SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1996.
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 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former
fiscal year, if changed since last report)
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 .
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION, 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).
Form 10-Q - Part I The Southern New England Telephone Company
PART I - FINANCIAL INFORMATION
The Southern New England Telephone Company ("Telephone Company")
is a wholly owned telephone operating subsidiary of Southern New
England Telecommunications Corporation ("Corporation") and has
its principal executive offices at 227 Church Street, New Haven,
Connecticut 06510 (telephone number (203) 771-5200).
The condensed financial statements on the following pages have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments of a normal recurring nature
necessary for fair presentation for each period shown. The 1995
financial statements have been reclassified to conform to the
current year presentation. 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. Management believes that the disclosures made are
adequate to make the information presented not misleading.
Operating results for any interim periods, or comparisons between
interim periods, are not necessarily indicative of the results
that may be expected for full fiscal years. It is suggested that
these financial statements be read in conjunction with the
financial statements and notes thereto included in the Telephone
Company's 1995 Annual Report on Form 10-K.
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
Dollars in Millions 1996 1995 1996 1995
Revenues
Local service $ 168.5 $ 160.0 $ 333.2 $ 317.4
Network access 97.1 93.0 194.1 184.5
Intrastate toll 64.6 66.5 131.0 135.6
Publishing and other 58.2 57.2 118.5 115.9
Total Revenues 388.4 376.7 776.8 753.4
Costs and Expenses
Operating 117.7 114.2 224.0 219.8
Maintenance 82.1 85.5 168.5 168.6
Depreciation and amortization 74.9 75.2 149.3 150.0
Taxes other than income 11.8 13.6 24.6 26.6
Total Costs and Expenses 286.5 288.5 566.4 565.0
Operating Income 101.9 88.2 210.4 188.4
Interest expense 11.5 13.2 23.1 26.4
Other income, net .4 1.3 1.4 2.6
Income Before Income Taxes 90.8 76.3 188.7 164.6
Income taxes 34.7 29.5 72.9 64.3
Net Income $ 56.1 $ 46.8 $ 115.8 $ 100.3
Retained Earnings, Beginning $ 55.9 $ 669.5 $ 31.8 $ 648.0
of Period
Net income 56.1 46.8 115.8 100.3
Dividends declared to parent (39.0) (29.5) (74.6) (61.5)
Retained Earnings,End of Period $ 73.0 $ 686.8 $ 73.0 $ 686.8
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEETS
Dollars in Millions June 30, 1996 December 31, 1995
(Unaudited)
Assets
Cash and temporary cash investments $ 97.2 $ 70.5
Accounts receivable, net of allowance
for uncollectibles of $29.8 and $26.1,
respectively 286.5 298.1
Accounts receivable from affiliates 9.8 10.9
Materials and supplies 14.1 10.7
Prepaid publishing 34.8 37.2
Deferred income taxes 54.0 57.8
Other current assets 40.8 25.2
Total Current Assets 537.2 510.4
Total telephone plant, at cost 4,244.3 4,166.9
Less: Accumulated depreciation 2,938.3 2,832.9
Net Telephone Plant 1,306.0 1,334.0
Deferred charges and other assets 65.5 53.2
Total Assets $1,908.7 $1,897.6
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 168.5 $ 180.9
Restructuring charge - current 45.7 59.0
Advance billings and customer deposits 43.9 43.0
Accrued compensated absences 33.8 33.8
Accounts payable to affiliates 21.4 29.6
Other current liabilities 86.9 61.8
Total Current Liabilities 400.2 408.1
Long-term debt 746.7 746.6
Unamortized investment tax credits 16.6 17.6
Restructuring charge - long-term 6.6 13.0
Other liabilities and deferred credits 134.5 149.4
Total Liabilities 1,304.6 $1,334.7
Shareholder's Equity
Common stock; $12.50 par value;
30,428,596 shares issued and
30,385,900 outstanding 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 73.0 31.8
Less: Treasury stock; 42,696 shares,
at cost (1.4) (1.4)
Total Shareholder's Equity 604.1 562.9
Total Liabilities and Shareholder's
Equity $1,908.7 $1,897.6
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
Dollars in Millions 1996 1995
Operating Activities
Net income $ 115.8 $ 100.3
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 149.3 150.0
Restructuring payments (42.6) (38.4)
Change in operating assets and liabilities,
net (23.1) (10.6)
Other, net 13.6 12.8
Net Cash Provided by Operating Activities 213.0 214.1
Investing Activities
Cash expended for capital additions (129.3) (142.5)
Other, net 1.6 1.3
Net Cash Used by Investing Activities (127.7) (141.2)
Financing Activities
Cash dividends (58.6) (62.0)
Net Cash Used by Financing Activities (58.6) (62.0)
Increase in Cash and Temporary Cash Investments 26.7 10.9
Cash and temporary cash investments at
beginning of period 70.5 44.2
Cash and Temporary Cash Investments at
End of Period $ 97.2 $ 55.1
Income Taxes Paid $ 59.8 $ 58.0
Interest Paid $ 26.4 $ 26.5
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Note 1: Restructuring Charge
In December 1993, the Telephone Company recorded a restructuring
charge of $335.0 to provide for a comprehensive restructuring
program. Specifically, the program included costs to be incurred
to facilitate employee separations. The charge also included
incremental costs of: implementing appropriate reengineering
solutions; designing and developing new processes and tools to
continue the Telephone Company's provision of excellent service;
and retraining of the remaining employees to help them meet the
changing demands of customers.
The original 1993 restructuring charge and costs incurred during
1994 and 1995 are summarized as follows:
Costs Costs
Balance at incurred incurred Balance at
Dec 31, during during Dec. 31,
1993 1994 1995 1995
Employee separation costs $160.0 $38.6 $107.8 $13.6
Process and systems reengineering 145.0 35.0 74.2 35.8
Exit and other costs 30.0 1.5 5.9 22.6
Total $335.0 $75.1 $187.9 $72.0
The Telephone Company incurred restructuring costs in 1996 as
follows:
For the Three Months For the Six Months
Ended June 30, 1996 Ended June 30, 1996
Employee separation costs
(including net settlement gains) $(13.6) $(9.8)
Process and systems reengineering 13.8 27.2
Exit and other costs 1.3 2.3
Total Costs Incurred $ 1.5 $19.7
Costs incurred for employee separations included payments for
severance, unused compensated absences, health care continuation,
as well as non-cash net pension and postretirement settlement
gains. Process and systems reengineering costs included
incremental costs incurred in connection with the execution of
numerous reengineering programs involving network operations,
customer service, repair and support processes. Exit and other
costs included expenses related to redesigning work areas to
reduce overall corporate space requirements.
In July 1995, the early-out offer ("EOO") was available to the
bargaining-unit work force and approximately 2,600 employees
accepted the offer and left the Telephone Company through June
1996. Net settlement gains of $22.9 were recorded in the second
quarter 1996 to account for the estimated lump-sum pension
payments made for employee separations during the quarter. In
addition, approximately 400 management employees accepted a
severance plan during 1996. To date, approximately 300 employees
have left the Telephone Company under this plan. The enhanced
benefits under the severance plan are expected to result in an
additional net settlement gain to be recorded to the
restructuring charge in the second half of 1996. The Telephone
Company has not yet quantified the additional net settlement
gain.
Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Note 1: Restructuring Charge (continued)
Total employee separations under the restructuring program are
expected to approximate 4,050 employees. As of June 30, 1996,
approximately 3,950 employees had left the Telephone Company under
the restructuring program: 890 employees left under severance plans
through the end of 1994, 2,140 employees left primarily under the
EOO in 1995 and 920 employees left under the EOO and a severance
plan through the first half of 1996. The remaining 100 employee
separations are expected to occur in the second half of 1996.
Total employee separations to date were offset partially by an
increase in provisional employees.
To date, the Telephone Company has implemented network
operations, customer service, repair and support programs and
developed new processes to substantially reduce the costs of
business while significantly improving quality and customer
service. The initial installation and ongoing development of
these new integrated processes have enabled the Telephone Company
to increase its responsiveness to customer specific needs and to
eliminate certain current labor-intensive interfaces between the
existing systems.
As a result of employee separations since June 30, 1995, employee-
related expenses for the first half of 1996 were reduced by
approximately $30 compared with the first half of 1995, net of
costs for provisional employees. Most of the reduction in
employee-related expenses, due to the EOO, will be realized in
1996 since the majority of the employee separations occurred in
the fourth quarter of 1995, with the remainder occuring through
June 1996. After full implementation of the restructuring
program, the Telephone Company anticipates annual savings of
approximately $120 from reduced employee-related expenses, net of
costs for provisional employees. These anticipated savings will
also be substantially offset by growth in the business.
Cash expenditures for the restructuring program are estimated to
be $80 in 1996. The EOO was funded primarily by the pension and
postretirement plans. Incremental capital expenditures related
to the restructuring program approximated $9 in the first half of
1996. These items were recorded in property, plant and equipment
and will result in increased depreciation expense in future
years. The Telephone Company currently anticipates total
incremental capital expenditures of approximately $30 in 1996
under the restructuring program.
Specific process and systems reengineering projects under the
restructuring program are expected to be completed in 1996. In
addition, shifts within reserve categories are expected to occur
in 1996. Management believes that the total restructuring
reserve balance of $52.3 as of June 30, 1996, plus any additional
net settlement gain previously discussed, is adequate for future
estimated costs under the restructuring program.
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of six months ended June 30, 1996 vs. six months ended June 30, 1995
Operating Results
Net income was $115.8 in 1996 compared with $100.3 in 1995. The
increase was due to strong growth in demand for local service
and network access, offset partially by anticipated lower
intrastate toll rates.
Revenues
For the Six Months Ended June 30, 1996 1995
Local Service $333.2 $317.4
Network access 194.1 184.5
Intrastate toll 131.0 135.6
Publishing and other 118.5 115.9
Total Revenues $776.8 $753.4
Local service revenues, derived from providing local exchange,
public telephone and local private line services, increased
$15.8, or 5.0%, in 1996. The increase was due primarily to
growth of 3.3% in access lines in service to approximately
2,109,000 lines as of June 30, 1996. This increase included
significant growth in second residential access lines. Local
service revenues also increased due to growth in subscriptions
to SmartLink[R] advanced calling features, including Caller ID,
missed call dialing, call blocking and call tracing. Management
continues to expect competition to impact local service revenues
beginning in the later half of 1996 as other telecommunications
providers start to offer local service [see Competition].
Network access revenues, generated primarily from interstate and
intrastate services, increased $9.6, or 5.2%. Interstate access
revenues increased $6.1, or 3.5%, due primarily to growth in
interstate minutes of use of approximately 8% and an increase in
access lines in service, discussed previously. Partially
offsetting the impact of the increase in minutes of use was a
decrease in tariff rates implemented on August 1, 1995, in
accordance with the Telephone Company's annual Federal
Communications Commission ("FCC") filing under price cap
regulation. In addition, intrastate access revenues increased
$3.5 due primarily to an increase in intrastate minutes of use
by competitive providers of intrastate long-distance service.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $4.6, or 3.4%. Toll message
revenues decreased $4.5 due primarily to reduced intrastate toll
rates, offset partially by a 4.3% increase in toll message
volume. The decline in rates was attributable to the
introduction of several discount calling plans that provide
competitive options to business and residence customers. Higher
toll volume was mainly due to greater customer demand, partially
offset by the increasingly competitve toll market. The offering
of competitive discount calling plans and the implementation of
intrastate equal access through November 1996 will continue to
place downward pressure on intrastate toll revenues.
Growth in Yellow Pages advertising was the primary contributor
to the $2.6 increase in publishing and other revenues.
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of six months ended June 30, 1996 vs. six months ended June 30,1995
Costs and Expenses
For the Six Months Ended June 30,
1996 1995
Operating $224.0 $219.8
Maintenance 168.5 168.6
Total operating costs 392.5 388.4
Depreciation and amortization 149.3 150.0
Taxes other than income 24.6 26.6
Total Costs and Expenses $566.4 $565.0
Operating costs - Operating costs consist primarily of employee-
related expenses, including wages and benefits. Cost of
services and general and administrative expenses, including
marketing, represent the remaining portion of these expenses.
Total operating costs increased $4.1, or 1.1%. Excluding an
$11.0 charge in 1995, associated primarily with a court ruling
on the Telephone Company's labor practices, operating costs
increased $15.1. Higher contracted service costs, due in part
to certain outsourcing initiatives, and increased advertising were
the primary factors of the increase. Partially offsetting these
increases was a reduction in employee-related expenses as a result
of a smaller work force. The Telephone Company's work force
decreased to 8,325 employees at June 30, 1996, compared with 9,216
employees at June 30, 1995, due primarily to the EOO and
severance programs under the restructuring program [see Note 1].
The decrease in employee-related expenses was partially offset by
compensation increases for employees and increased overtime, due
to severe weather and increased service volume.
Interest Expense
For the Six Months Ended June 30, 1996 1995
Interest expense $23.1 $26.4
Interest expense decreased $3.3, or 12.5%, due primarily to
reporting capitalized interest as a cost of telephone plant and
a reduction to interest expense. Prior to the discontinuance of
Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation," capitalized
interest was reported as a component of other income, net.
Income Taxes
For the Six Months Ended June 30, 1996 1995
Income taxes $72.9 $64.3
The combined federal and state effective tax rate for 1996 was
38.6% compared with 39.1% for 1995. The decrease in the
effective tax rate was due primarily to the combined effect of
lower Connecticut state tax rates and a higher level of state
tax credits in 1996.
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of balances as of June 30, 1996 vs. December 31, 1995
Other Current Liabilities
Other current liabilities increased $25.1 due primarily to an
increase in dividends payable.
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$213.0 during the six months ended June 30, 1996 as compared
with $214.1 during the six months ended June 30, 1995. The
primary use of corporate funds continued to be capital
expenditures.
For the six months ended June 30, 1996, cash outlays relating to
the Telephone Company's restructuring charge totaled $42.6.
Primarily all of the expenditures related to incremental costs
incurred for executing numerous reengineering programs during
the first six months of 1996. All cash expenditures were funded
with cash flows from operations. Management anticipates that
cash expenditures in connection with the restructuring program
will approximate $80 in 1996 and will be funded from operations.
Competition
The Telephone Company is experiencing increased competition from
carriers, including competitive access providers, that construct
and operate their own communications systems and networks, as
well as from resellers of telecommunications systems and networks
of underlying carriers. Over 120 telecommunications providers
have received approval from the Department of Public Utility
Control ("DPUC") to offer competitive intrastate long-distance
services. In addition, over 60 companies have filed for initial
certificates of public convenience and necessity and are awaiting
DPUC approval. The implementation of intrastate equal access for
all dual preferred interexchange carrier capable switches will be
completed by November 1996.
To provide competitive products, the Telephone Company, with its
affiliates, has realigned its discount and rate structures to
provide Connecticut customers with SNET All Distance[SM], a
seamless toll service product line which includes discount
calling plans that combine intrastate, interstate and
international calling. The migration of customers to these
bundled calling plans will continue to place downward pressure on
intrastate toll rates and revenues.
Concerning competition for local exchange service, eleven
telecommunications providers have been granted a certificate of
public convenience and necessity for local service and six
additional applications are pending before the DPUC. The effect
of increased competition on local service revenues cannot be
predicted at this time. While some customers may purchase
services from competitors, the Telephone Company expects that
most competitors will resell the Telephone Company's network and
that increased network access revenues will offset a portion of
local service revenues lost to competition. Local service
competition is expected to begin in the later half of 1996.
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Regulatory Matters
State Regulatory Initiatives
On June 28, 1996, the Telephone Company filed its first
reclassification application with the DPUC. The Telephone
Company has requested that message toll service and calling card
service be reclassified from the noncompetitive category to
competitive in its entire service territory. Reclassification
provides the Telephone Company with the opportunity to gain
additional promotional and pricing flexibility for its products
and services, and to operate under regulatory guidelines similar
to our competitors. A decision is expected by October 1996.
Additional services will be filed for reclassification as market
conditions warrant.
On March 15, 1996, the Telephone Company filed a petition with
the DPUC requesting a waiver of the Telecommunications Act of 1996
("Federal Act") that requires the pricing of wholesale local
residential service based on retail rates minus avoided costs.
On May 17, 1996, the DPUC issued a decision denying the Telephone
Company's petition without prejudice. The DPUC determined that
the Telephone Company may be entitled to a suspension of the
application of the Federal Act's resale provisions, but that the
record in the proceeding was not sufficient to make that
determination. The DPUC indicated that the Telephone Company may
find it necessary to renew its petition after the DPUC's review
of the Telephone Company's revised cost studies and
determinations regarding a universal service fund for the State
of Connecticut. On May 31, 1996, the DPUC began a proceeding to
review the revised cost studies submitted by the Telephone
Company. A decision is expected in November 1996.
Federal Regulatory Initiatives
On August 1, 1996, the FCC adopted regulations which enable the
states to begin implementing local competition under the
provisions of the Federal Act. The regulations addressed the
methods of entry into the local telephone market and the cost-
based method for states to use in determining rates for
interconnection and the purchase of unbundled elements. This
decision is the first of three parts to carry out the Federal
Act. Future decisions will include universal service and access
charge reform. The majority of the regulations are consistent
with legislation enacted by the State of Connecticut in 1994
which opened Connecticut telecommunications market to
competition. Management expects the DPUC's proceedings on cost
studies to be consistent with these regulations. The impact on
the Telephone Company will not be known until all decisions are
finalized.
On January 17, 1996, the Telephone Company filed with the FCC a
petition requesting authorization to provide interstate and
international telecommunications services under non-dominant
regulation. On July 19, 1996, the FCC issued a decision denying
the request. Rather than issuing decisions on a company by
company basis, the FCC subsequently issued a Notice of Proposed
Rulemaking seeking comment on this topic for all independent
local exchange carriers. The Telephone Company filed its
comments on August 5, 1996. If granted non-dominant status, the
Telephone Company would have the option of providing these
services, rather than providing them through SNET America, Inc.,
a separate subsidiary of the Corporation.
Form 10-Q - Parts I & II The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
On June 24, 1996, the FCC approved the Telephone Company's 1996
annual interstate access tariff filing. These tariffs became
effective July 1, 1996. The Telephone Company again elected a
4.0% productivity factor and will be allowed to earn up to a
12.25% interstate rate of return annually before any sharing.
The filing is anticipated to decrease interstate network access
revenues by $2.3 for the period July 1, 1996 to June 30, 1997.
Management expects this decrease to be offset by increased
demand. The price cap interstate rate of return of 11.58% for
calendar year 1995 was also reported to the FCC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the second quarter of 1996.
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibit.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
On April 23, 1996, the Telephone Company filed a report
on Form 8-K, dated April 23, 1996 announcing the
Corporation's financial results for the first quarter of
1996.
On July 23, 1996, the Telephone Company filed a report
on Form 8-K, dated July 23, 1996 announcing the
Corporation's financial results for the second quarter
of 1996.
Form 10-Q - Part II The Southern New England Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
August 8, 1996
/s/ Donald R. Shassian
Donald R. Shassian, Senior Vice President
and Chief Financial Officer