UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 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 of (I.R.S. Employer
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).
- 1 -
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, which are normal and
recurring in 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.
- 2 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
Dollars in Millions 1996 1995 1996 1995
Revenues
Local service $ 170.5 $ 161.8 $ 503.7 $ 479.2
Network access 94.4 91.8 288.5 276.3
Intrastate toll 62.1 66.4 193.1 202.0
Publishing and other 56.7 63.7 175.2 179.6
Total Revenues 383.7 383.7 1,160.5 1,137.1
Costs and Expenses
Operating 124.4 116.5 348.4 336.3
Maintenance 87.1 80.2 255.6 248.8
Depreciation and amortization 75.1 75.6 224.4 225.6
Taxes other than income 12.5 14.0 37.1 40.6
Total Costs and Expenses 299.1 286.3 865.5 851.3
Operating Income 84.6 97.4 295.0 285.8
Interest expense 11.3 13.1 34.4 39.5
Other income, net .7 4.1 2.1 6.7
Income Before Income Taxes 74.0 88.4 262.7 253.0
Income taxes 26.4 32.8 99.3 97.1
Net Income $ 47.6 $ 55.6 $ 163.4 $ 155.9
Retained Earnings, Beginning
of Period $ 73.0 $ 686.8 $ 31.8 $ 648.0
Net income 47.6 55.6 163.4 155.9
Dividends declared to parent (40.5) (28.9) (115.1) (90.4)
Retained Earnings, End
of Period $ 80.1 $ 713.5 $ 80.1 $ 713.5
The accompanying notes are an integral part of these financial statements.
- 3 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEETS
Dollars in Millions September 30, 1996 December 31, 1995
(Unaudited)
Assets
Cash and temporary cash investments $ 108.1 $ 70.5
Accounts receivable, net of allowance
for uncollectibles of $28.1 and $26.1,
respectively 284.9 298.1
Accounts receivable from affiliates 8.4 10.9
Materials and supplies 12.8 10.7
Prepaid publishing 33.7 37.2
Deferred income taxes 62.9 57.8
Other current assets 33.2 25.2
Total Current Assets 544.0 510.4
Total telephone plant, at cost 4,286.6 4,166.9
Less: Accumulated depreciation 2,973.4 2,832.9
Net Telephone Plant 1,313.2 1,334.0
Deferred charges and other assets 68.3 53.2
Total Assets $1,925.5 $1,897.6
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 167.5 $ 180.9
Restructuring charge - current 67.2 59.0
Advance billings and customer deposits 46.9 43.0
Accrued compensated absences 34.1 33.8
Accounts payable to affiliates 22.7 29.6
Other current liabilities 101.4 61.8
Total Current Liabilities 439.8 408.1
Long-term debt 746.8 746.6
Unamortized investment tax credits 16.0 17.6
Restructuring charge - long-term 13.0 13.0
Other liabilities and deferred credits 98.7 149.4
Total Liabilities 1,314.3 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 80.1 31.8
Less: Treasury stock; 42,696 shares, at cost (1.4) (1.4)
Total Shareholder's Equity 611.2 562.9
Total Liabilities and Shareholder's Equity $1,925.5 $1,897.6
The accompanying notes are an integral part of these financial statements.
- 4 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
Dollars in Millions 1996 1995
Operating Activities
Net income $ 163.4 $ 155.9
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 224.4 225.6
Restructuring payments (56.5) (61.7)
Change in operating assets and liabilities, net (21.2) (15.8)
Other, net 25.3 14.9
Net Cash Provided by Operating Activities 335.4 318.9
Investing Activities
Cash expended for capital additions (202.6) (215.8)
Other, net 2.4 .6
Net Cash Used by Investing Activities (200.2) (215.2)
Financing Activities
Cash dividends paid (97.6) (91.5)
Net Cash Used by Financing Activities (97.6) (91.5)
Increase in Cash and Temporary Cash Investments 37.6 12.2
Cash and temporary cash investments at
beginning of period 70.5 44.2
Cash and Temporary Cash Investments at
End of Period $ 108.1 $ 56.4
Income Taxes Paid $ 83.1 $ 94.4
Interest Paid $ 36.6 $ 36.7
The accompanying notes are an integral part of these financial statements.
- 5 -
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 are
summarized as follows:
Balance Costs Costs Costs Balance
at incurred incurred incurred at
Dec. 31, during during during Sept. 30,
1993 1994 1995 1996 1996
Employee separation
costs $160.0 $(38.6) $(107.8) $ 48.2 $61.8
Process and systems
reengineering 145.0 (35.0) (74.2) (36.4) (0.6)
Exit and other costs 30.0 (1.5) (5.9) (3.6) 19.0
Total $335.0 $(75.1) $(187.9) $ 8.2 $80.2
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 lump-sum pension payments made
for employee separations during the quarter. A settlement gain
of $20.5 was also recorded in the third quarter 1996 to account
for the remaining settlement gains resulting from the EOO. In
addition, approximately 400 management employees accepted a
severance plan during 1996. Approximately 370 management
employees have left the Telephone Company under this plan through
September 30, 1996. As a result, a net settlement gain of $21.3
was recorded in the third quarter 1996.
Total employee separations under the restructuring program are
expected to approximate 4,100 employees. As of June 30, 1996,
approximately 4,020 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 990 employees left under the
EOO and severance plans through the nine months of 1996. Total
employee separations to date were offset substantially by an
increase in provisional employees to support greater demand for
services.
- 6 -
Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Note 1: Restructuring Charge (continued)
As a result of employee separations since September 30, 1995,
employee-related expenses for the first nine months of 1996 were
reduced by approximately $50 compared with the first nine months
of 1995, net of costs for provisional employees. Beginning in
1997, the Telephone Company anticipates annual savings of
approximately $100 from reduced employee-related expenses, net of
costs for provisional employees. These anticipated savings will
also be offset by growth in the business.
Cash expenditures for the restructuring program are estimated to
be $65 in 1996. The EOO was funded primarily by the pension
and postretirement plans. Incremental capital expenditures
related to the restructuring program approximated $14 in the
first nine months 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
$20 in 1996 under the restructuring program.
Certain process improvement and reengineering programs have been
redesigned due to business changes and will extend into 1997. In
addition, shifts within reserve categories are expected to occur
in the fourth quarter 1996. Management believes that the total
restructuring reserve balance of $80.2 as of September 30, 1996
is adequate for future estimated costs under the restructuring
program.
- 7 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of nine months ended September 30, 1996 vs. nine
months ended September 30, 1995
Operating Results
Net income was $163.4 in 1996 compared with $155.9 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 Nine Months Ended September 30, 1996 1995
Local service $ 503.7 $ 479.2
Network access 288.5 276.3
Intrastate toll 193.1 202.0
Publishing and other 175.2 179.6
Total Revenues $1,160.5 $1,137.1
Local service revenues, derived from providing local exchange,
public telephone and local private line services, increased
$24.5, or 5.1%, in 1996. The increase was due primarily to
growth of 4.3% in access lines in service to approximately
2,145,000 lines as of September 30, 1996. This increase
included significant growth in Centrex sales and 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 as other
telecommunications providers offer local service [see
Competition].
Network access revenues, generated primarily from interstate and
intrastate services, increased $12.2, or 4.4%. Interstate
access revenues increased $6.6, or 2.5%, due primarily to growth
in interstate minutes of use of approximately 9%. Partially
offsetting the impact of the increase in minutes of use was a
decrease in rates due to discount calling plans and the
Telephone Company's 1996 Federal Communications Commission
("FCC") filing under price cap regulation. In addition,
intrastate access revenues increased $5.6 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 $8.9, or 4.4%, due primarily
to reduced intrastate toll rates, offset partially by a 2.3%
increase in toll message volume. The decline in rates was due
primarily to the migration of customers to several of the
Corporation's discount calling plans. Higher toll volume was
mainly due to greater customer demand, partially offset by the
increasingly competitive toll market. The offering of
competitive discount calling plans and the completion of
intrastate equal access in November 1996 will continue to place
downward pressure on intrastate toll revenues.
The absence of billing revenues upon the expiration of the AT&T
contract was the primary contributor to the $4.4 decrease in
publishing and other revenues.
- 8 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of nine months ended September 30, 1996 vs. nine
months ended September 30, 1995
Costs and Expenses
For the Nine Months Ended September 30, 1996 1995
Operating $348.4 $336.3
Maintenance 255.6 248.8
Total operating costs 604.0 585.1
Depreciation and amortization 224.4 225.6
Taxes other than income 37.1 40.6
Total Costs and Expenses $865.5 $851.3
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 $18.9, or 3.2%. Excluding an
$11.0 charge in 1995, associated primarily with a court ruling
on the Telephone Company's labor practices, operating costs
increased $29.9. Higher contracted services, due in part to
outsourcing certain functions, marketing and uncollectible
expenses were the primary factors of the increase. Partially
offsetting these increases was a reduction in employee-related
expenses as a net result of a smaller work force, compensation
increases, and increased overtime. The Telephone Company's work
force decreased to 8,656 employees at September 30, 1996,
compared with 8,873 employees at September 30, 1995, due
primarily to the EOO and severance plans under the restructuring
program [see Note 1]. The decrease in the work force was offset
substantially by the hiring of provisional employees to meet
increased demand for services.
Interest Expense and Other Income, Net
For the Nine Months Ended September 30, 1996 1995
Interest expense $34.4 $39.5
Other income, net $ 2.1 $ 6.7
The decrease in interest expense and other income, net is due
primarily to a change in the reporting of capitalized interest
to a reduction in 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 Nine Months Ended September 30, 1996 1995
Income taxes $99.3 $97.1
The combined federal and state effective tax rate for 1996 was
37.8% compared with 38.4% 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.
- 9 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of balances as of September 30, 1996 vs. December 31,
1995
Other Current Liabilities
Other current liabilities increased $39.6 due to an increase in
dividends payable and an increase in accrued income taxes due to
the timing of payments.
Restructuring Charge
The combined current and long-term restructuring charge
increased $8.2 due to pension settlement gains of $22.9 and
$41.8 recorded in the second and third quarter of 1996,
respectively. These gains were offset by the charges against
the restructuring reserve for the period.
Other Liabilities and Deferred Credits
Other liabilities and deferred credits decreased $50.7 due
primarily to the settlement gains discussed under Restructuring
Charge, above, lowering the accrued pension liability.
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$335.4 during the nine months ended September 30, 1996 as
compared with $318.9 during the nine months ended September 30,
1995. The primary use of corporate funds continued to be
capital expenditures.
For the nine months ended September 30, 1996, cash outlays
relating to the Telephone Company's restructuring charge totaled
$56.5. Primarily all of the expenditures related to incremental
costs incurred for executing numerous reengineering programs
during the first nine 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 $65 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. Approximately 140 telecommunications
providers have received approval from the Department of Public
Utility Control ("DPUC") to offer 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, Wireline has realigned its
discount and rate structures to provide Connecticut customers
with SNET All Distance[SM], a one bill, seamless toll service
product line which includes discount calling plans that include
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,
while at the same time, promote growth for interstate and
international toll services.
- 10 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Concerning competition for local exchange service, fifteen
telecommunications providers have been granted certificates of
public convenience and necessity for local service and two
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.
Regulatory Matters
Federal Regulatory Initiatives
On February 8, 1996, Congress passed the Telecommunications Act
of 1996 ("Act"). The Act was designed to overhaul U.S.
Telecommunication policy by removing barriers to local
competition. The FCC's First and Second Report and Order
("Order"), adopted August 1, 1996, implements the Act and
contains numerous provisions regarding the interconnection of the
Telephone Company's network with those of its competitors.
Massive changes to network and data systems will be required for
the Telephone Company to comply with the Order. In addition, the
Order would require fundamental changes in the development of the
prices that the Telephone Company would charge competitors for
purchasing regulated network products and services. This
decision is the first of three major rulemakings to carry out the
Act. Future decisions will include universal service and access
charge reform. With respect to these decisions, the Order, as
well as universal service and access charge reform, could have a
material negative impact on the Telephone Company. The Order was
appealed by various local telephone companies, including the
Telephone Company, the National Association of Regulatory Utility
Commissioners and individual state regulatory commissions.
On October 15, 1996, the Court issued an injunction delaying the
effectiveness of the pricing provisions and the "pick and choose"
rule of the Order. The Court is expected to issue a final ruling
on this matter in early Spring 1997. The FCC appealed the
Court's decision to stay these rules with the Supreme Court.
Justice Clarence Thomas of the Supreme Court subsequently
declined to hear the appeal, however the FCC has requested a
review from the full Supreme Court.
State Regulatory Initiatives
On March 15, 1996, the Telephone Company filed a petition with
the DPUC requesting a waiver of the section of the Act that
requires the pricing of wholesale local residential service to be
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
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. This proceeding is
currently being held in abeyance pending action by the Court,
described previously.
- 11 -
Form 10-Q - Parts I & II The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
In compliance with the Act, the Telephone Company has filed with
the DPUC numerous cost studies supporting its proposed wholesale
(i.e., resale) and unbundled rates for interconnection services.
In light of the Order, the DPUC on September 26, 1996 held a
hearing on resale rates. The DPUC ordered that an interim
discount rate of 21% off retail prices be applied to services
resold to competitors. This percentage represents the midpoint
between the 17% and 25% proxy rates required by the FCC in its
Order. The day following the hearing, the Court issued a
temporary stay of the Order, pending a decision on the various
stay motions filed by local exchange carriers, including the
Telephone Company, with the Court. As a result of this action,
the Telephone Company requested a deferral of the effective date
of the 21% discount rate until such time as the Court's stay was
lifted or until the DPUC reviewed the merits of the Telephone
Company's appeal. The DPUC found merit in the Telephone
Company's request and deferred the implementation of the 21%
rate. In the meantime, as requested by the DPUC, the Telephone
Company has filed new cost studies related to the discount rate.
On November 8, 1996, the DPUC issued a draft decision granting
the Telephone Company's request to reclassify message toll
service and calling card service 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 its competitors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the third
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 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.
On October 22, 1996, the Telephone Company filed a
report on Form 8-K, dated October 22, 1996 announcing
the Corporation's financial results for the third
quarter of 1996.
- 12 -
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
November 12, 1996
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer