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 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
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 .
Common stock, par value $1.00 per share: 65,481,898 shares
outstanding as of July 31, 1996
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
offices 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 management, include all adjustments, consisting 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
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 1995 Annual Report on Form 10-K.
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three For the Six
Months Ended Months Ended
Dollars in Millions, Except June 30, June 30,
Per Share Amounts 1996 1995 1996 1995
Revenues and Sales $ 487.8 $ 447.5 $ 961.8 $ 887.9
Costs and Expenses
Operating 201.4 174.7 382.2 339.9
Maintenance 84.5 88.9 172.4 173.5
Depreciation and amortization 88.2 83.6 177.4 167.0
Taxes other than income 13.5 14.3 27.5 27.8
Total Costs and Expenses 387.6 361.5 759.5 708.2
Operating Income 100.2 86.0 202.3 179.7
Interest expense 22.7 19.0 45.3 37.0
Other income, net 2.1 3.3 5.8 4.2
Income Before Income Taxes 79.6 70.3 162.8 146.9
Income taxes 29.1 30.2 60.1 60.1
Net Income $ 50.5 $ 40.1 $ 102.7 $ 86.8
Weighted Average Common Shares
Outstanding (in thousands) 65,626 64,800 65,505 64,721
Earnings Per Share $ .77 $ .62 $ 1.57 $ 1.34
Dividends Declared Per Share* $ .44 $ .44 $ .88 $ .88
The accompanying notes are an integral part of these financial statements.
* The first and second quarter 1996 dividends were declared out of proceeds
in excess of par value.
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Per Share June 30, 1996 December 31, 1995
Amounts
(Unaudited)
Assets
Cash and temporary cash investments $ 11.8 $ 11.1
Accounts receivable, net of allowance
for uncollectibles of $38.9 and $34.2,
at each period end 337.6 347.3
Materials, supplies and inventories 28.3 26.1
Prepaid publishing 34.8 37.3
Deferred income taxes 63.9 66.8
Other current assets 53.9 46.3
Total Current Assets 530.3 534.9
Property, plant, and equipment, at cost 4,619.8 4,532.1
Less: Accumulated depreciation 3,078.5 2,966.9
Property, Plant and Equipment, net 1,541.3 1,565.2
Intangible assets, net 406.9 414.9
Deferred income taxes 90.9 92.0
Deferred charges, leases and other assets 114.4 117.2
Total Assets $2,683.8 $2,724.2
Liabilities and Shareholders' Equity
Short-term debt $ 198.9 $ 232.2
Accounts payable and accrued expenses 237.4 261.9
Restructuring charge - current 48.1 59.0
Advance billings and customer deposits 56.5 58.0
Accrued compensated absences 36.7 36.6
Other current liabilities 89.4 87.9
Total Current Liabilities 667.0 735.6
Long-term debt 1,174.3 1,182.4
Accrued postretirement benefit
obligation 313.2 310.8
Restructuring charge - long-term 9.0 18.0
Unamortized investment tax credits 16.5 17.6
Other liabilities and deferred credits 87.6 106.9
Total Liabilities 2,267.6 2,371.3
Common stock; $1.00 par value;
300,000,000 shares authorized;
68,147,090 and 67,881,159 issued,
respectively 68.2 67.9
Proceeds in excess of par value * 650.7 697.9
Retained deficit (146.3) (249.5)
Less: Treasury stock; 2,758,512
shares, at cost (104.7) (104.7)
Unearned compensation related
to ESOP (51.7) (58.7)
Total Shareholders' Equity 416.2 352.9
Total Liabilities and Shareholders'
Equity $2,683.8 $2,724.2
The accompanying notes are an integral part of these financial statements.
* The first and second quarter 1996 dividends were declared out of proceeds
in excess of par value.
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
Dollars in Millions 1996 1995 1996 1995
Common Stock, Par Value
Balance at Beginning of Period $ 68.0 $ 67.4 $ 67.9 $ 67.3
Common shares issued, at market:
Dividend reinvestment plan .1 .1 .2 .2
Savings and incentive plans .1 .1 .1 .1
Balance at End of Period $ 68.2 $ 67.6 $ 68.2 $ 67.6
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 674.3 $ 682.8 $ 697.9 $ 677.8
Dividends declared * (28.8) - (57.5) -
Common shares issued, at market:
Dividend reinvestment plan 3.7 3.6 7.2 7.4
Savings and incentive plans 1.5 1.5 3.1 2.7
Balance at End of Period $ 650.7 $ 687.9 $ 650.7 $ 687.9
Retained (Deficit) Earnings
Balance at Beginning of Period $(197.0) $ 400.4 $(249.5) $ 381.8
Net income 50.5 40.1 102.7 86.8
Dividends declared * - (28.6) - (57.0)
Tax benefit of dividends declared
on unallocated shares held in ESOP .2 .3 .5 .6
Balance at End of Period $(146.3) $ 412.2 $(146.3) $ 412.2
Treasury Stock
Balance at Beginning and End
of Period $(104.7) $(104.7) $(104.7) $(104.7)
Unearned Compensation Related To
Employee Stock Ownership Plan
Balance at Beginning of Period $ (55.3) $ (66.9) $ (58.7) $ (69.3)
Reduction of ESOP debt - - 7.6 7.1
ESOP earned compensation accrual 3.6 3.5 (.6) (1.2)
Balance at End of Period $ (51.7) $ (63.4) $ (51.7) $ (63.4)
Total Shareholders' Equity $ 416.2 $ 999.6 $ 416.2 $ 999.6
The accompanying notes are an integral part of these financial statements.
* The first and second quarter 1996 dividends were declared out of proceeds
in excess of par value.
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
Dollars in Millions 1996 1995
Operating Activities
Net income $ 102.7 $ 86.8
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 177.4 167.0
Restructuring payments (43.5) (36.2)
Change in operating assets and
liabilities, net (28.0) (7.2)
Other, net 19.8 12.1
Net Cash Provided by Operating Activities 228.4 222.5
Investing Activities
Cash expended for capital additions (152.5) (164.9)
Repayment of loan made to ESOP .5 .5
Other, net 17.1 34.8
Net Cash Used by Investing Activities (134.9) (129.6)
Financing Activities
Net (payments) proceeds of short-term debt (33.7) 464.0
Repayments of long-term debt (9.1) (44.4)
Cash dividends (50.0) (49.1)
Net Cash (Used) Provided by Financing
Activities (92.8) 370.5
Increase in Cash and Temporary Cash Investments .7 463.4
Cash and temporary cash investments at
beginning of period 11.1 6.7
Cash and Temporary Cash Investments at
End of Period $ 11.8 $ 470.1
Income Taxes Paid $ 42.5 $ 33.6
Interest Paid $ 49.0 $ 38.7
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
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 1: Restructuring Charge
In December 1993, the Corporation recorded a restructuring charge
of $355.0 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 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 and 1995 are summarized as follows:
Costs Costs
Balance incurred incurred Balance
at Dec. 31, during during at Dec. 31,
1993 1994 1995 1995
Employee separation costs $170.0 $41.8 $111.2 $17.0
Process and systems reengineering 145.0 35.0 74.2 35.8
Exit and other costs 40.0 13.3 2.5 24.2
Total $355.0 $90.1 $187.9 $77.0
The Corporation 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) $(13.9) $ (9.6)
Process and systems reengineering 13.8 27.2
Exit and other costs 1.3 2.3
Total Costs Incurred $ 1.2 $ 19.9
Costs incurred for employee separations included payments for
severance, unused compensated absences and 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 2,700 employees
accepted the offer and left the Corporation through June 1996.
Net settlement gains of $23.6 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 450 management employees accepted a severance plan
during 1996. To date, approximately 350 employees have left the
Corporation 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 Corporation has not yet quantified the
additional net settlement gain.
Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 1: Restructuring Charge (continued)
Total employee separations under the restructuring program are
expected to approximate 4,250 employees. As of June 30, 1996,
approximately 4,150 employees had left the Corporation under the
restructuring program: 970 employees left under severance plans
through the end of 1994, 2,195 employees left primarily under the
EOO in 1995 and 985 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 and growth in the business.
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
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 occurring through
June 1996. After full implementation of the restructuring
program, the Corporation 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 Corporation 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 $57.1 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 Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 2: Supplemental Financial Information
Operating Earnings(1) - The following unaudited financial data on
the Corporation's product groups is voluntary and it is provided
for informational purposes only:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Wireline $146.6 $131.7 $300.9 $276.2
Wireless 10.2 .7 12.2 (1.8)
Information and Entertainment 28.3 26.9 55.0 53.7
Other(2) 3.3 10.3 11.6 18.6
Total(3) $188.4 $169.6 $379.7 $346.7
(1) Represents earnings before interest, taxes, depreciation and
amortization. Operating earnings is not a generally accepted
accounting principle measurement.
(2) Includes real estate and holding company operations and
eliminations.
(3) Operating earnings, normalized to exclude a special item, was
$180.6 and $357.7 for the three and six month periods ended
June 30, 1995, respectively. The special item was an $11.0
before-tax charge for litigation matters recorded by the
Wireline product group.
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Southern New England Telecommunications Corporation has business
units in the following telecommunications product groups:
wireline; wireless; and information and entertainment. Wireline
includes telephone related services, premium services and
equipment sales. Wireless consists of cellular and paging
services; and information and entertainment includes publishing,
internet and multimedia services. Other activities, such as real
estate and holding company operations, and eliminations are
included in other.
Comparison of the periods ended June 30, 1996 vs. the periods
ended June 30, 1995
Operating Results
Net income was $50.5, or $.77 per share, and $102.7, or $1.57
per share, for the three and six months ended June 30, 1996,
respectively. The corresponding periods in 1995 generated net
income of $40.1, or $.62 per share, and $86.8, or $1.34 per
share. Net income for 1996 was partially offset by a $.07 and
$.18 per share dilutive impact for the three and six month
periods, respectively, related to cellular acquisitions that
were completed in July 1995. Net income for both periods of
1995 was partially offset by an $11.0 charge, $6.3 or $.10 per
share after-tax, associated primarily with a court ruling on The
Southern New England Telephone Company's ("Telephone Company")
labor practices.
Revenues and Sales
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Wireline
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
Interstate and
international toll 24.4 9.3 42.4 16.1
Premium services and
equipment sales 24.6 27.4 50.2 54.0
Other revenues 12.4 11.7 26.8 25.8
Total Wireline 391.6 367.9 777.7 733.4
Wireless
Cellular 54.8 34.2 100.8 64.3
Paging 1.6 4.5 3.0 8.8
Total Wireless 56.4 38.7 103.8 73.1
Information and Entertainment 46.1 45.5 92.1 90.1
Other (6.3) (4.6) (11.8) (8.7)
Total Revenues and Sales $487.8 $447.5 $961.8 $887.9
Wireline - Local service revenues, derived from providing local
exchange, public telephone and local private line services,
increased $8.5, or 5.3%, and $15.8, or 5.0%, for the three and
six month periods, respectively. The increases were due
primarily to growth of 3.3% in access lines in service to
approximately 2,109,000 lines as of June 30, 1996. These
increases 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
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of the periods ended June 30, 1996 vs. the periods
ended June 30, 1995
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 $4.1, or 4.4%, and $9.6, or 5.2%,
for the three and six month periods, respectively. Interstate
access revenues increased $2.5, or 2.8%, for the quarter, and
$6.1, or 3.5%, for the six month period, due primarily to growth
in interstate minutes of use of approximately 7% and 8%,
respectively, 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 $1.6 for the quarter and $3.5 for the
six month period, 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 $1.9, or 2.9%, and $4.6, or
3.4%, for the three and six month periods, respectively. Toll
message revenues decreased $2.3 and $4.4 for the same periods.
The decreases were due primarily to reduced intrastate toll
rates, offset partially by increases in toll message volume of
2.4% for the quarter and 4.3% for the six month period. 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 competitive toll market. The offering of
competitive discount calling plans and the implementation of
intrastate equal access by November 1996 will continue to place
downward pressure on intrastate toll revenues.
Interstate and international toll services provided to
Connecticut based customers increased significantly as the
customer base more than tripled within one year. Customers
continue to migrate to the SNET All Distance[SM] product line
which allows Connecticut customers to package their entire long-
distance calling into one competitively priced calling plan.
Wireless - For the three and six month periods, cellular
wholesale and retail sales increased $20.6, or 60.2%, and $36.5,
or 56.8%, respectively, due mainly to the impact of the cellular
acquisitions completed in July 1995. Also contributing to the
increase in cellular sales was strong growth of 37.4% in the
preacquisition subscriber base in response to competitive
marketing and pricing strategies. Including the new subscribers
from the expanded cellular coverage area, the subscriber base
increased 77.9%. Average usage per subscriber continued to
decline in 1996, in line with a nationwide trend, as lower
volume users made up a larger portion of the subscriber base.
Paging sales decreased as a result of the sale of substantially
all of the paging network assets and certain accounts in June
1995. Wireless retained certain paging retail accounts and will
continue as a reseller to market paging services under its Page
2000[R] brand name.
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of the periods ended June 30, 1996 vs. the periods
ended June 30, 1995
Information and Entertainment - Growth in Yellow Pages advertising
and internet sales were the primary contributors to the increase
in information and entertainment sales.
Costs and Expenses
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Operating $201.4 $174.7 $382.2 $339.9
Maintenance 84.5 88.9 172.4 173.5
Total operating costs 285.9 263.6 554.6 513.4
Depreciation and amortization 88.2 83.6 177.4 167.0
Taxes other than income 13.5 14.3 27.5 27.8
Total Costs and Expenses $387.6 $361.5 $759.5 $708.2
Operating costs - Operating costs consist primarily of employee-
related expenses, including wages and benefits. Cost of goods
sold and general and administrative expenses, including
marketing, represent the remaining portion of these expenses.
Total operating costs increased $22.3, or 8.5%, for the quarter,
and $41.2, or 8.0%, for the six month period.
Wireline - For the three and six month periods, wireline
operating costs increased $10.5, or 4.7%, and $21.4, or 5.0%,
respectively. Excluding the $11.0 litigation charge in 1995,
operating costs for those periods increased $21.5 and $32.4,
respectively, due primarily to an increase in the direct costs
of providing interstate and international toll services.
Additionally, increases occurred in contracted services, due in
part to certain outsourcing initiatives, and in advertising.
Partially offsetting these increases was a reduction in employee-
related expenses as a result of a smaller work force. The
Telephone Company's wireline work force decreased to 7,899
employees at June 30, 1996, compared with 8,706 employees at
June 30, 1995, due primarily to the EOO and severance plans
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.
Wireless - For the three and six month periods, wireless
operating costs increased $7.6, or 20.2%, and $15.7, or 21.2%,
respectively, due primarily to costs related to the expanded
cellular area and the increasing preacquisition subscriber base.
Partially offsetting these increases was a reduction in roaming
fraud as a result of preventive control programs. Operating
costs also decreased due to the impact from the sale of
substantially all the paging network assets in June 1995.
Information and Entertainment - Information and entertainment
operating costs decreased 4.3% for the quarter as the
discontinuance of the video dial tone trial was offset partially
by development costs associated with SNET Personal Vision, Inc.
("Personal Vision") and start-up costs of providing internet
service. For the six month period, operating costs increased
1.9% due to the increasing costs of providing internet service
and cable television development costs.
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of the periods ended June 30, 1996 vs. the periods
ended June 30, 1995
Depreciation and Amortization - Depreciation and amortization
expense increased $4.6, or 5.5%, and $10.4, or 6.2%, for the
three and six month periods, respectively. The increases were
due primarily to amortization expense on intangible assets,
mainly cellular licenses, acquired in the cellular acquisitions.
Such amortization expense approximated $4 and $8 for the three
and six month periods, respectively. An increase in the average
depreciable telecommunications property, plant and equipment,
mainly cell sites, also contributed to the increase in
depreciation and amortization expense.
Interest Expense
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Interest expense $22.7 $19.0 $45.3 $37.0
Interest expense increased due primarily to the issuance of
commercial paper and medium-term notes in connection with the
cellular acquisitions. Interest on the financing of the
cellular acquisitions approximated $7 for the quarter and $15
for the six month period. These increases were partially offset
by interest savings realized from repayment of debt in June 1995
related to paging and real estate operations and by reporting
capitalized interest as a cost of telecommunications 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 Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Income taxes $29.1 $30.2 $60.1 $60.1
The combined federal and state effective tax rate for the
quarter was 36.6% compared with 43.0% for the same period in
1995. The tax rate for the six month period decreased to 36.9%
from 40.9% for the respective 1995 period. 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.
Comparison of balances as of June 30, 1996 vs. December 31, 1995
Short-term Debt
Short-term debt decreased $33.3 due to the pay-down on
commercial paper outstanding as a result of an improved cash
position.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses decreased $24.5 due to
timing of payments of accounts payable.
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
Comparison of balances as of June 30, 1996 vs. December 31, 1995
Other Liabilities and Deferred Credits
Other liabilities and deferred credits decreased $19.3 due
primarily to recognition of a pension settlement gain associated
with the EOO which decreased the accrued pension liability.
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $228.4
during the six months ended June 30, 1996 as compared with
$222.5 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 Corporation's restructuring charge totaled $43.5. 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.
The Corporation's ratio of debt to total capitalization
decreased to 76.7% at June 30, 1996 compared with 80.0% at year-
end 1995. For the second quarter of 1996, the Corporation's
Board of Directors declared a dividend of $.44 per share from
proceeds in excess of par value.
Management believes that the Corporation has sufficient 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 1996. The
Corporation also has access to external resources including
lines of credit and long-term shelf registration commitments.
WIRELINE
Competition
Wireline (primarily 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
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.
Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
To provide competitive products, Wireline 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 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.
Concerning competition for local exchange service, eleven
telecommunications providers have been granted certificates 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.
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 its 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
Form 10-Q - Part I & II Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
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 Corporation 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.
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
rates 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.
INFORMATION AND ENTERTAINMENT
On August 2, 1996, the DPUC, in a draft decision, approved
Personal Vision's application for a certificate of public
convenience and necessity to operate a community antenna
television system that would serve the entire state of
Connecticut. A final decision is anticipated by the end of the
third quarter of 1996 with service expected to begin in January
1997.
On June 18, 1996, Personal Vision signed a letter of intent to
join the Americast partnership. The partnership will provide
Personal Vision the full range of americast[TM] programming and
marketing services and access to the joint venture's innovative
technology. The americast service is expected to be launched in
Connecticut in early 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the second quarter of 1996.
Form 10-Q - Part II Southern New England Telecommunications Corporation
Item 4. Submission of Matters to a Vote of Security Holders
On May 8, 1996, the Corporation held its Annual Meeting
of Shareholders ("Annual Meeting").
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 I
Directors for a term of three years:
(a) Directors For Withheld
William F. Andrews 51,682,071 1,086,573
Barry M. Bloom 51,711,663 1,056,981
William R. Fenoglio 51,728,378 1,040,266
Dr. Claire L. Gaudiani 51,642,712 1,125,932
Daniel J. Miglio 51,268,974 1,499,670
The terms of office of the following Directors continued
after the Annual Meeting: Richard H. Ayers, Zoe Baird,
Robert L. Bennett, Frank J. Connor, James R. Greenfield,
Ira D. Hall, Dr. Burton G. Malkiel, Frank R. O'Keefe, Jr.
(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,
1996. The vote was 51,853,317 shares FOR and 590,321
shares AGAINST, with 325,006 shares abstaining.
(c) Shareholders approved the establishment of the 1996 Non-
Employee Director Stock Plan. The vote was 48,040,543
shares FOR and 3,755,215 shares AGAINST, with 972,885
shares abstaining.
(d) Shareholders rejected the shareholder proposal to
eliminate the classified board. The vote was 16,706,663
shares FOR and 29,269,263 shares AGAINST, with 1,712,348
shares abstaining and 5,080,470 broker non-votes.
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 Corporation and the Telephone
Company filed, separately, reports 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 Corporation and the Telephone
Company filed, separately, reports 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 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 8, 1996
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer