UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
Common stock, par value $1.00 per share: 65,629,020 shares
outstanding as of October 31, 1996.
- 1 -
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, which are normal
and recurring in nature, necessary for fair presentation for each
period shown. The 1995 financial statements have been
reclassified to conform to the current year presentation.
Certain information and footnote disclosures normally included in
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.
- 2 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
Dollars in Millions, Except 1996 1995 1996 1995
Per Share Amounts
Revenues and Sales $ 488.2 $ 464.9 $ 1,450.0 $ 1,352.8
Costs and Expenses
Operating 205.8 194.2 588.0 534.1
Maintenance 89.5 84.3 261.9 257.8
Depreciation and amortization 88.5 88.3 265.9 255.3
Taxes other than income 13.9 14.7 41.4 42.5
Total Costs and Expenses 397.7 381.5 1,157.2 1,089.7
Operating Income 90.5 83.4 292.8 263.1
Interest expense 21.9 24.3 67.2 61.3
Other income, net .4 5.5 6.2 9.7
Income Before Income Taxes 69.0 64.6 231.8 211.5
Income taxes 23.2 23.3 83.3 83.4
Net Income $ 45.8 $ 41.3 $ 148.5 $ 128.1
Weighted Average Common Shares
Outstanding (in thousands) 65,606 64,957 65,539 64,800
Earnings Per Share $ .70 $ .64 $ 2.27 $ 1.98
Dividends Declared Per Share * $ .44 $ .44 $ 1.32 $ 1.32
The accompanying notes are an integral part of these financial statements.
* The 1996 dividends were declared out of proceeds in excess of par value.
- 3 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except
Per Share Amounts September 30, 1996 December 31, 1995
(Unaudited)
Assets
Cash and temporary cash investments $ 13.1 $ 11.1
Accounts receivable, net of allowance for
uncollectibles of $35.9 and $34.2,
respectively 336.6 347.3
Materials, supplies and inventories 26.6 26.1
Prepaid publishing 33.7 37.3
Deferred income taxes 73.3 66.8
Other current assets 38.6 46.3
Total Current Assets 521.9 534.9
Property, plant and equipment, at cost 4,671.0 4,532.1
Less: Accumulated depreciation 3,120.1 2,966.9
Property, Plant and Equipment, net 1,550.9 1,565.2
Intangible assets, net 404.5 414.9
Deferred income taxes 92.1 92.0
Deferred charges, leases and other assets 112.4 117.2
Total Assets $2,681.8 $2,724.2
Liabilities and Shareholders' Equity
Short-term debt $ 187.3 $ 232.2
Accounts payable and accrued expenses 226.7 261.9
Restructuring charge - current 71.1 59.0
Advance billings and customer deposits 62.2 58.0
Accrued compensated absences 36.9 36.6
Other current liabilities 95.4 87.9
Total Current Liabilities 679.6 735.6
Long-term debt 1,169.7 1,182.4
Accrued postretirement benefit obligation 313.2 310.8
Restructuring charge - long-term 17.0 18.0
Unamortized investment tax credits 16.0 17.6
Other liabilities and deferred credits 45.5 106.9
Total Liabilities 2,241.0 2,371.3
Common stock; $1.00 par value; 300,000,000
shares authorized; 68,267,999 and
67,881,159 issued, respectively 68.3 67.9
Proceeds in excess of par value * 626.7 697.9
Retained deficit (100.3) (249.5)
Less: Treasury stock; 2,758,512 shares,
at cost (104.7) (104.7)
Unearned compensation related to ESOP (49.2) (58.7)
Total Shareholders' Equity 440.8 352.9
Total Liabilities and Shareholders'Equity $2,681.8 $2,724.2
The accompanying notes are an integral part of these financial statements.
* The 1996 dividends were declared out of proceeds in excess of par value.
- 4 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
Dollars in Millions 1996 1995 1996 1995
Common Stock, Par Value
Balance at Beginning of Period $ 68.2 $ 67.6 $ 67.9 $ 67.3
Common shares issued, at market:
Dividend reinvestment plan .1 .1 .3 .3
Savings and incentive plans - - .1 .1
Balance at End of Period $ 68.3 $ 67.7 $ 68.3 $ 67.7
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 650.7 $ 687.9 $ 697.9 $ 677.8
Dividends declared * (28.8) - (86.3) -
Common shares issued, at market:
Dividend reinvestment plan 3.6 4.0 10.8 11.4
Savings and incentive plans 1.2 - 4.3 2.7
Balance at End of Period $ 626.7 $ 691.9 $ 626.7 $ 691.9
Retained (Deficit) Earnings
Balance at Beginning of Period $(146.3) $ 412.2 $ (249.5) $ 381.8
Net income 45.8 41.3 148.5 128.1
Dividends declared * - (28.5) - (85.5)
Tax benefit of dividends declared
on unallocated shares held
in ESOP .2 .3 .7 .9
Balance at End of Period $(100.3) $ 425.3 $ (100.3) $ 425.3
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 $ (51.7) $ (63.4) $ (58.7) $ (69.3)
Reduction of ESOP debt 4.5 4.0 12.1 11.1
ESOP earned compensation accrual (2.0) (1.1) (2.6) (2.3)
Balance at End of Period $ (49.2) $ (60.5) $ (49.2) $ (60.5)
Total Shareholders' Equity $ 440.8 $1,019.7 $ 440.8 $1,019.7
The accompanying notes are an integral part of these financial statements.
* The 1996 dividends were declared out of proceeds in excess of par value.
- 5 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
Dollars in Millions 1996 1995
Operating Activities
Net income $ 148.5 $ 128.1
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 265.9 255.3
Restructuring payments (57.9) (62.7)
Change in operating assets and liabilities, net (34.1) (5.2)
Other, net 27.6 27.3
Net Cash Provided by Operating Activities 350.0 342.8
Investing Activities
Cash expended for capital additions (234.6) (248.6)
Repayment of loan made to ESOP 1.0 .9
Purchase of cellular properties - (455.6)
Proceeds from asset sales 6.9 65.1
Other, net 10.0 3.7
Net Cash Used by Investing Activities (216.7) (634.5)
Financing Activities
Net (payments) proceeds of short-term debt (25.9) 152.3
Proceeds from long-term debt - 300.0
Repayments of long-term debt (30.4) (65.9)
Cash dividends paid (75.0) (73.4)
Other, net - (2.3)
Net Cash (Used) Provided by Financing Activities (131.3) 310.7
Increase in Cash and Temporary Cash Investments 2.0 19.0
Cash and temporary cash investments at
beginning of period 11.1 6.7
Cash and Temporary Cash Investments at
End of Period $ 13.1 $ 25.7
Income Taxes Paid $ 61.5 $ 63.6
Interest Paid $ 74.7 $ 56.4
The accompanying notes are an integral part of these financial statements.
- 6 -
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 are
summarized as follows:
Balance Costs Costs Costs Balance
at incurred incurred incurred at
Dec. 31, during during during Sept. 30,
1993 1994 1995 1996 1996
Employee separation
costs $170.0 $(41.8) $(111.2) $ 51.1 $ 68.1
Process and systems
reengineering 145.0 (35.0) (74.2) (36.4) (0.6)
Exit and other costs 40.0 (13.3) (2.5) (3.6) 20.6
Total $355.0 $(90.1) $(187.9) $ 11.1 $ 88.1
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 lump-sum pension payments made for
employee separations during the quarter. A settlement gain of
$21.0 was also recorded in the third quarter 1996 to account for
the remaining settlement gains resulting from the EOO. In
addition, approximately 450 management employees accepted a
severance plan with enhanced benefits during 1996. Approximately
420 management employees have left the Corporation under this
plan through September 30, 1996. As a result, a net settlement
gain of $24.4 was recorded in the third quarter 1996.
Total employee separations under the restructuring program are
expected to approximate 4,300 employees. As of September 30,
1996, approximately 4,230 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 1,065 employees left under
the EOO and severance plans through the nine months of 1996.
Total employee separations to date were offset substantially by
an increase in provisional employees to support greater demand
for services.
- 7 -
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)
As a result of employee separations since September 30, 1995,
employee-related expenses for the first nine months of 1996 were
reduced by approximately $50 compared with the first nine months
of 1995, net of costs for provisional employees. Beginning in
1997, the Corporation anticipates annual savings of approximately
$100 from reduced employee-related expenses, net of costs for
provisional employees. These anticipated savings will also be
offset by growth in the business.
Cash expenditures for the restructuring program are estimated to
be $70 in 1996. The EOO was funded primarily by the pension and
postretirement plans. Incremental capital expenditures related
to the restructuring program approximated $14 in the first nine
months of 1996. These items were recorded in property, plant and
equipment and will result in increased depreciation expense in
future years. The Corporation currently anticipates total
incremental capital expenditures of approximately $20 in 1996
under the restructuring program.
Certain process improvement and reengineering programs have been
redesigned due to business changes and will extend into 1997. In
addition, shifts within reserve categories are expected to occur
in the fourth quarter 1996. Management believes that the total
restructuring reserve balance of $88.1 as of September 30, 1996
is adequate for future estimated costs under the restructuring
program.
Note 2: Subsequent Event
On October 22, 1996, the Corporation announced that it will
acquire the remaining 63.5% of Woodbury Telephone Company
("Woodbury") which it does not already own for an aggregate
consideration of approximately $30. Under the terms of the
agreement, common shareholders of Woodbury will exchange each
outstanding Woodbury common share for an amount of SNET common
shares having a market value of $43 per share at the closing of
the transaction, subject to certain conditions. The acquisition
will be accounted for as a purchase, and is expected to close in
mid-1997, pending approval by Woodbury shareholders and
regulatory agencies. Woodbury has approximately 19,000 access
lines, all in Connecticut, and reported 1995 net income of $1.8
on $12.6 in revenue.
- 8 -
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 3: Supplemental Financial Information
Operating Earnings(1) The following unaudited financial data on
the Corporation's product groups is voluntary and is provided for
informational purposes only:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
Wireline $135.7 $140.7 $436.6 $416.9
Wireless 11.2 (4.5) 23.4 (6.3)
Information and Entertainment 30.0 24.3 85.0 78.0
Other(2) 2.1 11.2 13.7 29.8
Total $179.0 $171.7 $558.7 $518.4(3)
(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 an $11.0 before-tax
charge for litigation matters recorded by the Wireline product group,
was $529.4 for the nine month period ended September 30, 1995.
- 9 -
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 services and
equipment sales 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 September 30, 1996 vs. the
periods ended September 30, 1995
Operating Results
Net income was $45.8, or $.70 per share, and $148.5, or $2.27
per share, for the three and nine months ended September 30,
1996, respectively. The corresponding periods in 1995 generated
net income of $41.3, or $.64 per share, and $128.1, or $1.98 per
share. Net income for the nine month period of 1996 was
partially offset by an $.18 per share dilutive impact related to
cellular acquisitions that were completed in July 1995. Net
income for the nine month period 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 For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
Wireline
Local service $170.5 $161.8 $503.7 $479.2
Network access 94.4 91.8 288.5 276.3
Intrastate toll 62.1 66.4 193.1 202.0
Interstate and international toll 28.9 12.0 71.3 28.1
Premium services and equipment sales 26.9 26.2 77.1 80.2
Other revenues 11.1 18.1 37.9 43.9
Total Wireline 393.9 376.3 1,171.6 1,109.7
Wireless
Cellular service 52.7 44.0 149.0 106.2
Cellular equipment sales 2.5 2.5 7.0 4.6
Paging 1.5 1.9 4.5 10.7
Total Wireless 56.7 48.4 160.5 121.5
Information and Entertainment 46.0 45.6 138.1 135.7
Other (8.4) (5.4) (20.2) (14.1)
Total Revenues and Sales $488.2 $464.9 $1,450.0 $1,352.8
Wireline - Local service revenues, derived from providing local
exchange, public telephone and local private line services,
increased $8.7, or 5.4%, and $24.5, or 5.1%, for the three and
nine month periods, respectively. The increases were due
primarily to growth of 4.3% in access lines in service to
approximately 2,145,000 lines as of September 30, 1996. This
increase included significant growth in Centrex sales and second
residential access lines. Local service revenues also increased
due to growth in subscriptions to SmartLink[R] advanced calling
features, including Caller ID, missed call dialing, call
- 10 -
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 September 30, 1996 vs. the
periods ended September 30, 1995
blocking and call tracing. Management continues to expect
competition to impact local service revenues as other
telecommunications providers offer local service [see
Competition].
Network access revenues, generated primarily from interstate and
intrastate services, increased $2.6, or 2.8%, and $12.2, or
4.4%, for the three and nine month periods, respectively.
Interstate access revenues were relatively flat for the quarter,
and increased $6.6, or 2.5%, for the nine month period, due
primarily to growth in interstate minutes of use of
approximately 9%. Partially offsetting the impact of the
increase in minutes of use was a decrease in rates due to
discount calling plans and the Telephone Company's 1996 Federal
Communications Commission ("FCC") filing under price cap
regulation. In addition, intrastate access revenues increased
$2.1 for the quarter and $5.6 for the nine 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 $4.3, or 6.5%, and $8.9, or
4.4%, for the three and nine month periods, respectively. The
decreases were due primarily to reduced intrastate toll rates
from the migration of customers to several of the Corporation's
discount calling plans. Toll message volume decreased by 1.7%
for the quarter and increased by 2.3% for the nine month period.
Lower toll volume for the quarter was mainly due to the
increasingly competitive toll market, while higher customer
demand more than offset the impact of competition during the
nine month period. Customer migration to discount calling plans
and the completion of intrastate equal access in 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 doubled from September 30, 1995 to
September 30, 1996. This customer base increased due primarily
to a promotion offering both intrastate and interstate long
distance services on one bill.
Wireless - For the three and nine month periods, cellular
wholesale and retail service revenues increased $8.7, or 18.7%,
and $45.2, or 40.8%, respectively, due mainly to growth of 29%
in the subscriber base in response to competitive marketing and
pricing strategies. Also contributing to the increase for the
nine month period was the acquisition of additional cellular
areas in July 1995. 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.
Information and Entertainment - Growth in Yellow Pages
advertising was the primary contributor to the nine month period
increase in information and entertainment sales, while the
quarter increase is attributable to internet sales.
- 11 -
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 September 30, 1996 vs. the
periods ended September 30, 1995
Costs and Expenses
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
Operating $205.8 $194.2 $588.0 $534.1
Maintenance 89.5 84.3 261.9 257.8
Total operating costs 295.3 278.5 849.9 791.9
Depreciation and amortization 88.5 88.3 265.9 255.3
Taxes other than income 13.9 14.7 41.4 42.5
Total Costs and Expenses $397.7 $381.5 $1,157.2 $1,089.7
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 $16.8, or 6.0%, for the quarter,
and $58.0, or 7.3%, for the nine month period.
Wireline - For the three and nine month periods, wireline
operating costs increased $24.0, or 10.8%, and $45.4, or 7.0%,
respectively. The nine month period increase would have been
$56.4 excluding the $11.0 litigation charge in the second
quarter of 1995. The primary contributor to the higher expenses
was the direct costs of providing increased volume of interstate
and international toll services. Contracted services, due in
part to outsourcing certain functions, marketing and
uncollectible expenses also increased. Partially offsetting
these increases was a reduction in employee-related expenses as
a net result of a smaller work force, compensation increases,
and increased overtime. The Telephone Company's wireline work
force decreased to 8,264 employees at September 30, 1996,
compared with 8,385 employees at September 30, 1995, due
primarily to the EOO and severance plans under the restructuring
program [see Note 1]. The decrease in employees was offset
substantially by the hiring of provisional employees to meet
increased demand for services.
Wireless - For the quarter, wireless operating costs decreased
$8.0, or 15.2%, due primarily to fraud reduction initiatives,
and the non-recurrence of transition costs which occurred in the
third quarter of 1995 to integrate the expanded cellular area
from the July 1995 acquisitions. For the nine months ended
September 30, 1996, wireless operating costs increased $7.7, or
6.1%, due primarily to costs related to the expanded cellular
area and the increasing preacquisition subscriber base. The
impact from the sale of substantially all the paging network
assets in June 1995 partially offset these increases.
Information and Entertainment - Information and entertainment
operating costs decreased 24.9% and 8.0% for the quarter and the
nine month period, respectively, as the discontinuance of the
video dial tone trial was offset partially by development costs
associated with the cable offering by SNET Personal Vision, Inc.
("Personal Vision") and costs of providing internet service.
- 12 -
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 September 30, 1996 vs. the
periods ended September 30,1995
Depreciation and Amortization - Depreciation and amortization
expense was relatively flat for the quarter, and increased
$10.6, or 4.2%, for the nine month period. The increase for the
nine month period was due primarily to amortization expense on
intangible assets, mainly cellular licenses, acquired in the
cellular acquisitions. An increase in the average depreciable
telecommunications property, plant and equipment also
contributed to the increase in depreciation and amortization
expense.
Interest Expense
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
Interest expense $21.9 $24.3 $67.2 $61.3
Interest expense decreased for the quarter due primarily to a
change in the reporting of capitalized interest to a reduction
of 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. Interest
expense increased for the nine month period due primarily to the
issuance of commercial paper and medium-term notes in connection
with the cellular acquisitions.
Other Income, Net
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
Other income, net $.4 $5.5 $6.2 $9.7
Other income, net, decreased for the quarter and nine month
period due primarily to interest income related to the
completion of an IRS audit being recorded in the third quarter
of 1995. Adding to the decrease was the reclassification of
capitalized interest noted above.
Income Taxes
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995 1996 1995
Income taxes $23.2 $23.3 $83.3 $83.4
The combined federal and state effective tax rate for the
quarter was 33.6% compared with 36.1% for the same period in
1995. The tax rate for the nine month period decreased to 35.9%
from 39.4% for the respective 1995 period. The decrease in the
effective tax rate was due primarily to the settlement of tax
matters and the combined effect of lower Connecticut state tax
rates and a higher level of state tax credits in 1996.
- 13 -
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 September 30, 1996 vs. December 31,
1995
Short-term Debt
Short-term debt decreased $44.9 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 $35.2 due to
timing of payments of accounts payable.
Restructuring Charge
The combined current and long-term restructuring charge
increased $11.1 due to pension settlement gains of $23.6 and
$45.4 recorded in the second and third quarter of 1996,
respectively. These gains were offset by the charges against
the restructuring reserve for the nine months ended September
30, 1996.
Other Liabilities and Deferred Credits
Other liabilities and deferred credits decreased $61.4 due
primarily to the settlement gains discussed under Restructuring
Charge, above, lowering the accrued pension liability.
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $350.0
during the nine months ended September 30, 1996 as compared with
$342.8 during the nine months ended September 30, 1995. The
primary use of corporate funds continued to be capital
expenditures.
For the nine months ended September 30, 1996, cash outlays
relating to the Corporation's restructuring program totaled
$57.9. Primarily all of the expenditures related to incremental
costs incurred for executing numerous reengineering programs
during the first nine months of 1996. All cash expenditures
were funded with cash flows from operations. Management
anticipates that cash expenditures in connection with the
restructuring program will approximate $70 in 1996 and will be
funded from operations.
The Corporation's ratio of debt to total capitalization
decreased to 75.5% at September 30, 1996 compared with 80.0% at
year-end 1995. For the third 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.
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Form 10-Q Part I - Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
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.
Approximately 140 telecommunications providers have received
approval from the Department of Public Utility Control ("DPUC")
to offer intrastate long-distance services. In addition, over 60
companies have filed for initial certificates of public
convenience and necessity and are awaiting DPUC approval. The
implementation of intrastate equal access for all dual preferred
interexchange carrier capable switches will be completed by
November 1996.
To provide competitive products, Wireline has realigned its
discount and rate structures to provide Connecticut customers
with SNET All Distance[SM], a one bill, seamless toll service
product line which includes discount calling plans that include
intrastate, interstate and international calling. The migration
of customers to these bundled calling plans will continue to
place downward pressure on intrastate toll rates and revenues,
while at the same time, promote growth for interstate and
international toll services.
Concerning competition for local exchange service, fifteen
telecommunications providers have been granted certificates of
public convenience and necessity for local service and two
additional applications are pending before the DPUC. The effect
of increased competition on local service revenues cannot be
predicted at this time. While some customers may purchase
services from competitors, the Telephone Company expects that
most competitors will resell the Telephone Company's network and
that increased network access revenues will offset a portion of
local service revenues lost to competition.
Regulatory Matters
Federal Regulatory Initiatives
On February 8, 1996, Congress passed the Telecommunications Act
of 1996 ("Act"). The Act was designed to overhaul U.S.
Telecommunication policy by removing barriers to local
competition. The FCC's First and Second Report and Order
("Order"), adopted August 1, 1996, implements the Act and
contains numerous provisions regarding the interconnection of the
Telephone Company's network with those of its competitors.
Massive changes to network and data systems will be required for
the Telephone Company to comply with the Order. In addition, the
Order would require fundamental changes in the development of the
prices that the Telephone Company would charge competitors for
purchasing regulated network products and services. This
decision is the first of three major rulemakings to carry out the
Act. Future decisions will include universal service and access
charge reform. With respect to these decisions, the Order, as
well as universal service and access charge reform, could have a
material negative impact on the Telephone Company. The Order was
appealed by various local telephone companies, including the
Telephone Company, the National Association of Regulatory Utility
Commissioners and individual state regulatory commissions.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
On October 15, 1996, the Court issued an injunction delaying the
effectiveness of the pricing provisions and the "pick and choose"
rule of the Order. The Court is expected to issue a final ruling
on this matter in early Spring 1997. The FCC appealed the
Court's decision to stay these rules with the Supreme Court.
Justice Clarence Thomas of the Supreme Court subsequently
declined to hear the appeal, however the FCC has requested a
review from the full Supreme Court.
State Regulatory Initiatives
On March 15, 1996, the Telephone Company filed a petition with
the DPUC requesting a waiver of the section of the Act that
requires the pricing of wholesale local residential service to be
based on retail rates minus avoided costs. On May 17, 1996, the
DPUC issued a decision denying the Telephone Company's petition
without prejudice. The DPUC determined that the Telephone
Company may be entitled to a suspension of the application of the
Act's resale provisions, but that the record in the proceeding
was not sufficient to make that determination. The DPUC
indicated that the Telephone Company may find it necessary to
renew its petition after the DPUC's review of the Telephone
Company's revised cost studies and determinations regarding a
universal service fund for the State of Connecticut. On May 31,
1996, the DPUC began a proceeding to review the revised cost
studies submitted by the Telephone Company. This proceeding is
currently being held in abeyance pending action by the Court,
described previously.
In compliance with the Act, the Telephone Company has filed with
the DPUC numerous cost studies supporting its proposed wholesale
(i.e., resale) and unbundled rates for interconnection services.
In light of the Order, the DPUC on September 26, 1996 held a
hearing on resale rates. The DPUC ordered that an interim
discount rate of 21% off retail prices be applied to services
resold to competitors. This percentage represents the midpoint
between the 17% and 25% proxy rates required by the FCC in its
Order. The day following the hearing, the Court issued a
temporary stay of the Order, pending a decision on the various
stay motions filed by local exchange carriers, including the
Telephone Company, with the Court. As a result of this action,
the Telephone Company requested a deferral of the effective date
of the 21% discount rate until such time as the Court's stay was
lifted or until the DPUC reviewed the merits of the Telephone
Company's appeal. The DPUC found merit in the Telephone
Company's request and deferred the implementation of the 21%
rate. In the meantime, as requested by the DPUC, the Telephone
Company has filed new cost studies related to the discount rate.
On November 8, 1996, the DPUC issued a draft decision granting
the Telephone Company's request to reclassify message toll
service and calling card service from the noncompetitive category
to competitive in its entire service territory. Reclassification
provides the Telephone Company with the opportunity to gain
additional promotional and pricing flexibility for its products
and services, and to operate under regulatory guidelines similar
to its competitors.
INFORMATION AND ENTERTAINMENT
On September 6, 1996, Personal Vision received an 11 year license
from the DPUC to operate a community antenna television system
that will serve the entire state of Connecticut. Pending an
appeal by the New England Cable Television Association and
certain cable companies, Personal Vision will
- 16 -
Form 10-Q - Parts I & II Southern New England Telecommunications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions, Except Per Share Amounts)
launch its cable service by first quarter 1997 and expects to be
able to serve 36% of Connecticut households by 1998 and the
entire state by 2007. Personal Vision plans to offer a 76
channel lineup, including standard cable programming, pay-per-
view services, movies, live sporting events and concerts.
Personal Vision is a partner in the Americast joint venture. 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 third
quarter of 1996.
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibit
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
On July 23, 1996, the 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.
On October 22, 1996, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
October 22, 1996 announcing the Corporation's financial
results for the third quarter of 1996. The
Corporation's Form 8-K also announces the acquisition of
Woodbury Telephone Company [see Note 2].
- 17 -
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
November 12, 1996
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer
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