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, 1995.
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 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive (Zip Code)
offices)
(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 .
Common stock, par value $1.00 per share: 64,944,430 shares
outstanding as of July 31, 1995
Form 10-Q - Part I Southern New England Telecommunications Corporation
PART I - FINANCIAL INFORMATION
Southern New England Telecommunications Corporation
("Corporation") was incorporated under the laws of the State of
Connecticut on January 7, 1986 and has its principal executive
office at 227 Church Street, New Haven, Connecticut 06510
(telephone number (203) 771-5200).
The condensed, consolidated 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 the management, include all adjustments, consisting of
a normal recurring nature necessary for fair presentation for
each period shown. The 1994 financial statements have been
reclassified to conform to the current-year presentation.
Certain information and footnote disclosures normally included in
consolidated 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 condensed,
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in
the Corporation's 1994 Annual Report on Form 10-K.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Statement of Income
(Unaudited)
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
Dollars in Millions, Except 1995 1994 1995 1994
Per Share Amounts
Revenues and Sales
Local service $160.0 $154.3 $317.4 $306.3
Network access 93.0 88.4 184.5 175.2
Intrastate toll 66.5 75.9 135.6 154.9
Publishing 45.5 45.7 90.1 90.4
Sales and other 88.0 63.5 168.5 124.2
Total Revenues and Sales 453.0 427.8 896.1 851.0
Costs and Expenses
Operating and maintenance 265.8 237.5 517.4 472.9
Depreciation and amortization 83.6 81.3 167.0 162.0
Taxes other than income 14.3 14.4 27.8 28.6
Total Costs and Expenses 363.7 333.2 712.2 663.5
Operating Income 89.3 94.6 183.9 187.5
Interest 19.0 19.0 37.0 38.8
Income Before Income Taxes 70.3 75.6 146.9 148.7
Income taxes 30.2 30.3 60.1 59.9
Net Income $ 40.1 $ 45.3 $ 86.8 $ 88.8
Weighted Average Common Shares
Outstanding (in thousands) 64,800 64,134 64,721 64,058
Earnings Per Share $ .62 $ .71 $ 1.34 $ 1.39
Dividends Declared Per Share $ .44 $ .44 $ .88 $ .88
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Balance Sheet
Dollars in Millions, Except Per Share June 30, 1995 Dec. 31, 1994
Amounts (Unaudited)
Assets
Cash and temporary cash investments $ 14.5 $ 6.7
Cash, designated for cellular 455.6 -
acquisitions
Total Cash and Cash Equivalents 470.1 6.7
Accounts receivable, net of allowance
for uncollectibles of $30.0 and $29.8, 298.3 294.4
respectively
Materials, supplies and inventories 24.6 26.4
Prepaid publishing 38.6 39.0
Deferred income taxes 109.1 101.8
Prepaid taxes and other assets 30.8 29.4
Total Current Assets 971.5 497.7
Property, plant, and equipment, at cost 4,446.7 4,372.6
Less: Accumulated depreciation 1,763.5 1,660.4
Property, Plant and Equipment, net 2,683.2 2,712.2
Deferred charges, leases and other assets 267.2 294.7
Total Assets $3,921.9 $3,504.6
Liabilities and Shareholders' Equity
Debt maturing within one year $ 44.9 $ 39.6
Short-term debt, financing for cellular 455.6 -
acquisitions
Accounts payable and accrued expenses 182.3 205.1
Restructuring charge - current 162.0 145.5
Advance billings and customer deposits 57.5 56.7
Accrued compensated absences 36.7 36.8
Other current liabilities 84.4 84.6
Total Current Liabilities 1,023.4 568.3
Long-term debt 908.8 952.1
Deferred income taxes 378.2 375.0
Postretirement benefits other than 308.2 308.2
pension
Restructuring charge - long-term 66.7 119.4
Unamortized investment tax credits 39.4 42.9
Other liabilities and deferred credits 197.6 185.8
Total Liabilities 2,922.3 2,551.7
Common stock; $1.00 par value;
300,000,000 shares authorized;
67,581,263 and 67,264,435 issued, 67.6 67.3
respectively
Proceeds in excess of par value 687.9 677.8
Retained earnings 412.2 381.8
Less: Treasury stock; 2,758,512 (104.7) (104.7)
shares, at cost
Unearned compensation related (63.4) (69.3)
to ESOP
Total Shareholders' Equity 999.6 952.9
Total Liabilities and Shareholders' $3,921.9 $3,504.6
Equity
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Statement of Changes In
Shareholders' Equity
(Unaudited)
For the 3 Months For the 6 Months
Ended June 30, Ended June 30,
Dollars in Millions 1995 1994 1995 1994
Common Stock, Par Value
Balance at Beginning of Period $ 67.4 $ 66.8 $ 67.3 $ 66.6
Common shares issued:
Dividend reinvestment plan .1 .1 .2 .2
Savings and incentive plans .1 - .1 .1
Balance at End of Period $ 67.6 $ 66.9 $ 67.6 $ 66.9
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 682.8 $ 661.9 $ 677.8 $ 656.7
Common shares issued, at market:
Dividend reinvestment plan 3.6 3.9 7.4 7.6
Savings and incentive plans 1.5 .4 2.7 1.9
Balance at End of Period $ 687.9 $ 666.2 $ 687.9 $ 666.2
Retained Earnings
Balance at Beginning of Period $ 400.4 $ 331.4 $ 381.8 $ 315.7
Net income 40.1 45.3 86.8 88.8
Dividends declared (28.6) (28.2) (57.0) (56.4)
Tax benefit of dividends declared
on unallocated shares held in ESOP .3 .3 .6 .7
Balance at End of Period $ 412.2 $ 348.8 $ 412.2 $ 348.8
Treasury Stock
Balance at Beginning and End of $(104.7) $(104.7) $(104.7) $(104.7)
Period
Unearned Compensation Related To
Employee Stock Ownership Plan
Balance at Beginning of Period $ (66.9) $ (77.8) $ (69.3) $ (79.7)
Reduction of ESOP debt - - 7.1 6.6
ESOP earned compensation accrual 3.5 4.4 (1.2) (.3)
Balance at End of Period $ (63.4) $ (73.4) $ (63.4) $ (73.4)
Total Shareholders' Equity $ 999.6 $ 903.8 $ 999.6 $ 903.8
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Statement of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
Dollars in Millions 1995 1994
Operating Activities
Net income $ 86.8 $ 88.8
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 167.0 162.0
Effect of business restructuring (36.2) (31.6)
Change in operating assets and (7.2) (44.3)
liabilities, net
Other, net 12.1 16.9
Net Cash Provided by Operating Activities 222.5 191.8
Investing Activities
Cash expended for capital additions (164.9) (126.3)
Repayment of loan made to ESOP .5 .4
Other, net 34.8 6.8
Net Cash Used by Investing Activities (129.6) (119.1)
Financing Activities
Net proceeds of short-term debt 464.0 30.0
Repayments of long-term debt (44.4) (252.3)
Cash dividends (49.1) (48.5)
Other, net - (.1)
Net Cash Provided (Used) by Financing 370.5 (270.9)
Activities
Increase (decrease) in cash and cash 463.4 (198.2)
equivalents
Cash and cash equivalents at beginning 6.7 224.8
of period
Cash and Cash Equivalents at End of $470.1 $26.6
Period
Income Taxes Paid $33.6 $58.5
Interest Paid $38.7 $46.3
The accompanying notes are an integral part of these financial statements.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 1: Financial Data on Subsidiaries
Selected financial data on the Corporation's subsidiaries is
summarized as follows:
For the 3 Months Ended For the 6 Months Ended
June 30, June 30,
Dollars in Millions 1995 1994 1995 1994
Revenues and Sales:
The Southern New England
Telephone Company $374.0 $371.1 $748.0 $740.5
Cellular operations(1) 33.6 23.3 63.2 44.6
SNET Diversified Group,
Inc. (2) 27.4 24.7 54.0 49.3
SNET Real Estate, Inc. 7.2 3.3 10.2 6.5
All others (3) 10.8 5.4 20.7 10.1
Total $453.0 $427.8 $896.1 $851.0
Operating Earnings
(Loss) (4) :
The Southern New England
Telephone Company $ 164.7 $ 167.6 $ 341.0 $ 327.5
Cellular operations(1) 1.2 5.5 (.3) 9.9
SNET Diversified Group,
Inc. (2) (2.3) 1.6 (1.4) 4.2
SNET Real Estate, Inc. 6.7 2.4 9.3 4.8
All others (3) 2.6 (1.2) 2.3 3.1
Total (5) $ 172.9 $ 175.9 $ 350.9 $ 349.5
(1) Cellular operations consist of the Corporation's wholesale and
retail cellular businesses, SNET Cellular, Inc. ("Cellular") and
SNET Mobility, Inc., net of cellular intercompany amounts.
(2) SNET Diversified Group, Inc. includes results of Business
Communications, SNET Premium Services and Multi-Media Services.
(3) All others include SNET America, Inc.("SNET America"), SNET
Paging, Inc. ("Paging") and Parent Company operations.
(4) Represents earnings (loss) before interest, taxes, depreciation
and amortization. Operating earnings (loss) is not a generally
accepted accounting principle measurement. Management provides
this measurement for informational purposes only.
(5) Operating earnings (loss), normalized to exclude special items,
is $181.2 million and $359.2 million for the 3 month and 6 month
periods ended June 30, 1995, respectively. Special items include:
an $11.0 million before-tax charge for litigation matters recorded by
The Southern New England Telephone Company ("Telephone Company");
a $1.4 million before-tax charge for state tax adjustments recorded
by the Parent Company; and a $4.1 million before-tax gain on the
sale of real estate recorded by SNET Real Estate, Inc.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 2: Acquisitions and Sale of Certain Assets
In July 1995, Cellular purchased from Bell Atlantic Corporation,
NYNEX Corporation and Richmond Telephone Company, for
approximately $456 million in aggregate, certain cellular
properties in Rhode Island and New Bedford and Pittsfield,
Massachusetts, and an increased interest in Springwich Cellular
Limited Partnership ("Springwich"). Since the acquisition date,
Cellular and SNET Springwich, Inc. a wholly-owned subsidiary of
Cellular, together hold a 98.6% partnership interest in
Springwich. In total, these acquisitions expanded Cellular's
service area by 70% or approximately 2.3 million POPS (population
equivalents) along the Boston to New York corridor.
The acquisitions were financed with approximately $456 million of
short-term debt issued in June 1995. It is expected that the
short-term debt will be replaced with medium-term debt in the
third quarter of 1995. The acquisitions were accounted for under
the purchase method. Accordingly, the operating results of the
cellular properties and the increased interest in Springwich will
be included in the consolidated financial statements subsequent
to the acquisition date.
Cellular licenses, customer lists and goodwill of approximately
$424 million, arising from these acquisitions, will be amortized
using the straight-line method over a period of up to 40 years.
Assuming the acquisitions were completed as of the beginning of
the periods presented, unaudited pro forma consolidated results
of operations are as follows:
For the 6 Months Ended
June 30,
Dollars in Millions, Except Per Share Amounts 1995 1994
Revenues and Sales $917.5 $869.4
Income Before Income Taxes $129.0 $131.2
Net Income $ 76.3 $ 78.5
Earnings Per Share $ 1.18 $ 1.22
On June 30, 1995, Paging and TNI Associates, Inc. ("TNIA"), a
wholly-owned subsidiary of Paging, completed the sale of
substantially all of the network assets of Paging and TNIA,
including wireless messaging network transmitters, switches, and
operating frequencies, as well as all reseller accounts and
TNIA's retail accounts, to Paging Network of New York, Inc.
Paging will retain its retail accounts and will continue, as a
reseller, to market paging services under its Page 2000[R] brand
name.
Note 3: Income Taxes
In the second quarter of 1995, new state income tax rates were
signed into law to accelerate the reduction of rates originally
enacted in 1993. The current state income tax rate of 11.25%
will gradually decrease to 7.5% in 2000. For the three month and
six month periods ended June 30, 1995, income taxes included a
provision to adjust deferred tax balances for the effect of the
change in state income tax rates.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 4: Restructuring Charge
In December 1993, the Corporation recorded a restructuring charge
of $355.0 million before-tax, $204.2 million after-tax, or $3.21
per share, to provide for a comprehensive restructuring program.
The program included costs to be incurred to facilitate employee
separations involving approximately 2,500 employees. The charge
also included: incremental costs of implementing appropriate
reengineering solutions; designing and developing new processes
and tools to continue the Corporation'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 are summarized as follows:
Balance at Costs incurred Balance at
Dollars in Millions Dec. 31, 1993 during 1994 Dec. 31, 1994
Employee separation costs $170.0 $41.8 $128.2
Process and systems 145.0 35.0 110.0
reengineering
Exit and other costs 40.0 13.3 26.7
Total $355.0 $90.1 $264.9
The Corporation incurred restructuring costs in 1995 as follows:
For the 3 Months For the 6 Months
Dollars in Millions Ended June 30, 1995 Ended June 30, 1995
Employee separation costs $ 2.2 $ 5.0
Process and systems reengineering 20.2 33.9
Exit and other costs (3.0) (2.7)
Total Costs Incurred $19.4 $36.2
Costs incurred for employee separations included payments for
severance, unused compensated absences, health care continuation
and employee retraining. 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 primarily a non-cash adjustment of
approximately $3 million in connection with the completed sale of
substantially all of the assets of Paging and TNIA [see Note 2].
The adjustment reduced the total non-cash charge recorded in 1994
for exiting the paging network business to approximately $9
million.
To date, the Corporation 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
remaining employee separations will not be possible without the
development and installation of these new processes which, among
other things, will reduce or eliminate the current labor-
intensive interfaces between the existing systems.
As of June 30, 1995, approximately 1,010 employees (630
management and 380 bargaining-unit employees, or 17.6% and 5.5%
of the respective total workforce at the inception of the
restructuring program) had left the Corporation under severance
plans and retirement incentives under the restructuring program.
On April 21, 1995, the Connecticut Union of Telephone Workers
("CUTW") ratified a new contract which includes a voluntary
"early-out offer" available to bargaining-unit
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 4: Restructuring Charge (continued)
employees [see Employee Relations]. The early-out offer provides
enhanced pension benefits by adding six years to the age and the
length of service of employees for purposes of determining
pension and postretirement health care benefits eligibility. The
employees will also have the option to select a pension
distribution method (e.g. lump sum, monthly pension or a
combination of both) at the time of separation. Approximately
2,700 bargaining-unit employees, or 40.7% of the total bargaining-
unit workforce, accepted the early-out offer available during
July 1995. The majority of the employee separations are expected
to occur in the latter half of 1995. In certain cases, the
Corporation may stagger separation dates through June 1996 to
ensure that service to customers will not be adversely affected.
Expected accumulated savings are dependent on the timing and mix
of total employee separations and, based on original projections,
are estimated to be $60 million, $90 million, and $110 million
for 1995, 1996, and 1997, respectively. As a result of higher
than expected response to the early-out offer, these estimated
savings are currently being reassessed. Management continues to
expect that savings will be substantially offset by costs related
to the growth in business, the construction of I-SNET, a
statewide information superhighway, and the cost of adding other
employees with different skills.
Cash expenditures for the restructuring program are estimated to
be $120 million, $85 million, and $35 million in 1995, 1996, and
1997, respectively. The early-out offer will be funded primarily
by the pension and postretirement plans. Incremental capital
expenditures related to the restructuring program approximated
$12 million for the first six months of 1995. These items have
been recorded in property, plant and equipment and will result in
increased depreciation expense in future years. The Corporation
currently anticipates total incremental capital expenditures of
approximately $60 million over the remaining life of the program.
In order to maintain quality customer service while at the same
time reengineer the business, the 1993 restructuring program is
expected to extend into 1997, rather than be completed by 1996 as
originally intended. It is also possible that shifts within
reserve categories may occur. In addition, as a result of higher
than expected response to the early-out offer, total employee
separations under the restructuring program are expected to
increase to approximately 3,800 employees from the original
estimate of 2,500 employees. Management is in the process of
evaluating whether an additional provision for employee
separations is required. A final determination is expected to be
made in the fourth quarter of 1995 when the majority of the
affected employees are actually separated.
Note 5: Litigation
On June 14, 1995, a U.S. District Court decision was issued in
favor of the Department of Labor against the Corporation and the
Telephone Company. The decision held that the Corporation and
the Telephone Company violated certain sections of the Fair Labor
Standards Act and were liable for back wages and liquidating
damages. A decision assessing the exact amount to be paid to
employees is pending. The Corporation and the Telephone Company
are appealing this decision. The Telephone Company has recorded
a liability of $11.0 million as its anticipated cost of total
damages for this and other litigation matters, which was charged
to operating and maintenance expenses in the second quarter of
1995.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of quarter ended June 30, 1995 vs. quarter ended June 30, 1994
Results of Operations
The Corporation's consolidated net income decreased 11.5% to
$40.1 million or $0.62 per share. Net income included the impact
of three items: a $6.3 million after-tax or $0.10 per share
charge resulting from a court ruling on the Telephone Company's
labor practices and other litigation matters; a $3.6 million
after-tax or $0.06 per share charge for state tax adjustments;
and a $2.4 million after-tax or $0.04 per share gain on the sale
of real estate. Excluding these three items, net income would
have increased 5.1% to $47.6 million or $0.74 per share.
Revenues and Sales
Local service revenues increased $5.7 million, or 3.7%, due
primarily to growth experienced in access lines in service.
Access lines in service grew 2.9% to approximately 2,041,000 at
June 30, 1995 from approximately 1,984,000 at June 30, 1994.
Also contributing to the increase in local service revenues was
an increase in subscriptions to premium services, such as
SmartLink[R]. In addition, revenues from maintenance of inside
wiring for residence customers increased due to increased rates
effective January 1995.
Network access revenues generated primarily from interstate and
intrastate services increased $4.6 million, or 5.2%. Interstate
access revenues increased $1.9 million due primarily to an
increase in interstate minutes of use of approximately 3%.
Partially offsetting the impact of the increase in minutes of use
was a decrease in interstate access tariff rates implemented on
July 1, 1994, in accordance with the Telephone Company's 1994
annual Federal Communications Commission ("FCC") filing under
price cap regulation. In addition, intrastate access revenues
increased $2.7 million due primarily to an increase in intrastate
minutes of use as a result of growth in competition for
intrastate long-distance services.
Intrastate toll revenues, which include revenues primarily from
toll and WATS services, decreased $9.4 million, or 12.4%. Toll
message revenues decreased $7.3 million due primarily to reduced
intrastate toll rates and decreased volume. The decline in rates
was attributable to the introduction of several discount calling
plans in 1994 that provide competitive options to business and
residence customers. Toll message volume decreased 3.2%
primarily as a result of increased competition offset partially
by the migration of customers from WATS services. WATS revenues
decreased $1.4 million due primarily to lower message volume
resulting from the shift to lower priced services and the impact
of competition.
Sales and other revenues, which include sales primarily from the
Corporation's non-telephone businesses, increased $24.5 million,
or 38.6%. Sales of cellular operations increased $10.3 million,
or 44.2%, net of cellular intercompany amounts, due mainly to
strong growth of 80.5% in the customer base as a result of
competitive marketing and pricing strategies. In addition, sales
of SNET America, a reseller of interstate and international long-
distance services to Connecticut customers, increased as a result
of continued growth in the customer base.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of quarter ended June 30, 1995 vs. quarter ended June 30, 1994
Operating and Maintenance
Operating and maintenance expenses are comprised primarily of
employee-related costs, including wages and employee-benefit
costs. Cost of goods sold and general and administrative
expenses, including marketing, represent the remaining portion of
these expenses. On a consolidated basis, operating and
maintenance expenses increased $28.3 million, or 11.9%.
Excluding an $11.0 million before-tax charge resulting primarily
from a court ruling on the Telephone Company's labor practices,
operating and maintenance expenses increased $17.3 million, or
7.3%.
The Telephone Company's operating and maintenance expenses,
excluding the litigation charge, decreased $5.2 million or 2.7%.
Excluding employee-related costs, operating and maintenance
expenses decreased approximately $7 million due primarily to cost-
containment efforts in areas such as contract services and
publishing. Partially offsetting the decrease was an increase in
employee-related costs of approximately $2 million. This
increase was primarily attributable to a 5.0% wage rate increase
for bargaining-unit employees effective October 1994 in
accordance with the 1992 CUTW contract.
The non-telephone businesses' operating and maintenance expenses
increased $22.5 million or 47.3%. Excluding employee-related
costs, cellular operations experienced increased expenses of
approximately $14 million due to costs associated with an
expanding customer base, including additional marketing. Also
contributing to the higher expenses were increased marketing and
operating efforts associated with SNET America and the multimedia
trial. Employee-related costs of the non-telephone businesses
increased approximately $2 million as a result of wage increases
previously mentioned and increases in the average workforce,
particularly in the cellular and long-distance areas.
Depreciation and Amortization
Depreciation and amortization expense increased $2.3 million, or
2.8%. This increase was due primarily to revised depreciation
rate schedules for the Telephone Company's intrastate plant, as
approved by the Connecticut Department of Public Utility Control
("DPUC"), effective January 1, 1995. Higher levels of property,
plant and equipment, including wireless cell sites, also
contributed to the increase.
Income Taxes
The combined federal and state effective tax rate for 1995 was
43.0% compared with 40.1% for 1994. Income taxes in 1995
included a provision to adjust deferred tax balances for the
change in the enacted state income tax rate. The current state
income tax rate of 11.25% will gradually decrease to 7.5% in
2000. The new state income tax rates accelerate the reduction of
rates originally enacted in 1993. The increase was partially
offset by the recognition of an state income tax credit related
to personal property taxes paid on certain data processing
equipment.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of six months ended June 30, 1995 vs. six months ended June 30, 1994
Results of Operations
The Corporation's consolidated net income decreased 2.3% to $86.8
million or $1.34 per share. Net income included the impact of
three items: a $6.3 million after-tax or $0.10 per share charge
resulting from a court ruling on the Telephone Company's labor
practices and other litigation matters; a $3.6 million after-tax
or $0.06 per share charge for state tax adjustments; and a $2.4
million after-tax or $0.04 per share gain on the sale of real
estate. Excluding these three items, net income would have
increased 6.2% to $94.3 million or $1.46 per share.
Revenues and Sales
Local service revenues increased $11.1 million, or 3.6%, due
primarily to growth experienced in access lines in service.
Access lines in service grew 2.9% to approximately 2,041,000 at
June 30, 1995 from approximately 1,984,000 at June 30, 1994.
Also contributing to the increase in local service revenues was
an increase in subscriptions to premium services, such as
SmartLink[R]. In addition, revenues from maintenance of inside
wiring for residence customers increased due to increased rates
effective January 1995.
Network access revenues generated primarily from interstate and
intrastate services increased $9.3 million, or 5.3%. Interstate
access revenues increased $4.4 million due primarily to an
increase in interstate minutes of use of approximately 4%.
Partially offsetting the impact of the increase in minutes of use
was a decrease in interstate access tariff rates implemented on
July 1, 1994, in accordance with the Telephone Company's 1994
annual FCC filing under price cap regulation. In addition,
intrastate access revenues increased $4.9 million due primarily
to an increase in intrastate minutes of use as a result of growth
in competition for intrastate long-distance services.
Intrastate toll revenues, which include revenues primarily from
toll and WATS services, decreased $19.3 million, or 12.5%. Toll
message revenues decreased $14.3 million due primarily to reduced
intrastate toll rates and decreased volume. The decline in rates
was attributable to the introduction of several discount calling
plans in 1994 that provide competitive options to business and
residence customers. Toll message volume decreased 3.8%
primarily as a result of increased competition offset partially
by the migration of customers from WATS services. WATS revenues
decreased $3.6 million due primarily to lower message volume
resulting from the shift to lower priced services and the impact
of competition.
Sales and other revenues, which include sales primarily from the
Corporation's non-telephone businesses, increased $44.3 million,
or 35.7%. Sales of cellular operation increased $18.6 million,
or 41.7%, net of cellular intercompany amounts, due mainly to
strong growth of 80.5% in the customer base as a result of
competitive marketing and pricing strategies. The customer base
is expected to increase significantly as a result of the
acquisitions of cellular properties in the beginning of July
1995. Sales of SNET America, a reseller of interstate and
international long-distance services to Connecticut customers,
also increased as a result of continued growth in the customer
base.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of six months ended June 30, 1995 vs. six months ended June 30, 1994
Operating and Maintenance
Operating and maintenance expenses are comprised primarily of
employee-related costs, including wages and employee-benefit
costs. Cost of goods sold and general and administrative
expenses, including marketing, represent the remaining portion of
these expenses. On a consolidated basis, operating and
maintenance expenses increased $44.5 million, or 9.4%. Excluding
an $11.0 million before-tax charge resulting primarily from a court
ruling on the Telephone Company's labor practices, operating and
maintenance expenses increased $33.5 million, or 7.1%.
The Telephone Company's operating and maintenance expenses,
excluding the litigation charge, decreased $16.4 million or 4.3%.
Excluding employee-related costs, operating and maintenance
expenses decreased approximately $19 million due primarily to
cost-containment efforts in areas such as contract services and
publishing. Partially offsetting the decrease was an increase in
employee-related costs of approximately $3 million. This
increase was primarily attributable to a 5.0% wage rate increase
for bargaining-unit employees effective October 1994 in
accordance with the 1992 CUTW contract, and to a lesser extent,
an average 4.0% salary increase for management employees
effective April 1994. Also contributing to the increase in
employee-related costs was an increase in overtime payments. The
impact of a 1.7% decrease in the average work force partially
offset these increases. Cost savings associated with the
restructuring program are anticipated to continue as additional
employee separations are expected to occur in the latter half of
1995 [see Note 4].
The non-telephone businesses' operating and maintenance expenses
increased $49.9 million or 57.3%. Excluding employee-related
costs, cellular operations experienced increased expenses of
approximately $27 million due to costs associated with an
expanding customer base including additional marketing. Also
contributing to the higher expenses were increased marketing and
operating efforts associated with SNET America and the multimedia
trial. Employee-related costs of the non-telephone businesses
increased approximately $3 million as a result of wage increases
previously mentioned and increases in the average workforce,
particularly in the cellular and long-distance areas.
Depreciation and Amortization
Depreciation and amortization expense increased $5.0 million, or
3.1%. This increase was due primarily to revised depreciation
rate schedules for the Telephone Company's intrastate plant, as
approved by the DPUC, effective January 1, 1995. Higher levels
of property, plant and equipment, including wireless cell sites,
also contributed to the increase. Amortization expense is
expected to include an increase of approximately $10 million in
the second half of 1995 when compared to the same period in 1994
primarily as a result of the amortization of intangible assets
associated with the acquisitions discussed in Note 2.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of six months ended June 30, 1995 vs. six months ended June 30, 1994
Interest Expense
Interest expense decreased $1.8 million, or 4.6% due primarily to
a decrease in average debt outstanding of approximately $92
million. Interest expense is expected to include an increase of
approximately $16 million in the second half of 1995 when
compared to the same period in 1994 primarily as a result of the
financing of the acquisitions discussed in Note 2.
Income Taxes
The combined federal and state effective tax rate for 1995 was
40.9% compared with 40.3% for 1994. Income taxes in 1995
included a provision to adjust deferred tax balances for the
change in the enacted state income tax rate. The current state
income tax rate of 11.25% will gradually decrease to 7.5% in
2000. The new state income tax rates accelerate the reduction of
rates originally enacted in 1993. The increase was partially
offset by the recognition of an state income tax credit related
to personal property taxes paid on certain data processing
equipment.
Comparison of balances as of June 30, 1995 vs. December 31, 1994
Deferred Charges, Leases and Other Assets
Deferred charges, leases and other assets decreased $27.5 million
due primarily to the disposition of intangible assets, associated
with the sale of paging assets [see Note 2], and a decrease in
the Telephone Company's regulatory asset due primarily to the
change in state income tax rates.
Accounts Payable and Accrued Expenses
Accounts payable decreased $22.8 million due primarily to the
timing of payments of accounts payable.
Other Liabilities and Deferred Credits
Other liabilities and deferred credits increased $11.8 million
due primarily to an increase in the Telephone Company's
regulatory liability. This increase was primarily the result of
the change in state income tax rates.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $222.5
million during the six months ended June 30, 1995 as compared
with $191.8 million during the six months ended June 30, 1994.
The primary use of corporate funds continued to be capital
expenditures.
For the six months ended June 30, 1995, cash outlays related to
the Corporation's restructuring charge recorded in December 1993
amounted to $34.5 million. Substantially all of the expenditures
related to incremental costs incurred for executing numerous
reengineering programs during the first half of 1995. These
expenditures were funded from cash flows from operations.
Management anticipates that cash expenditures for the restructuring
program will approximate $120 million, $85 million, and $35
million in 1995, 1996, and 1997, respectively, and will be funded
from operations. The early-out offer will be funded primarily
by the pension and postretirement plans.
The Corporation's ratio of debt to total capitalization increased
to 58.5% at June 30, 1995 compared with 51.0% at December 31,
1994. The increase in the debt ratio is primarily due to the
issuance of short-term debt of $464.0 million, of which $455.6
million was issued to acquire the cellular properties discussed
in Note 2. The repayment of long-term debt of $44.4 million
partially offset the increase in short-term debt. For the second
quarter of 1995, the Corporation's Board of Directors declared a
dividend of $0.44 per share.
The Corporation maintained bank lines of credit to facilitate the
issuance of commercial paper. As part of these credit
facilities, the Corporation has obtained a contractual commitment
to $570.0 million in lines of credit provided by a syndicate of
banks. As of June 30, 1995, the entire $570.0 million was
available.
In July 1995, the Corporation filed a shelf registration
statement with the SEC to sell up to $470.0 million in medium-
term notes. The notes are expected to be issued in the third
quarter of 1995 and the proceeds will be used to establish
permanent financing of the acquisitions discussed in Note 2.
Management believes that the Corporation has adequate internal
and external resources to finance the anticipated requirements of
business development. Capital additions, restructuring costs,
dividends and maturing debt are expected to be funded primarily
with cash from operations during 1995. The Corporation also has
access to external resources including lines of credit and long-
term public financing.
Competition
On May 26, 1994, Public Act 94-83 ("Act") was enacted providing a
new regulatory framework for the Connecticut telecommunications
industry. The Act, which took effect on July 1, 1994, represents
a broad strategic response to the changes facing the
telecommunications industry in Connecticut based on the premise
that broader participation in the Connecticut telecommunications
market will be more beneficial to the public than will broader
regulation. The Act opens Connecticut telecommunications
services to full competition, including local phone service
currently provided primarily by the Telephone Company, and
encourages the DPUC to adopt alternative forms of regulation for
telephone companies, including the Telephone Company's
noncompetitive and emerging competitive services.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The DPUC has conducted, and is conducting, a number of
proceedings, in two phases, to implement the Act. In the
competitive phase, the DPUC is addressing competition in the
areas of: local exchange service; alternative operator services
and customer owned coin operated telephone service; universal
service and lifeline program policy issues; unbundling of local
exchange carriers' ("LECs") local networks; and reclassification
of LECs' products and services into competitive, emerging
competitive and noncompetitive categories. During the
alternative regulation phase, also underway, the Telephone
Company submitted to the DPUC on June 19, 1995 an alternative
regulation plan that will replace rate of return regulation with
price regulation for non-competitive and emerging competitive
services. The plan also indicates that the Telephone Company
will not increase the price of local service before 1998. In
addition, the alternative regulation phase will involve a
complete financial review of the Telephone Company and will
address cost of service, capital recovery and service standards.
At this time, two telecommunication providers have been granted
certificate of public convenience and necessity for local
service. Two additional applications are pending before the
DPUC. Local service competition is expected to begin by the end
of 1995 under the framework resulting from the state regulation
initiatives discussed below.
Since the July 1, 1993 effective date of "10XXX" competition,
over 65 telecommunications providers have received approval from
the DPUC to offer "10XXX" or other competitive intrastate long-
distance services. In addition, over 35 companies have filed
for initial certificates of public convenience and necessity and
are awaiting DPUC approval. Increasing competition in intrastate
long-distance service and the Telephone Company's reduction in
intrastate toll rates will continue to place significant downward
pressure on the Telephone Company's intrastate toll revenues as
will the implementation of intrastate equal access, which is
required to be implemented for all dual preferred interexchange
carrier capable switches no later than December 1, 1996.
Since the introduction of "10XXX" competition, major carriers
have increased their marketing efforts in Connecticut to sell
intrastate long-distance services primarily to residential
customers. In response to major carriers and other competitors'
efforts, the Telephone Company has undertaken a number of
initiatives. The Telephone Company remains focused on providing
excellent customer service and quality products and has made
several changes to its product lines. During the latter part of
1994 and the beginning of 1995, the Telephone Company added
several new discount calling plans to its existing High Volume
Discount Toll service offering. Additionally, the Telephone
Company, working with its affiliate SNET America, realigned its
discount and rate structures to provide the Connecticut customer
with a seamless toll service product line which includes a
discount structure that can be applied to intrastate, interstate
and international calling each month.
Management expects to see continued movement toward a fully
competitive telecommunications marketplace, both on an
interexchange and intraexchange basis. The Telephone Company's
ability to compete is dependent upon regulatory reform that will
allow pricing flexibility to meet competition and provide a level
playing field with similar regulation for similar services and
with reduced regulation to reflect an emerging competitive
marketplace. The Act and regulatory proceedings that flow from
it should produce a telecommunications marketplace in Connecticut
that, by providing equal opportunity to all competitors, will
work to benefit Connecticut consumers.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Regulatory Matters
State Regulation Initiatives
On June 15, 1995, the Telephone Company filed a tariff with the
DPUC to offer unbundled loops and ports and interconnection
arrangements of loops and ports to certified local exchange
providers ("CLECs"). These services provide CLECs with an
opportunity to purchase individual local service functions to
meet their local exchange certification requirements. A final
DPUC decision and offering is expected by the latter part of
1995.
On July 5, 1995, the Telephone Company filed a tariff with the
DPUC to offer wholesale local service and certain related
features. The service provides CLECs with an alternative to
building facilities or constructing a ubiquitous network to meet
their coverage obligations. A final DPUC decision and offering
is expected by the latter part of 1995.
Federal Regulation Initiatives
The FCC adopted an interim plan in 1995 for interstate access
rates requiring the LECs to adopt higher productivity targets
into their rates. The interim plan requires LECs to chose from
among three productivity factors (4.0%, 4.7% or 5.3%). These
factors are subtracted from inflation-based price increases
allowed each year to account for increasing productivity. If
either the 4.0% or 4.7% factor is chosen, LECs must share 50% of
earnings above a 12.25% rate of return. In addition, all
earnings above 13.25% and 16.25%, respectively, will be returned.
If the 5.3% factor is chosen, all earnings can be retained
without sharing. In addition, companies are required to
reinitialize their price cap index ("PCI") on a one-time downward
basis of 0.7% for each year they elected the 3.3% factor up to a
2.8% maximum. The Telephone Company has maintained its selection
of the 3.3% productivity factor each year since entering price
cap regulation in 1991. Accordingly, the Telephone Company is
required to reinitialize its PCI downward by 2.8%. A further
notice will be issued to address price cap changes to respond to
competition.
On May 9, 1995, the Telephone Company filed its 1995 annual
interstate access tariff filing under price cap regulation to
become effective August 1, 1995. The Telephone Company 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
mechanism is invoked. The filing, if approved by the FCC, is
anticipated to decrease interstate network access revenues by
approximately $10 million for the period August 1, 1995 to June
30, 1996. Management expects this decrease to be at least
partially offset by increased demand.
On March 9, 1995, the Telephone Company filed proposed tariffs
with both the FCC and DPUC to establish rates for its market test
of Video Dialtone ("VDT") trial service. Approval of these
tariffs by the respective regulatory agencies will allow the
Telephone Company to charge its customers for services in the
West Hartford area and expanded trial area within Connecticut.
The FCC recently limited its jurisdiction over VDT to the
provision of transport of video communications that have been
transmitted over radio waves or across state lines.
Consequently, the Telephone Company filed a state tariff for
video-on-demand, enhanced pay-per-view and broadcast services
originating within the state. The Telephone Company's tariffs
initially cover analog services based upon currently available
technology. The Telephone Company intends to deploy digital
equipment when technically feasible and economically reasonable.
On June 28, 1995, the DPUC approved the Telephone Company's
tariff for the VDT trial service. FCC approval is expected in
the latter part of 1995.
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
On April 28, 1995, the Telephone Company filed with the FCC an
application to construct, operate, own, and maintain facilities
used to provide commercial VDT service in the State of
Connecticut. The proposed system, if approved, would be
constructed over the next 15 years and would eventually reach all
customers throughout the Telephone Company's service area.
On January 19, 1994, the Telephone Company filed suit in the U.S.
District Court ("Court") in New Haven requesting the Court find
that the Cable Communications Policy Act of 1984 violates the
Telephone Company's First and Fifth Amendment rights. On April
28, 1995, the Court ruled in favor of the Telephone Company,
pending further court actions, by allowing the Telephone Company
to provide in-territory cable programming and to own more than 5%
of any company that provides cable programming in its local
service area.
Effects of Regulatory Accounting
The Telephone Company gives accounting recognition to the actions
of regulatory authorities where appropriate, as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 71
"Accounting for the Effects of Certain Types of Regulation."
Under SFAS No. 71, the Telephone Company records certain assets
and liabilities because of actions of regulatory authorities.
More significantly, amounts charged to operations for
depreciation expense reflect estimated lives and methods
prescribed by regulatory authorities rather than those consisting
of useful and economic lives that might otherwise apply to
unregulated enterprises. In the event that the Telephone Company
no longer meets the criteria for following SFAS No. 71, the
accounting impact to the Corporation would be an extraordinary
non-cash charge to operations of a material amount. The Telephone
Company continues to review the criteria set forth in SFAS No. 71
and has determined that the continuing application of the
regulatory accounting standard is appropriate at this time.
Employee Relations
On April 21, 1995, a new labor contract was ratified by members
of the CUTW. As part of the new contract, a voluntary "early-out
offer" was available to bargaining-unit employees during July
1995 and subsequent dates, when considered necessary, during the
life of the contract. The early-out offer provides additional
incentives in the form of enhanced pension benefits. Bargaining-
unit employees leaving under the offer will receive increased
pensions of between 35% and 45%. CUTW members who remain with the
Corporation will receive a 4.0% wage rate increase in January
1996 and a 3.0% wage rate increase in both January 1997 and
January 1998. In addition, the contract also provides a sign-on
bonus and health benefit and pension enhancements. The new
agreement replaced the existing contract which was scheduled to
expire on August 5, 1995 and will be in effect until August 8,
1998. The contract is intended to keep layoffs to a minimum
while enabling the Corporation to position itself to meet
increasing competition through downsizing efforts.
Form 10-Q - Part II Southern New England Telecommunications Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the second quarter of 1995.
Item 4. Submission of Matters to a Vote of Security Holders
On May 10, 1995, the Corporation held its Annual Meeting of
Shareholders ("Annual Meeting").
(a) The following persons, having received the FOR votes set opposite
their respective names, constituting in excess of a majority of the
votes cast at the Annual Meeting for the election of Directors,
were duly elected Class III Directors for a term of three years:
Directors For Withheld
Richard H. Ayers 53,173,185 1,392,158
Frank J. Connor 53,194,294 1,371,049
Ira D. Hall 53,003,365 1,561,978
Dr. Burton G. Malkiel 53,104,881 1,460,462
Frank R. O'Keefe, Jr. 53,108,120 1,457,223
The terms of office of the following Directors continued after the
Annual Meeting: Dr. Frederick G. Adams, William F. Andrews,
Zoe Baird, Robert L. Bennett, Dr. Barry M. Bloom, William R.
Fenoglio, Dr. Claire L. Gaudiani, James R. Greenfield, Daniel J.
Miglio.
(b) Shareholders ratified the appointment of Coopers & Lybrand, L.L.P.,
as independent public accountants, to examine the consolidated
financial statements of the Corporation for the current year ending
December 31, 1995. The vote was 53,404,018 shares FOR and 751,268
shares AGAINST, with 410,057 shares abstaining.
(c) Shareholders approved the establishment of the 1995 Stock Incentive
Plan. The vote was 39,180,944 shares FOR and 9,623,737 shares
AGAINST, with 1,208,783 shares abstaining and 4,551,879 broker
non-votes.
Form 10-Q - Part II Southern New England Telecommunications Corporation
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibit
(27) Financial Data Schedule
(b) Reports on Form 8-K
On April 21, 1995, the Corporation and the Telephone Company
filed, separately, reports on Form 8-K, dated April 20, 1995
announcing the Corporation's financial results for the first
quarter of 1995.
On May 19, 1995, the Corporation and the Telephone Company
filed, separately, reports on Form 8-K, dated May 18, 1995,
announcing that the Telephone Company gave notice of intent to file
with the DPUC an application for approval of a plan for alternative
regulation. The filing will also include financial data to enable
the DPUC to conduct a financial review of the Telephone Company.
The Telephone Company stated that it is not seeking to increase the
price of local service.
On July 5, 1995, the Corporation filed a report on Form 8-K, dated
July 1, 1995, announcing the completion of the acquisitions of
cellular properties that include all of the Rhode Island and the
New Bedford, Massachusetts areas formerly owned by Bell Atlantic
as well as the Pittsfield, Massachusetts market, 80 percent of
which was owned by NYNEX, and the 16.1 percent interest that
NYNEX held in a cellular partnership that serves all of Connecticut
and the Springfield, Massachusetts area. The registrant also reached
an agreement with the Richmond Telephone Company to purchase the
remaining 20 percent of the Pittsfield market.
On July 25, 1995, the Corporation and the Telephone Company
filed, separately, reports on Form 8-K, dated July 24, 1995
announcing the Corporation's financial results for the second
quarter of 1995.
On August 3, 1995, the Corporation filed a report on Form 8-K,
dated August 2, 1995 commenting on the estimated impact of
recent developments on operating results including the acceptance
of an early-out offer by 2,660 bargaining-unit employees and the
acquisition of cellular properties on July 1, 1995. The impact of
the early-out offer will not have a material impact on 1995
operating earnings and the 1993 restructuring charge may be
adjusted in the fourth quarter of this year when the costs
of the current offer are definitively known. The impact
of the cellular acquisitions will dilute 1995 earnings by
approximately 12 percent.
Form 10-Q - Part II Southern New England Telecommunications Corporation
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.
Southern New England Telecommunications Corporation
August 10, 1995
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller