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 March 31, 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
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STATEMENTS OF INCOME
Dollars in millions
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------
Three months ended
March 31,
--------------------
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Local service $ 1,393 $ 1,314
Network access:
Interstate 613 558
Intrastate 258 272
Long distance service 191 189
Other 321 268
- ------------------------------------------------------------------------------------
Total operating revenues 2,776 2,601
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Operating Expenses
Operations and support 1,431 1,383
Depreciation and amortization 515 480
- ------------------------------------------------------------------------------------
Total operating expenses 1,946 1,863
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Operating Income 830 738
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Other Income (Expense)
Interest expense (94) (89)
Other income (expense) - net 1 (10)
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Total other income (expense) (93) (99)
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Income Before Income Taxes 737 639
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Income Taxes 272 237
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Net Income $ 465 $ 402
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See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
- -----------------------------------------------------------------------------------
BALANCE SHEETS
Dollars in millions
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<CAPTION>
March 31, December 31,
--------------------------
1999 1998
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<S> <C> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 82 $ 60
Accounts receivable - net of allowances for
uncollectibles of $47 and $47 1,767 1,953
Prepaid expenses 326 174
Deferred income taxes 126 152
Other current assets 227 199
- -----------------------------------------------------------------------------------
Total current assets 2,528 2,538
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Property, Plant and Equipment - at cost 33,003 32,602
Less: Accumulated depreciation and amortization 19,691 19,398
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Property, Plant and Equipment - Net 13,312 13,204
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Other Assets 71 37
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Total Assets $ 15,911 $ 15,779
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Liabilities and Shareowner's Equity
Current Liabilities
Intercompany loans $ 2,122 $ 1,766
Current portion of long-term obligations 204 64
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Total debt maturing within one year 2,326 1,830
Accrued taxes 601 526
Accounts payable and accrued liabilities 2,071 2,323
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Total current liabilities 4,998 4,679
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Long-Term Debt 4,209 4,358
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Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 494 461
Postemployment benefit obligation 2,465 2,528
Unamortized investment tax credits 185 193
Other noncurrent liabilities 284 298
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Total deferred credits and other noncurrent liabilities 3,428 3,480
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Shareowner's Equity
Common stock - one share, no par value 1 1
Paid-in surplus 2,545 2,545
Retained earnings 730 716
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Total shareowner's equity 3,276 3,262
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Total Liabilities and Shareowner's Equity $ 15,911 $ 15,779
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See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
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STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash
and cash equivalents
(Unaudited)
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<CAPTION>
Three months ended
March 31,
---------------------
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 465 $ 402
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 515 480
Provision for uncollectible accounts 32 30
Amortization of investment tax credits (8) (7)
Deferred income tax expense 60 145
Other - net (294) (758)
- ------------------------------------------------------------------------------------
Total adjustments 305 (110)
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Net Cash Provided by Operating Activities 770 292
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Investing Activities
Construction and capital expenditures (643) (531)
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Net Cash Used in Investing Activities (643) (531)
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Financing Activities
Net change in short-term borrowings with original
maturities of three months or less 356 955
Issuance of long-term debt - 195
Repayment of long-term debt (10) (531)
Dividends paid (451) (468)
Equity received from parent - 100
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Net Cash Provided by (Used in) Financing Activities (105) 251
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Net increase in cash and cash equivalents 22 12
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Cash and cash equivalents beginning of year 60 79
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Cash and Cash Equivalents End of Period $ 82 $ 91
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Cash paid during the three months ended March 31 for:
Interest $ 97 $ 94
Income taxes $ 60 $ 113
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHWESTERN BELL TELEPHONE COMPANY
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STATEMENT OF SHAREOWNER'S EQUITY
Dollars in millions
(Unaudited)
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<CAPTION>
Common Paid-in Retained
Stock Surplus Earnings
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 1 $ 2,545 $ 716
Net income - - 465
Dividends to shareowner - - (451)
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Balance, March 31, 1999 $ 1 $ 2,545 $ 730
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
* * * *
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
At March 31, or for the three months then ended: 1999 1998
-------- -------
<S> <C> <C>
Debt ratio........................................ 66.61% 66.65%
Network access lines in service (000)............. 16,704 16,025
Access minutes of use (000,000)................... 15,887 15,066
Resold lines (000)................................ 589 341
Number of employees............................... 50,420 50,740
</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 does not apply 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. At March 31, 1999 and December 31, 1998,
remaining accruals for anticipated cash expenditures related to these
decisions were approximately $26 and $27.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)- Continued
Dollars in millions
3. SOFTWARE COSTS The American Institute of Certified Public Accountants has
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 for the quarter ended March 31,
1999 by approximately $10.
<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 quarter of 1999 and 1998 are summarized as follows:
- ---------------------------------------------------------------------------
Three-Month Period
-----------------------------
Percent
1999 1998 Change
- ---------------------------------------------------------------------------
Operating revenues $ 2,776 $ 2,601 6.7%
Operating expenses $ 1,946 $ 1,863 4.5%
Net income $ 465 $ 402 15.7%
===========================================================================
SWBell's net income for the first quarter of 1999 increased $63, or 15.7%. The
primary factor contributing to the increase in net income during the first
quarter of 1999 was growth in demand for services and products.
Operating Revenues
SWBell's operating revenues increased $175, or 6.7%, in the first quarter of
1999. Components of operating revenues for the first quarter of 1999 and 1998
are as follows:
- ----------------------------------------------------------------------------
Three-Month Period
------------------------------
Percent
1999 1998 Change
- ----------------------------------------------------------------------------
Local service $ 1,393 $ 1,314 6.0%
Network access:
Interstate 613 558 9.9
Intrastate 258 272 (5.1)
Long distance service 191 189 1.1
Other 321 268 19.8
- -------------------------------------------------------------------
Total $ 2,776 $ 2,601 6.7%
============================================================================
Local service revenues increased $79, or 6.0%, in the first quarter of
1999 due primarily to increases in demand totaling approximately $64,
contributing were increases in demand for access lines including wholesale
lines, vertical services, and data-related services revenues. The number
of access lines increased by 4.2% since March 31, 1998, of which 65% was
due to growth in Texas. Approximately 32% of access line growth was due to
sales of additional access lines to existing residential customers, and
approximately 37% of access line growth was due to sales of wholesale
lines, primarily business lines. Vertical services revenues, which include
custom calling services, call control options, Caller ID and other
services, increased by 12% totaling more than $250 for the first quarter
of 1999. Local service revenues also increased with the introduction and
deployment of extended local area service plans in the third quarter of
1998 by approximately $8, resulting in a shift of revenue from long
distance service of approximately $7. The overall increase to total
operating revenues resulting from introduction of the plans was $1.
<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 $55, or 9.9%,
in the first quarter of 1999 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 totaling approximately $60. Additional increases totaling $15
were related to customer number portability cost recovery implemented this
quarter and access reform issues. Partially offsetting these increases
were the effects of the annual rate reduction of approximately $21 related
to the federal productivity factor adjustment.
Intrastate network access revenues decreased $14, or 5.1%, in the first
quarter of 1999. Decreases of approximately $17 were driven primarily by
state regulatory rate order reductions and elimination of a state toll
pool program. 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
quarter of 1999. Long distance revenues increased by approximately $20 due
to the elimination of a state toll pool program of which SWBell had
generally been a net contributor and 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 $11. As
discussed in local service, long distance revenues decreased by
approximately $7 due to the introduction and deployment of extended area
local service plans.
Other operating revenues increased $53, or 19.8%, in the first quarter of
1999. Approximately $33 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 $12 and an increase
in state universal fund net receipts of approximately $9.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
RESULTS OF OPERATIONS - Continued
Operating Expenses SWBell's operating expenses increased $83, or 4.5%, in the
first quarter of 1999. Components of operating expenses for the first quarter of
1999 and 1998 are as follows:
- ---------------------------------------------------------------------------
Three-Month Period
-----------------------------
Percent
1999 1998 Change
- ---------------------------------------------------------------------------
Operations and support $ 1,431 $ 1,383 3.5%
Depreciation and amortization 515 480 7.3
- ------------------------------------------------------------------
Total $ 1,946 $ 1,863 4.5%
===========================================================================
Operations and support increased $48, or 3.5%, in the first quarter of
1999. The increase includes costs associated with reciprocal compensation
for the termination of Internet traffic of approximately $24. Wages and
salaries increased by approximately $32. Research and development and
materials increased approximately $24. These increases were partially
offset by reductions in the use of contract labor, agent commissions and
customer number portability costs totaling approximately $17. 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 $9 and
other non-labor related cost reductions of $15.
Depreciation and amortization increased $35, or 7.3%, in the first quarter
of 1999. The net increase was due primarily to increased depreciation
expense from overall higher plant levels.
Income Taxes increased $35, or 14.8%, in the first quarter of 1999 primarily due
to higher income before income taxes.
COMPETITIVE AND REGULATORY ENVIRONMENT
IntraLATA Toll Dialing Parity In a January 1999 decision, the United States
Supreme Court (Supreme Court) ruled that the Federal Communications Commission
(FCC) had the authority to issue rules to guide the state commissions in
implementing intrastate and intraLATA dialing parity. In March 1999, the FCC
released an order establishing new deadlines by which local exchange carriers
(LECs) must implement dialing parity for intraLATA long distance calls.
Specifically, the FCC ordered carriers whose dialing parity plans had been
approved by a state commission to implement dialing parity no later than May 7,
1999. Carriers that had not filed dialing parity plans with their state
commissions were required to do so by April 22, 1999. If state commissions have
not approved the plans by June 22, 1999, the carriers must file them with the
FCC for approval. Carriers will be required to implement dialing parity within
30 days of state or FCC approval.
In Texas, Oklahoma and Kansas, SWBell began providing dialing parity in early
May 1999. In Arkansas and Missouri, SWBell filed dialing parity plans in
accordance with the April 22, 1999 FCC deadline. SWBell is scheduled to provide
dialing parity in Arkansas in May 1999, and in Missouri by the date ordered by
the state commission, which is expected to be during the second quarter of 1999.
SWBell anticipates that implementation of dialing parity will contribute to a
loss of intraLATA revenue in 1999.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
COMPETITIVE AND REGULATORY ENVIRONMENT - Continued
In March 1999, U S WEST, Inc. (U S West) filed pleadings in the Eighth Circuit
Court of Appeals (Eighth Circuit) challenging both the validity of the FCC's
March 1999 order and the authority of the FCC to determine the date by which a
state must provide intraLATA dialing parity. While SBC believes that the
pleadings of U S West are meritorious, at present, it is uncertain how the
Eighth Circuit will rule on these pleadings.
InterLATA Long Distance Application SBC continues to seek entry into interLATA
long distance by requesting favorable recommendation from state commissions and
approval from the FCC. In April 1999, the Texas Public Utility Commission (TPUC)
conditionally approved SWBell's interLATA long distance application, noting that
SWBell has met the 14-point checklist requirements of the Telecommunications Act
of 1996, intended to ensure its local market in Texas is open to competition. A
final decision by the TPUC on whether to recommend SWBell's in-region interLATA
long distance application to the FCC is expected when systems testing is
completed in mid-1999. Once approved, the FCC will then have 90 days to rule on
the application.
Pay Phone Per Call Compensation In February 1999, the FCC issued a ruling that
reduced the pay phone dial-around access or toll free call rate from 28.4 cents
to 24 cents per call, effective April 1999. In addition, the FCC order
determined that a reduced rate of 23.8 cents per call be applied retroactively
from October 1997 to April 1999. The retroactive rate change did not
significantly affect SWBell's first quarter 1999 results of operations.
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 LECs. 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. This rate is the subject of an FCC inquiry,
which is expected to be completed by mid-1999. Although SWBell cannot currently
predict the results of this rate inquiry, it is not expected to have a material
impact on SWBell's results of operations or financial position.
Texas Public Utility Regulatory Act Under the Texas Public Utility Regulatory
Act, which became effective in May 1995, SWBell elected to move from rate of
return regulation to price regulation with elimination of earnings sharing.
Basic local service rates are capped at existing levels for four years following
the election, i.e., until September 1999. The TPUC is prohibited from reducing
switched access rates charged by LECs to interexchange carriers while rates are
capped. The Texas legislature is currently considering many aspects of
telecommunications regulation, including access fees and pricing flexibility.
The TPUC may also consider these factors. The outcome of legislation or TPUC
rulings, if any are enacted or issued, on these matters is not determinable at
this time.
FCC Audit In March 1999, the FCC released the results of its 1997 audit of
regional holding companies' (RHCs) and GTE Corporation's (GTE)
telecommunications and other equipment. The FCC's audit alleged that each of the
RHCs and GTE were missing millions of dollars in equipment. Specifically, the
audit alleged that SWBell was missing $1.2 billion in equipment. SWBell believes
that the audit methodology was flawed and amounts of "missing" equipment
dramatically overstated. For example, the FCC's auditors sometimes labeled
equipment as missing because it was not in the precise location indicated in the
property records, even if it had been relocated. In April 1999, the FCC opened
an inquiry on the audit's ramifications. Among other things, the FCC is
interested in feedback on the audit methodology and statistical validity, the
impact of the audit findings on telephone customers and what action the FCC
should take against the RHCs and GTE. As SWBell uses composite group
depreciation accounting for its telephone plant, most reductions in plant levels
(e.g., sales, retirements) are not reflected in earnings, but are reflected as
changes in accumulated depreciation. Accordingly, if a write down of equipment
is required, it is not expected to have a material impact on SWBell's results of
operations or financial position.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
OTHER BUSINESS MATTERS
New Accounting Standards In June 1998, the Financial Accounting Standards Board
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. 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.
See Note 3 to the 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. Companywide 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
millennium.
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 is estimated to require 20% of the overall
effort and includes the identification of items (i.e., line-by-line review of
software code, switch generics, vendor products, etc.) that could be impacted by
the Year 2000 and the determination of the work effort required to ensure
compliance. The inventory and assessment phase has been completed. 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
117,000 personal computers and coordinating with 1,500 suppliers of 15,000
products to obtain adequate assurance they will be Year 2000 compliant or
determine and address any appropriate contingency plans or backup systems.
Making the hardware and software fixes is the second phase of the process and is
estimated to require 25% of the overall effort. This activity involves modifying
program code, upgrading computer software and upgrading or replacing hardware.
As of March 31, 1999, SBC had completed 96% of the hardware and software fixes.
<PAGE>
SOUTHWESTERN BELL TELEPHONE COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
Dollars in millions
OTHER BUSINESS MATTERS - Continued
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 89% complete. Contingency plans and backup systems are currently being
written.
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-three
percent of the deployment phase was completed as of March 31, 1999.
SBC has budgeted $265 on the entire project, with approximately $171 spent
through March 31, 1999. As testing and hardware and software fixes are estimated
to require most of the expenditures, there is not a strict correlation between
expenditures and project completion.
The activities involved in SBC's Year 2000 project necessarily 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>
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 March 31,
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
May 11, 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
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
<CAPTION>
----------------------- -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Income Taxes and
Extraordinary Loss $ 737 $ 639 $ 2,410 $ 1,888 $ 2,168 $ 1,688 $ 1,586
Add:Interest Expense 94 89 374 343 327 340 358
1/3 Rental Expense 12 10 45 41 33 26 25
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Earnings $ 843 $ 738 $ 2,829 $ 2,272 $ 2,528 $ 2,054 $ 1,969
========= ========= ========== ========== ========== =========== ===========
Total Interest Charges $ 98 $ 96 $ 392 $ 370 $ 348 $ 340 $ 358
1/3 Rental Expense 12 10 45 41 33 26 25
--------- --------- ---------- ---------- ---------- ----------- -----------
Adjusted Fixed Charges $ 110 $ 106 $ 437 $ 411 $ 381 $ 366 $ 383
========= ========= ========== ========== ========== =========== ===========
Ratio of Earnings to Fixed Charges 7.66 6.96 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 MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 82
<SECURITIES> 0
<RECEIVABLES> 1,814
<ALLOWANCES> 47
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 2,528
<PP&E> 33,003
<DEPRECIATION> 19,691
<TOTAL-ASSETS> 15,911
<CURRENT-LIABILITIES> 4,998
<BONDS> 4,209
0
0
<COMMON> 1
<OTHER-SE> 3,275
<TOTAL-LIABILITY-AND-EQUITY> 15,911
<SALES> 0<F2>
<TOTAL-REVENUES> 2,776
<CGS> 0<F3>
<TOTAL-COSTS> 1,033
<OTHER-EXPENSES> 515
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 737
<INCOME-TAX> 272
<INCOME-CONTINUING> 465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465
<EPS-PRIMARY> 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>
