.8
- -------------------------------------------------------------------
Total $ 5,578 $ 5,301 5.2%
============================================================================
Local service revenues increased for the first six months of 1999 by $145,
or 5.4%, due primarily to increases in demand totaling more than $150,
including increases in demand for access lines, vertical services, and
data-related services revenues. The number of access lines increased by
3.8% since June 30, 1998, of which 63% was due to growth in Texas.
Approximately 33% of access line growth was due to sales of additional
access lines to existing residential customers. Vertical services
revenues, which include custom calling services, including Caller ID, Call
Waiting and other enhanced services, increased by nearly 12% totaling more
than $516 for the first six months of 1999. The increase in demand was
partially offset by a decline in the public telephone business totaling
approximately $50. Local service revenues also increased with the
introduction and deployment of extended local area service plans deployed
in the third quarter of 1998 by approximately $20, resulting in a shift of
revenue from long distance service. The overall increase to total
operating revenues resulting from introduction of the plans was
approximately $6.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
Network access Interstate network access revenues increased $102, or 9.0%,
in the first six months of 1999 due largely to increases in demand for
access services by interexchange carriers, special access, and growth in
revenues from end-user charges, attributable to an increasing access line
base totaling approximately $122. Additional increases totaling
approximately $24 were related to 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 and access reform issues. Partially offsetting these
increases were the effects of the July 1998 rate reduction of
approximately $45 related to the federal productivity factor adjustment.
Intrastate network access revenues decreased $31, or 5.6%, in the first
six months of 1999. Decreases of approximately $35 were driven primarily
by state regulatory rate order reductions including a rate reduction due
to the elimination of a state toll pool program effective January 1999.
The elimination of the toll pool program had an offset that increased long
distance revenues. Overall demand increased by approximately $5, including
usage by alternative intraLATA toll carriers.
Long distance service revenues were essentially unchanged in the first six
months of 1999. Long distance revenues increased by approximately $20 due
to the elimination of payments made to a state toll pool program in 1998
and by approximately $11 due to expanded area charges implemented in
Texas. These increases were partially offset by reduced demand for
services as a result of price competition from alternative intraLATA toll
carriers and regulatory rate orders totaling approximately $17. As
discussed in local service, long distance revenues decreased by
approximately $14 due to the introduction and deployment of extended area
local service plans.
Other operating revenues increased $66, or 11.8%, in the first six months
of 1999. Approximately $32 was due to increased demand for nonregulated
services and products, including consumer equipment and network
integration services. Also contributing to the increase was the June 1998
repricing of maintenance and trouble diagnosis services related to inside
wire located on customers' premises of approximately $27 and an increase
in state universal fund net receipts of approximately $8.
Operating Expenses SWBell's operating expenses increased $110, or 2.9%, in the
first six months of 1999. Components of operating expenses for the first six
months of 1999 and 1998 are as follows:
- ---------------------------------------------------------------------------
Six-Month Period
-----------------------------
Percent
1999 1998 Change
- ---------------------------------------------------------------------------
Operations and support $ 2,896 $ 2,857 1.4%
Depreciation and amortization 1,047 976 7.3
- ------------------------------------------------------------------
Total $ 3,943 $ 3,833 2.9%
===========================================================================
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
Operations and support increased $39, or 1.4%, in the first six months of
1999. The increase includes costs associated with reciprocal compensation
for the termination of Internet traffic of approximately $55. Other
increases include wages and salaries of approximately $48, research and
development and materials of approximately $21 and benefits and employee
related costs of approximately $13. These increases were partially offset
by reductions in the use of contract labor and customer number portability
costs totaling approximately $37. Also offsetting the increase was a
reduction in right to use fees that are now capitalized with the
implementation of the software capitalization policy (see Note 3 of Notes
to Financial Statements) of approximately $39, a reduction in property and
other taxes of $12 and other non-labor related cost reductions of $22.
Depreciation and amortization increased $71, or 7.3%, in the first six
months of 1999. The net increase was due primarily to increased
depreciation expense from overall higher plant levels.
Income Taxes increased $60, or 12.7%, in the first six months of 1999 primarily
due to higher income before income taxes.
COMPETITIVE AND REGULATORY ENVIRONMENT
Texas Legislation In May 1999, the Texas legislature adopted Senate Bill 560, as
amended. The bill, which will become law on September 1, 1999, extends incentive
regulation indefinitely, provides more pricing flexibility on certain products
offered by SWBell, such as Caller ID, operator service and directory assistance,
and allows SWBell to package some services in ways attractive to customers. The
bill also requires SWBell to reduce the intrastate switched access rate it
charges to long distance carriers by 1 cent on September 1, 1999 and by 2
additional cents on the earlier of SWBell's entry into the long distance market
or July 1, 2000. This 1 cent reduction in intrastate access rates taking effect
on September 1, 1999 is expected to result in a reduction of intrastate network
access revenues of approximately $25 for the remainder of 1999.
Reciprocal Compensation is billed to SWBell by Competitive Local Exchange
Carriers (CLECs) for the termination of certain local exchange traffic to CLEC
customers. SBC Communications Inc. (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. Several state
commissions have taken the position that Internet communications is intrastate
or local traffic and ordered SWBell to pay reciprocal compensation to certain
CLECs pursuant to existing contracts. In February 1999, the FCC declared that
Internet traffic is not intrastate or local traffic but instead is primarily
interstate subject to interstate jurisdiction. However, the FCC 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. SWBell 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. SWBell began recovering LNP
costs at the rate of 48 cents per access line per month. In July 1999, the FCC
issued an order on SWBell's rate, revising the rate to 33 cents, with a refund
obligation for the period of February through July 1999. SWBell recorded $10 in
the second quarter of 1999 related to the rate reduction.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
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 SWBell, 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 SWBell'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 SWBell, 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 SWBell cannot be determined at this time.
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 3 of Notes to 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.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
OTHER BUSINESS MATTERS - Continued
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 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>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Dollars in millions
There has been no material change in SWBell's market risks since December 31,
1998.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that
are subject to risks and uncertainties. SWBell 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 SWBell's future results to differ materially
from those expressed in the forward-looking statements: (1) adverse economic
changes in the markets served by SWBell 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 state regulatory proceedings
in SWBell's operating areas, 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 SWBell's operating areas. Readers are cautioned that
other factors discussed in this report, although not enumerated here, also could
materially impact SWBell's future earnings.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
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.
Southwestern Bell Telephone Company
August 6, 1999 /s/ William B. McCullough
________________________________________
William B. McCullough
Vice President and Chief Financial Officer
<TABLE>
EXHIBIT 12
SOUTHWESTERN BELL TELEPHONE COMPANY
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 and
Extraordinary Loss $ 1,450 $ 1,278 $ 2,410 $ 1,888 $ 2,168 $ 1,688 $ 1,586
Add:Interest Expense 189 182 374 343 327 340 358
1/3 Rental Expense 23 21 45 41 33 26 25
---------- --------- --------- ----------- ---------- ---------- -----------
Adjusted Earnings $ 1,662 $ 1,481 $ 2,829 $ 2,272 $ 2,528 $ 2,054 $ 1,969
========== ========= ========= =========== ========== ========== ===========
Total Interest Charges $ 199 $ 194 $ 392 $ 370 $ 348 $ 340 $ 358
1/3 Rental Expense 23 21 45 41 33 26 25
---------- --------- --------- ----------- ---------- ---------- -----------
Adjusted Fixed Charges $ 222 $ 215 $ 437 $ 411 $ 381 $ 366 $ 383
========== ========= ========= =========== ========== ========== ===========
Ratio of Earnings to Fixed Charges 7.49 6.89 6.47 5.53 6.64 5.61 5.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN
BELL TELEPHONE COMPANY'S JUNE 30, 1999 FINANCIAL STATEMENTS ON FORM 10-Q 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> 67
<SECURITIES> 0
<RECEIVABLES> 1,886
<ALLOWANCES> 61
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,491
<PP&E> 33,546
<DEPRECIATION> 20,031
<TOTAL-ASSETS> 16,113
<CURRENT-LIABILITIES> 5,176
<BONDS> 4,210
0
0
<COMMON> 1
<OTHER-SE> 3,273
<TOTAL-LIABILITY-AND-EQUITY> 16,113
<SALES> 0<F2>
<TOTAL-REVENUES> 5,578
<CGS> 0<F3>
<TOTAL-COSTS> 2,035
<OTHER-EXPENSES> 1,047
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 189
<INCOME-PRETAX> 1,450
<INCOME-TAX> 534
<INCOME-CONTINUING> 916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 916
<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>
