SNET LOGO
Southern New England
Telecommunications Corporation
227 Church Street
New Haven, Connecticut 06510
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1996 ANNUAL REPORT & 1997 PROXY STATEMENT
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WIRELINE
WIRELESS
INFORMATION AND
ENTERTAINMENT
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Highlights 1
Year in Review 2
Letter to Shareowners 3
Financial Commentary 6
Report of Management 13
Report of Independent Accountants 13
Statements of Income (Loss) 14
Balance Sheets 15
Statements of Changes in Shareholders' Equity 16
Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Financial and Statistical Data (Unaudited) 29
Investor Information 30
Other Information 31
NOTICE OF ANNUAL MEETING 33
PROXY STATEMENT
Proxy Information 35
Beneficial Ownership of Common Stock 35
Election of Directors (Proposal 1) 36
Nominees for Election as Directors 36
Directors Continuing in Office 36
Compensation and Other Information Regarding Directors 38
Committees of the Board 38
Ratification of Appointment of Auditors (Proposal 2) 39
Submission of Shareholder Proposals 39
Other Matters to Come Before the Meeting 39
Report of Personnel Resources Committee of the Board of
Directors on Executive Compensation 39
1996 Executive Compensation 39
CEO Compensation 40
Summary Compensation Table 41
Option/SAR Grants in the Last Fiscal Year 42
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year End Option/SAR Values 43
Pension Plan 43
Change-in-Control Agreements 44
Certain Transactions 44
Performance Graph 44
Financial Statements 44
WHO WE ARE
SNET is a Connecticut-based company reaching beyond its traditional borders to
offer wireline, wireless and information and entertainment services, including
local, national and international calling; mobile communications; and
publishing, information and advertising. The company is building I-SNET(SM), a
statewide, information superhighway that brings to customers a full array of
information, communications and entertainment services.
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL HIGHLIGHTS
Dollars in Millions, Except as Noted 1996 1995 1994
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Operating Results
Revenues and Sales $1,941.9 $1,816.4 $1,717.8
Annual Growth 6.9% 5.7% 3.6%
Costs and Expenses(1) $1,203.6 $1,121.6 $1,014.9
Operating Cash Flow(2) $ 738.3 $ 694.8 $ 702.9
Net Income (Loss)(3) $ 192.8 $ (518.3) $ 177.6
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Per Common Share (dollars)
Income Before Extraordinary Charge $ 2.94 $ 2.60 $ 2.77
Net Income (Loss)(3) $ 2.94 $ (7.99) $ 2.77
Dividends Declared $ 1.76 $ 1.76 $ 1.76
Market Price (year-end) $ 38.875 $ 39.750 $ 32.375
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At Year-End
Total Assets $2,671.0 $2,724.2 $3,504.6
Debt Ratio(4) 74.9% 80.0% 51.0%
Telephone Company Wireline Employees 8,167 7,742 8,604
Total Employees 9,441 9,070 9,797
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Statistical Data
Network Access Lines in Service (thousands) 2,163 2,073 2,009
Annual Growth 4.3% 3.2% 2.3%
Second Residential Network Access Lines in Service (thousands) 97 75 60
Annual Growth 29.3% 25.0% 27.7%
Network Interstate Access Minutes of Use (millions) 7,906 7,298 6,917
Annual Growth 8.3% 5.5% 6.1%
Cellular Subscribers (thousands)(5) 392 323 166
Annual Growth(5) 21.4% 94.6% 88.6%
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Other Data
Telephone Company Wireline Cost Per Access Line (dollars)(6) $ 332 $ 320 $ 340
Net Cash Provided by Operating Activities $ 470.2 $ 439.2 $ 422.6
Cash Expended for Capital Additions $ 366.6 $ 354.0 $ 282.3
Cash Dividends Paid $ 100.2 $ 98.0 $ 97.2
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(1) Excludes depreciation and amortization.
(2) Represents operating income before depreciation and amortization.
Operating cash flow is not a generally accepted accounting principle
measurement. Management provides this measurement for informational
purposes only.
(3) 1995 includes a $1,202.6 before-tax extraordinary charge for the
discontinuance of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," that reduced net income and earnings per share by
$687.1 and $10.59, respectively.
(4) Excluding the effect of the non-cash extraordinary charge related to the
discontinuance of SFAS No. 71, the 1995 debt ratio would have been 57.6%.
Excluding the combined effect of the charge related to SFAS No. 71 and the
debt issued to acquire the cellular properties, the 1995 debt ratio would
have been 48.0%.
(5) Excluding the subscribers from the acquired cellular properties, cellular
subscribers would have increased 51.1% to 251,000 subscribers in 1995.
(6) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses.
SNET Annual Report 1
YEAR IN REVIEW
o We earned a record $2.94 per share for 1996, up 8%.
o Our wireline business reported record growth in access lines, and Connecticut
added an area code to accommodate burgeoning demand for telephone numbers.
o Our wireless business continued robust growth -- revenues up 27% -- with
improved margins.
o We became the number two long-distance provider in Connecticut, as
interstate/international revenues more than doubled.
o We continued to build I-SNET(sm), our broadband, full-service network.
Successful tests of telephony applications expanded to 2,000 customers.
o We obtained the first ever, statewide cable-TV franchise and joined the
americast partnership to gain world-class programming and technology.
o We entered the Internet access business and leaped to the number two position
in Connecticut.
o We led the industry in offering billing to the nearest second so customers
pay only for the time they talk on long-distance calls.
o We challenged the FCC's interconnection order and gained a court stay of
onerous provisions.
o We signed a definitive agreement to acquire Woodbury Telephone, the only
other independent telephone company in Connecticut.
2 SNET Annual Report
LETTER TO SHAREOWNERS
To Our Shareowners:
Trailblazing is an SNET tradition. Our drive to take customers beyond the call
is the reason behind our industry "firsts" and our finest accomplishments. SNET
is now an information, communications and entertainment company well positioned
for the 21st century.
In this transitional era of converging technologies and markets, we are
broadening and integrating our product lines, pursuing new growth opportunities
and proving to be a very scrappy competitor. We are pioneering new broadband
technology through a hybrid fiber/coaxial cable design that is less expensive
than an all-fiber network and just as effective. This is creating a platform for
further growth as we introduce and package an array of desirable information,
communications and entertainment products. Our proven ability to compete in
wireless and long distance prepares us for local telephone competition, which
will heat up in 1997, and for expansion into the cable-TV market.
In all of the following ways we have significant competitive strengths on
which to build:
o a strong brand name
o a superior local presence and knowledge of customers
o the broadest product line in the industry
o an experienced, diverse and battle-tested management team
o an employee team dedicated to quality and service
o a versatile landline network throughout Connecticut
o a wireless network covering Connecticut, Rhode Island and portions of
Massachusetts
o nimbleness of size: the ability to act and react quickly.
Stock Price Disappointing
Through the middle of 1996, our stock was doing relatively well, up about 4
percent. Beginning in July, the price declined with increasing investor
uncertainty about the effects of local competition. Investor confidence
plummeted further when the Federal Communications Commission (FCC) issued its
Interconnection Order in August, a topic to which
[Picture of Chairman]
DANIEL J. MIGLIO
Chairman and Chief Executive Officer
I'll return. On top of those industry-wide developments, our margins were
squeezed in the fourth quarter as costs rose to maintain service quality in the
face of skyrocketing demand.
We're taking aggressive steps to regain investor interest. We've challenged
the FCC's decision and are committed to improving margins in 1997. Others in the
industry will soon face the competition that we are succeeding against and our
record will compare favorably. I believe investors will view our performance
positively in the future and that our strong competitive position and growth
prospects will be reflected in our stock price.
Earnings Growth Continues
Net income for 1996 was $193 million or $2.94 per share. This represents an 8
percent gain over the prior year's operating earnings before one-time items,
including an extraordinary non-cash charge for a change in accounting method.
Our strong revenues -- up 7 percent to $1,942 million -- reflect our
ability to capitalize on growth opportunities in long distance and wireless. Our
wireline business grew 6 percent as interstate/international long-distance
revenues more than doubled. We led the industry in introducing billing to the
nearest second and initiated a very effective campaign promoting the advantages
of our single bill, which enabled us to capture a substantial
SNET Annual Report 3
share of the long-distance market. In addition, access lines grew at a healthy
clip -- a record 90,000 new lines, up 4.3 percent, fueled by booming demand for
business and second residential lines. Additional strong growth came from
vertical services like SNET SmartLink(R).
We also continued double-digit growth in our wireless business while
improving operating margins. Revenues climbed 27 percent to $219 million, due
partly to the cellular acquisitions we made in July, 1995. Wireless margins were
significantly better than a year ago and will be improving further in 1997 as we
push to achieve industry norms. Information and Entertainment revenues were up 2
percent to $184 million.
Consolidated operating expenses for the year were up 8 percent. Wireline
expenses increased 12 percent to support growth in interstate/international
toll, for aggressive marketing and for bad debts. In addition, weather
conditions, unparalleled demand for new lines and workforce inexperience caused
cost per access line to increase in 1996, counter to our long-term downward
trend. This year, we will be back on track with overall cost per line decreasing
once again. Wireless expenses, even including the cellular acquisitions, were
flat for the year. Information and Entertainment expenses were down 6 percent
for 1996 compared with 1995 when we trialed cable-TV and video-on-demand
services to gain valuable marketing and operational experience. Depreciation and
amortization expenses were up 3 percent for the year as was interest expense.
Finally, certain true-ups and credits resulted in lower state taxes.
This past year was clearly one of marketing successes and positioning for
the future. We incurred significant costs not only to meet unprecedented demand
and competition, but also to prepare for integrated marketing and product
packaging. This year, we will continue to position SNET as we prepare for our
exciting entry into cable TV, implement requirements of the Federal
Telecommunications Act and reprogram computers for the year 2000.
That reprogramming comes after a detailed examination of the implications
of the year 2000 for our computer systems and business processes. We estimate
that related expenses will be in the $15 million to $20 million range for 1997
as we revise and test over 30 million lines of computer code. In our business,
revenues derive from a very high volume of date-sensitive transactions. So, we
are pursuing this proactively, well in advance, to assure that there will be no
glitches at the turn of the century.
We're Pursuing New Growth Opportunities
As we continue to advance through turbulent, uncharted waters made murkier
by regulatory uncertainties, we are poised to take full advantage of growth
opportunities that change offers. For instance, we just proposed to the
Department of Public Utility Control (DPUC) that we separate our business into
wholesale and retail subsidiaries, formalizing the internal separation that
already exists between our wholesale and retail units. This new operating model
will unleash the growth potential of each arm of our business, and provide the
singularity of focus each needs to compete most effectively. Importantly, the
retail subsidiary will compete under the same rules as other providers of
telecommunications services in Connecticut to bring consumers an ever increasing
array of innovative products and services.
Our wholesale strategy is to remain the preeminent network by marketing our
transport, switching and processing capabilities to retail-service providers in
Connecticut and beyond. We offer sophisticated, feature-rich capabilities
unparalleled in quality. For instance, our network is so reliable that customers
experienced less than one minute on average of downtime in 1996.
We are constantly improving and replacing our network, aiming for the year
2007 when every inch of it will be an information superhighway that reaches all
households and businesses in Connecticut.
On the retail side, our aim is to be the hometown team of choice. We will
grow and retain our customer base by building lasting, multiple-product
relationships across a broad range of information, communications and
entertainment services.
You can see how we're executing that strategy through the exciting
initiatives we have under way or are about to launch. Our new statewide cable-TV
franchise will put us in a strong marketing position that we intend to use to
its fullest potential. One of our competitors attempted to slow the launch of
our new cable venture by alleging that the back-up network powering design isn't
safe. This contention is unfounded. We would never put our employees or anyone
else at risk. However, rather than engage in a prolonged appeal process dealing
with a minor technicality we are modifying our power-cable design to conform
with the current national code. This will not delay our entry into the cable-TV
business. We will launch SNET americast on schedule.
4 SNET Annual Report
In the long-distance business, we've set our sights on becoming the
market-share leader in Connecticut. Likewise, for Internet services, which
continue to grow geometrically.
We are honing our competitive edge by continuing to develop employee
capabilities and by reshaping a monopoly culture to one that is riveted on
customers and encourages an adaptive, creative work atmosphere and mentality.
And we're forging alliances that will leverage our strengths, improve margins
and add value. An example is our partnership with Disney through americast. This
gives us access to high-quality programming at competitive prices and
capitalizes on pooled resources to develop the next generation of television.
Legal Initiative Results In Important Partial
Stay Of FCC Order The
1994 landmark state statute that brought choice to consumers for
telecommunications services came far ahead of the 1996 federal legislation. But
the new federal law did give us an opportunity to enter the cable-TV business in
a big way, which we acted on quickly.
The FCC's first major interpretation of the new federal law was its
interconnection order. That order would have imposed unrealistic pricing
methodologies and pulled the rug out from under our pricing negotiations with
competitors. SNET took a leadership role in mounting a legal challenge to the
order. We won an important partial stay, and the appeal process is under way.
We're Reaping Success In An Explosive
Growth Industry
The companies that prevail will be those that are adaptable and invest in their
future while they remain their customers' most compelling choice for products,
price and service. We're right on track at SNET.
We have come a long way very fast. I've been in this business for many
years, and I know that SNET has the means and the will to reap continued success
in an explosive growth industry. I am confident about our ability to capture
that potential for you.
/s/ DAN MIGLIO
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Daniel J. Miglio
Chairman and Chief Executive Officer
February 12, 1997
SNET Annual Report 5
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL COMMENTARY
(Dollars in Millions, Except Per Share Amounts)
Southern New England Telecommunications Corporation ("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, are included with eliminations and other
sales.
Operating Results
Income before extraordinary charge was $192.8, $168.8 and $177.6 in 1996, 1995
and 1994, respectively. The corresponding earnings per share for those years
were $2.94, $2.60 and $2.77. The financial results are summarized as follows:
For the Years Ended December 31, 1996 1995 1994
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Income before extraordinary
charge $ 192.8 $ 168.8 $177.6
Extraordinary charge, net of tax -- (687.1) --
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Net Income (Loss) $ 192.8 $(518.3) $177.6
=================================================================
Earnings (Loss) Per Share:
Income before extraordinary
charge $ 2.94 $ 2.60 $ 2.77
Extraordinary charge -- (10.59) --
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Earnings (Loss) Per Share $ 2.94 $ (7.99) $ 2.77
=================================================================
Income before extraordinary charge increased $24.0 in 1996 due to strong
revenues, primarily in interstate and international toll and wireless, offset
partially by an increase in wireline expenses.
Income before extraordinary charge decreased $8.8 in 1995 due primarily to
the impact of the cellular acquisitions completed in July 1995 of approximately
$19, or $.29 per share dilution. Stronger operating cash flow in the wireline
business partially offset this decrease. Also included in 1995 was an $11.0
charge, $6.3 after-tax or $.10 per share, associated primarily with a court
ruling on the Corporation and The Southern New England Telephone Company's
("Telephone Company") labor practices [see Note 9].
In 1995, the Corporation recorded a non-cash extraordinary charge of
$1,202.6, $687.1 after-tax or $10.59 per share, related to the discontinuance of
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation" for financial reporting purposes. This
non-cash extraordinary charge consisted of the elimination of net regulatory
assets and the recognition of depreciation reserve deficiencies [see Note 3].
The Telephone Company determined that due to emerging competition and the change
in its regulatory environment, it would change from the methodology under SFAS
No. 71, which specifies accounting standards required for public utilities and
certain other regulated companies, to one which is more appropriate for a
competitive environment. As a result of this charge, net loss for 1995 was
$518.3, or $7.99 per share.
Revenues and Sales
Revenues and sales increased $125.5, or 6.9%, in 1996 and $98.6, or 5.7%, in
1995. The components of revenues and sales by product group are summarized as
follows:
For the Years Ended December 31, 1996 1995 1994
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Wireline:
Local service $ 673.7 $ 641.6 $ 618.8
Network access 388.1 369.4 354.5
Intrastate toll 251.2 266.4 295.4
Interstate and international toll 101.2 42.1 10.0
Premium services and
equipment sales 107.6 104.9 103.2
Other revenues 50.1 57.0 45.6
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Total Wireline 1,571.9 1,481.4 1,427.5
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Wireless:
Cellular service 203.0 153.1 97.0
Cellular equipment sales 10.1 7.8 4.5
Paging 6.1 12.2 17.8
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Total Wireless 219.2 173.1 119.3
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Information and Entertainment 184.2 180.9 180.5
Eliminations and Other Sales (33.4) (19.0) (9.5)
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Total Revenues and Sales $1,941.9 $1,816.4 $1,717.8
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WIRELINE Local service revenues, derived from providing local exchange, advanced
calling features and local private line services, increased $32.1, or 5.0%, in
1996 and $22.8, or 3.7%, in 1995. Growth in 1996 and 1995 was primarily
attributable to increases of 4.3% and 3.2%, respectively, in access lines in
service. The increases included significant growth in Centrex business lines in
1996, and second residential lines in both years. The 1996 increase of 90,012
access lines was the largest annual increase experienced by the Telephone
Company. Local service revenues also increased due to growth in subscriptions to
SmartLink(R) vertical calling services, including Caller ID, missed call
dialing, call blocking and call tracing. Management expects competition to
impact local service revenues in 1997 as other telecommunications providers
offer local service [see Competition].
Network access charges are assessed on interexchange carriers and end users
for access to the local exchange network. In 1996, network access revenues
increased $18.7, or 5.1%, compared with an increase of $14.9, or 4.2%, in 1995.
The increases in 1996 and 1995 were due primarily to continued growth in
interstate minutes of use of approximately 8% and 6%, respectively, and
increases in access lines in service
6 SNET Annual Report
discussed previously. Partially offsetting the impact of the increase in minutes
of use was a decrease in rates due to discount plans and reduced access tariffs
[see Regulatory Matters]. In addition, intrastate access revenues increased due
primarily to an increase in intrastate minutes of use by competitive providers
of intrastate long-distance service.
In 1996, intrastate toll revenues, which include primarily revenues from
toll and WATS "800" services, decreased $15.2, or 5.7%, compared with a decrease
of $29.0, or 9.8%, in 1995. Reduced intrastate toll rates due to the migration
of customers to several of the Corporation's discount calling plans was the
primary factor in the decrease in both years. Also contributing to the decreases
was a reduction in toll message volume of approximately 1% and 2% in 1996 and
1995, respectively. In 1996, increased volume in the first half of the year from
higher customer demand during inclement weather was offset by decreased volume
in the second half of the year as a result of the increasingly competitive toll
market. Customer migration to discount calling plans and increasing competition
will continue to place downward pressure on intrastate toll revenues.
Interstate and international toll services provided to Connecticut based
customers increased $59.1 in 1996 and $32.1 in 1995. Interstate and
international access line subscriptions more than doubled in both years to
approximately 758,000 access lines at year-end 1996. The increase in 1996 was
the result of customers' response to SNET All Distancer(R), a simple,
competitively priced product providing one-second rating on intrastate,
interstate and international toll services, along with local service on one
bill.
Other wireline revenues, which include primarily services rendered on
behalf of interexchange carriers, rent and late fee revenues, decreased $6.9 in
1996 compared with an increase of $11.4 in 1995. The 1996 decrease was due
primarily to the discontinuance of the provision of billing services for a major
long-distance carrier. Higher billing service and late payment fee revenues
contributed to the increase in 1995.
WIRELESS Cellular service revenues increased $49.9, or 32.6%, in 1996 and $56.1,
or 57.8%, in 1995. The increase in 1996 was due mainly to strong growth of 21.4%
in the subscriber base in response to competitive marketing and pricing
strategies. Also contributing to the increase was the impact from the first full
year of revenues from the cellular acquisitions completed in July 1995 [see Note
2]. The 1995 increase was due primarily to growth of 94.6% in the subscriber
base, including the new subscribers from the expanded cellular area. Average
usage per subscriber continued to decline in 1996 and 1995, in line with a
nationwide trend, as lower volume users made up a larger portion of the
subscriber base.
Paging sales decreased $6.1 in 1996 and $5.6 in 1995. The impact of the
sale of paging network assets in June 1995 contributed to the reduction in sales
[see Note 2]. Wireless continues, as a reseller, to market paging services under
the Page 2000(R) brand name.
INFORMATION AND ENTERTAINMENT Information and entertainment revenues increased
$3.3 in 1996 due primarily to growth in yellow page advertising, while revenues
remained relatively flat in 1995. Internet sales, a new service offered in 1996,
also contributed to the increase. The introduction of cable television service
is anticipated to have a positive impact on revenues in 1997.
Costs and Expenses
Total costs and expenses increased $92.1, or 6.3%, in 1996 and $124.1, or 9.2%,
in 1995. Total costs and expenses are summarized as follows:
For the Years Ended December 31, 1996 1995 1994
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Operating $ 777.9 $ 732.3 $ 633.4
Maintenance 371.1 332.8 325.3
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Total Operating Costs 1,149.0 1,065.1 958.7
Depreciation and amortization 356.1 346.0 328.6
Taxes other than income 54.6 56.5 56.2
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Total Costs and Expenses $1,559.7 $1,467.6 $1,343.5
====================================================================
Total 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 $83.9, or 7.9%, in 1996 compared with
an increase of $106.4, or 11.1%, in 1995.
Management expects to incur computer system related costs in order to avoid
complications with the recognition of the year 2000. These costs will be
incurred over the next three to four years, with related expenses estimated to
be approximately $15 to $20 in 1997.
WIRELINE Wireline operating costs increased $99.9, or 11.6%, in 1996 and $16.0,
or 1.9%, in 1995. The increase in 1996 was due primarily to the direct costs of
providing an increased volume of interstate and international toll services.
Also contributing to the increase were higher contract services, bad debt and
marketing expenses. The increase in contract services was due primarily to
outsourcing certain functions which experienced lower work force levels,
including the data processing, network and collection areas. Wireline bad debt
expenses increased primarily from higher credit risk in a competitive
environment and reduced collection efforts. The residential and business
collection efforts were negatively impacted during a period of transition when
employees departed under the early-out offer ("EOO") and most of the collection
function was outsourced to an external agency.
Employee-related expenses were relatively flat in 1996. Savings from the
EOO and severance programs
SNET Annual Report 7
under the 1993 restructuring program [see Note 6] were offset partially by the
costs from a higher work force level in the second half of the year. The
Telephone Company wireline work force increased to 8,167 employees at year-end
1996, primarily in the network area to meet increased service demands. Also
offsetting the savings were higher pension and postretirement expenses
(excluding net settlement gains and curtailment losses), annual compensation
increases and additional overtime.
In 1995, the direct costs of providing an increased volume of interstate
and international toll services and the previously discussed labor practice
charge were offset partially by lower employee-related expenses, including
pension income. Work force levels decreased during 1995 due primarily to the EOO
and severance programs. The Telephone Company's wireline work force decreased to
7,742 employees at year-end 1995, compared with 8,604 employees at year-end
1994.
WIRELESS Wireless operating costs were relatively flat in 1996 compared with an
increase of $79.3, or 76.9%, in 1995. Costs from the first full year of the
expanded cellular area in 1996 were offset by lower customer acquisition costs
and roaming fraud due to preventive control programs. The 1995 increase was due
primarily to costs associated with an expanding preacquisition subscriber base,
the operation of the cellular acquisitions in the second half of the year and
increased roaming fraud.
INFORMATION AND ENTERTAINMENT Information and entertainment operating costs
decreased $4.4, or 5.6%, in 1996 compared with an increase of $12.5, or 19.0%,
in 1995. The 1996 decrease was due primarily to the discontinuance of the
multimedia trial, offset partially by costs of providing internet service and
development costs associated with the commercial deployment of the Corporation's
cable offering. Costs of the multimedia trial, offset partially by lower
publishing expenses, contributed to the increase in 1995. Management expects
information and entertainment operating costs to increase in 1997 as the
Corporation launches SNET americast, its cable television service.
DEPRECIATION AND AMORTIZATION In 1996, depreciation and amortization expense
increased $10.1, or 2.9%, compared with an increase of $17.4, or 5.3%, in 1995.
The 1996 and 1995 increases were due primarily to the amortization of assets
acquired in the cellular acquisitions, primarily cellular licenses. An increase
in the average depreciable telecommunications property, plant and equipment also
contributed to the increase. The 1995 increase also resulted from 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.
RESTRUCTURING CHARGE In December 1993, the Corporation recorded a restructuring
charge to provide for a comprehensive restructuring program designed to reduce
costs and improve delivery of service. The restructuring charge of $355.0
before-tax was comprised of $170.0 in employee separation costs, $145.0 in
process and systems reengineering costs and $40.0 in exit and other costs.
Specifically, the program included costs to be incurred to facilitate employee
separations as well as incremental costs of implementing appropriate
reengineering solutions, including designing and developing new processes and
tools [see Note 6]. 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 be offset by
growth in the business.
Interest Expense
For the Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------
Interest Expense $88.7 $85.9 $74.9
===============================================================
Interest expense increased $2.8, or 3.3%, in 1996 and $11.0, or 14.7%, in
1995. The issuance of commercial paper and medium-term notes in connection with
the cellular acquisitions was the primary contributor to the increases in both
years [see Note 2]. In 1996, the increase was offset partially by lower average
interest rates and capitalized interest of $7.2 due to a change in the reporting
of capitalized interest as a reduction of interest expense. Prior to the
discontinuance of SFAS No. 71, capitalized interest was reported as a component
of other income, net.
Other Income, net
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------
Other Income, net $6.9 $15.5 $.1
=============================================================
Other income, net is comprised primarily of interest income, income from
investments and gains or losses on the disposition of non-telephone property.
The 1996 decrease was due primarily to the absence of income from the
disposition of a real estate partnership in 1995, lower interest income and the
change in the classification of capitalized interest from other income, net to
interest expense discussed previously. Other income, net increased in 1995 due
primarily to an increase in partnership income, interest income and a gain on
the disposal of non-telephone property.
Income Taxes
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------
Income Taxes $107.6 $109.6 $121.9
==============================================================
The combined federal and state effective tax rate in 1996 was 35.8% compared
with 39.4% in 1995 and 40.7% in 1994. The lower 1996 effective tax rate was due
primarily to a higher level of state tax credits. The
8 SNET Annual Report
recognition of state tax credits relating to certain personal property taxes
lowered the effective tax rate in 1995 when compared with 1994. A reconciliation
of these effective tax rates to the statutory tax rates is disclosed in Note 5.
Competition
As a result of unprecedented legislative and regulatory reform, the Corporation
continues to experience an increasingly competitive environment with respect to
telecommunications services in Connecticut. Competitors include interexchange
carriers and competitive access providers with respect to the wireline's
(Telephone Company's) existing services. In 1996, major carriers intensified
their marketing efforts to sell intrastate long-distance services with full
implementation of intrastate equal access. In addition, providers began offering
local exchange service to businesses in certain areas of the state. Management
supports bringing to customers the benefit of competition and affording all
competitors the opportunity to compete fairly under reduced regulation. The
competitive environment also provides opportunities for the Corporation to
continue to grow its interstate and international long-distance service and to
launch its cable television service in 1997.
On September 6, 1996, SNET Personal Vision, Inc. ("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. Personal
Vision also became a partner in the americast joint venture with The Walt Disney
Company, Ameritech Corporation, BellSouth Corporation, SBC Communications Inc.
and GTE Corporation. The partnership will provide a full range of americast(TM)
programming and marketing services and access to the joint venture's innovative
technology. Personal Vision will launch its cable service, SNET americast, in
the spring of 1997.
To provide competitive toll products, wireline led the industry in 1996 by
introducing the option of one-second rating for all toll calls so customers only
pay for the time they talk. Wireline also successfully promoted the one bill
feature of SNET All Distance, a seamless toll service product line which
provides discount calling plans that include intrastate, interstate and
international calling. The migration of Connecticut customers to wireline's
bundled calling plans resulted in significant growth for interstate and
international long-distance services.
Concerning competition for local exchange service, seventeen
telecommunications providers have been granted certificates of public
convenience and necessity for local service and one additional application is
pending before the DPUC. With only a few smaller companies offering local
service in 1996, including a cable television company, competition did not have
the impact on local service revenues as originally anticipated. Local service
competition is expected to grow; however, the timing and financial impact cannot
be predicted at this time. Based on existing state and federal regulations, the
Telephone Company expects that many competitors will resell the Telephone
Company's network and that increased network access revenues will offset a
significant portion of local service revenues lost to competition.
The Corporation's ability to compete in providing all of its products and
services 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.
Regulatory Matters
On February 8, 1996, Congress passed the Telecommunications Act of 1996 ("Act").
The Act was designed to overhaul U.S. Telecommunications policy by removing
barriers to local competition. The Federal Communications Commission's ("FCC")
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. Significant 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. These decisions are the
first of three major rule makings to carry out the Act. Future decisions will
include universal service and access charge reform, discussed below. 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 and a stay was requested by various local telephone
companies, including the Telephone Company, the National Association of
Regulatory Utility Commissioners and individual state regulatory commissions. On
October 15, 1996, the Eighth Circuit Court of Appeals ("Court") issued a stay
delaying the effectiveness of the pricing provisions and the "pick and choose"
rule of the Order. The FCC appealed the Court's decision to stay these rules to
the Supreme Court. The Supreme Court, however, subsequently declined to hear the
appeal. Oral arguments on the Order were heard by the Court on January 17, 1997.
A decision is expected in the first half of 1997. In the meantime, the Telephone
Company has proceeded to negotiate several interconnection agreements with other
carriers in accordance with the FCC's directives not affected by the Court's
stay.
In accordance with the Act, the Federal-State Joint Board adopted a
Recommended Decision on Universal
SNET Annual Report 9
Service on November 7, 1996. The recommendation addresses the universal service
provisions of the Act and proposes that one federal fund be established to
provide support for universal service. The proposal calls for interstate
telecommunications service providers to contribute to the fund based on their
telecommunications revenue, net of payments to other carriers. The revenue to be
assessed may either be total interstate and intrastate revenue, or interstate
revenue only, depending on further discussion of these issues. By May 1997, the
FCC is required to issue an order implementing the universal service section of
the Act.
On December 24, 1996, the FCC also released a Notice For Proposed Rule
Making, seeking comments on proposed changes to the way the Telephone Company
recovers interstate access charges from interstate toll providers, including
SNET America, Inc. A full analysis of the implications of the FCC's proposal has
not yet been completed. However, the industry could experience reduced access
revenues. The Telephone Company provided comments to the FCC proposal on January
27, 1997. A decision from the FCC regarding this matter is expected in April or
May 1997.
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, on January
9, 1997, the DPUC issued a draft decision setting a 17.8% discount rate for
local residence service. The Telephone Company filed its written exceptions and
a request seeking clarification of, among other things, the applicability of the
17.8% discount. A second draft decision is expected in the first quarter of
1997.
In March 1996, the DPUC issued a final decision that replaces traditional
rate of return regulation with alternative (price based) regulation to be
employed, effective April 1, 1996, during the transition to full competition.
The decision contains the following major items: price cap regulation for
non-competitive services; a five year monitoring period on financial results;
and a price cap formula on services categorized as non-competitive (utilizing an
inflation factor, a 5% productivity offset, a narrowly defined exogenous factor,
a potential service quality adjustment and various pricing bands). In addition,
basic local service rates for residence, business and coin may not be raised
above current levels until January 1, 1998, at which time the price cap formula
becomes effective for these services, unless they have been reclassified into
the emerging competitive or competitive categories. The impact of these changes
on the Telephone Company's operating results will depend on the timing of
classifying the various products and services into categories (non-competitive,
emerging competitive and competitive) for pricing (banding) changes.
On November 27, 1996, the DPUC issued a final decision granting the
Telephone Company's request to reclassify message toll and calling card services
from the non-competitive 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.
On June 24, 1996, the FCC approved the Telephone Company's 1996 annual
interstate access tariff filing. These tariffs became effective July 1, 1996.
The Telephone Company again elected a 4.0% productivity factor and will be
allowed to earn up to a 12.25% interstate rate of return annually before any
sharing. The filing is anticipated to decrease interstate network access
revenues by $2.3 for the period July 1, 1996 to June 30, 1997. Management
expects this decrease to be offset by increased demand. As of December 31, 1996,
the Telephone Company's interstate rate of return was below the 12.25%
threshold.
Employee Relations
On April 12, 1995, a new labor contract was ratified by members of the
Connecticut Union of Telephone Workers, Inc. ("CUTW"). As part of the new
contract, a voluntary EOO, which provided incentives in the form of enhanced
pension benefits, was available to bargaining-unit employees during July 1995.
Approximately 2,700 bargaining-unit employees accepted the offer at that time
and left the Corporation by June 1996. CUTW members who remained with the
Corporation received a combination of basic wage and lump sum increases to their
wages or cash balance pension plan account totaling 4.0% in January 1996 and
3.0% in January 1997. In January 1998, they will receive a combination of basic
wage and lump sum increases totaling 3.0%. In addition, the contract also
provided a sign-on bonus and health benefit and pension enhancements. The new
labor agreement will expire on August 8, 1998. The contract is intended to keep
layoffs to a minimum while enabling the Corporation to position itself to meet
increasing competition.
Liquidity and Capital Resources
OPERATING ACTIVITIES The Corporation generated cash flows from operations of
$470.2 during 1996 compared with $439.2 during 1995 and $422.6 during 1994. Cash
flows from operations increased in 1996 compared with 1995 due primarily to
strong growth in revenues.
In 1996, the consolidated balance sheet changed as a result of operating
activities. Even though revenues increased 6.9%, accounts receivable and the
related allowance for uncollectibles decreased due primarily to higher
write-offs in 1996. The higher write-offs reflect the impact of an increasingly
competitive environment
10 SNET Annual Report
and reduced collection efforts discussed previously. As a result of the changing
environment, management revised its procedure to write-off uncollectible
accounts within a shorter time frame. In addition, management enhanced its
evaluation of the adequacy of the allowance for uncollectibles by placing
additional emphasis on the risks associated with a competitive environment.
Other balance sheet changes included a decrease in the current portion of
deferred income taxes due primarily to costs incurred in 1996 under the
restructuring program and a decrease in accrued postretirement benefit
obligation as a result of favorable investment returns and increased funding to
the trust. The decrease in other liabilities and deferred credits was
attributable to a pension settlement gain.
Cash outlays relating to the Corporation's restructuring charge recorded in
December 1993 totaled $110.6, $89.1 and $63.6 in 1996, 1995 and 1994,
respectively. Costs incurred for employee separations of $20.0 in 1996, $9.0 in
1995 and $27.6 in 1994 included primarily payments for severance and unused
vacation. Incremental costs of $83.1 in 1996, $74.2 in 1995 and $35.0 in 1994
were incurred for executing numerous reengineering programs. In addition, exit
and other costs were $7.5 in 1996, $5.9 in 1995 and $1.0 in 1994 and included
expenses relating to the reduction of overall corporate space requirements. All
cash expenditures were funded with cash flows from operations. Management
anticipates that cash expenditures in connection with the restructuring program
will approximate $15 in 1997 and will be funded from operations.
INVESTING ACTIVITIES The primary use of corporate funds continued to be capital
expenditures. Cash expended for capital additions was $366.6, $354.0 and $282.3
in 1996, 1995 and 1994, respectively. Capital additions for all years were
funded entirely from cash flows from operations. The majority of these additions
was for construction of the wireline network. Capital additions also included
incremental capital additions under the restructuring program and improvements
to wireless cell sites.
Management anticipates that total capital expenditures for consolidated
telecommunications plant will approximate $435 in 1997 and will be funded from
cash flows from operations. Included in total capital expenditures in 1997 are
estimated additions of $262 to the wireline network as compared with actual 1996
expenditures of approximately $251. These additions include expenditures
relating to I-SNET(sm), a statewide telephony and information superhighway.
Since 1994, the wireline business has been replacing its existing network of
twisted copper wire with low maintenance fiber-optic and coaxial cable. The
buildout of I-SNET, a $4.5 billion investment, is expected to be completed by
2007. This advanced network is capable of delivering voice, video and a full
range of information and interactive multimedia services. I-SNET passed
approximately 234,000 households as of December 1996, and is expected to pass
approximately 334,000 households by December 1997. The support of this
investment will be primarily through increased productivity from the new
technology deployed and customer demand for the new services offered.
Incremental capital expenditures relating to the restructuring program
approximated $28, $29 and $20 in 1996, 1995 and 1994, respectively.
In July 1995, the Corporation completed the acquisitions of certain
cellular properties and an increased interest in an existing partnership for
approximately $456 [see Note 2]. The properties increased wireless' service area
by 2.3 million POPs (population equivalents) along the communication intensive
Boston to New York corridor. The purchases were financed with short-term debt of
approximately $456, of which $300.0 was subsequently replaced with medium-term
notes in August 1995.
During 1995, the Corporation completed the sale of substantially all of the
paging network assets [see Note 2]. In addition, as a part of the Corporation's
reengineering solutions, certain real estate properties were sold during the
year to reduce office space. Proceeds of $74.0 primarily from these transactions
were used to repay debt associated with these assets.
FINANCING ACTIVITIES In September 1996, a total of $20.0 of 7.61% medium-term
notes matured and were satisfied with the issuance of short-term debt.
In July 1995, the Corporation filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") to sell up to $470.0 in medium-term
notes. Pursuant to the registration statement, $300.0 of unsecured notes were
sold in August 1995 with interest rates ranging from 6.50% to 7.00%. The
proceeds of the sale were used to replace a portion of short-term debt and to
establish permanent financing for the cellular acquisitions discussed
previously.
In September 1995, the Corporation's 7.66% medium-term notes of $20.0
matured and were satisfied with the issuance of short-term debt. The Corporation
also repaid long-term debt of $88.3 with proceeds from the sale of paging and
real estate assets and the issuance of short-term debt.
Dividends paid totaled $100.2, $98.0 and $97.2 in 1996, 1995 and 1994,
respectively. The quarterly dividend rate of $.44 per share has remained
unchanged for the past seven years.
On February 4, 1997, the Corporation issued $100.0 of 6.50% medium-term
notes due 2002. The issuance replaced a portion of short-term debt related to
the cellular acquisitions discussed previously.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031, which were satisfied with the issuance of short-term debt. The
SNET Annual Report 11
early extinguishment of debt will result in an extraordinary charge to the
Corporation's first quarter 1997 earnings of approximately $3.7 after-tax, or
$.06 per share.
ESOP In connection with the establishment of the Employee Stock Ownership Plan
("ESOP") in 1990, the Corporation loaned the ESOP $10.0 and guaranteed a $110.0
loan to the ESOP by a third party. The Corporation has committed to make cash
contributions to the ESOP that, together with dividends received on shares held
by the ESOP, will enable the ESOP to make its principal and interest payments on
both loans. Both loans mature in the year 2000. In 1996, the Corporation made
cash payments to the ESOP for debt service of $13.5 and anticipates making
equivalent cash payments during 1997.
DEBT RATIO The Corporation's ratio of debt to total capitalization at year-end
1996 was 74.9% compared with 80.0% at year-end 1995 and 51.0% at year-end 1994.
The increase in 1995 was due primarily to the combined effect of the non-cash
extraordinary charge related to the discontinuance of SFAS No. 71 and the debt
issued to acquire the cellular properties in July 1995. The ESOP represented
2.7% of the debt ratio at December 31, 1996 compared with 3.4% and 3.8% at
December 31, 1995 and 1994, respectively.
CAPITAL RESOURCES The Corporation maintains bank lines of credit to facilitate
the issuance of commercial paper. As part of this credit facility, the
Corporation has obtained contractual commitments to $300.0 in lines of credit
provided by a syndicate of banks. The annual commitment fee is currently .05% on
the lines of credit. As of December 31, 1996, the entire $300.0 was available.
As of December 31, 1996, the Corporation and the Telephone Company had
$225.0 and $95.0, respectively, of unissued, unsecured debt securities
registered with the SEC. Subsequent to year-end, the Corporation's total
decreased to $125.0 with the February 1997 issuance of $100.0 of 6.50%
medium-term notes due 2002. Additional notes may be sold in one or more issues
from time to time as market conditions warrant.
Management believes that the Corporation has sufficient internal and
external resources to finance the anticipated requirements of business
development. Capital additions and dividends are expected to be funded primarily
with cash from operations during 1997. The purchase of Woodbury Telephone
Company will be funded through the issuance of treasury stock [see Note 2]. The
Corporation also has access to external resources including committed lines of
credit and unissued debt securities registered with the SEC.
12 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Report of Management
The Corporation's consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The Corporation is
responsible for the preparation and reliability of the data in these
consolidated financial statements, including estimates and judgments relating to
matters not concluded by year-end. To this end, the Corporation maintains a
highly developed system of internal controls and supports an extensive program
of internal auditing to monitor compliance with the system.
Management believes that this system provides reasonable, but not absolute,
assurance at a reasonable cost that the transactions of the Corporation are
executed in accordance with management's authorizations and are recorded
properly. This system requires that the recorded assets be compared with
existing assets at reasonable intervals and it provides reasonable assurance
that access to assets is permitted only in accordance with management's
authorization. The Corporation further seeks to assure the reliability of these
consolidated financial statements by the careful selection of its managers, by
organizational arrangements that provide appropriate division of responsibility
and by communication and inspection programs aimed at assuring understanding of
and compliance with its policies, standards and managerial authorities.
The Audit Committee of the Board of Directors, which consists of five
non-employee directors, meets periodically with the Corporation's financial
management, audit services and independent accountants (Coopers & Lybrand
L.L.P.) to review their work and the relationships between them in whatever
depth considered necessary to fulfill the Committee's responsibilities. Both
audit services and the independent accountants meet privately with and have
unrestricted access to the Audit Committee.
/s/ DONALD R. SHASSIAN
Donald R. Shassian
Senior Vice President and Chief Financial Officer
January 21, 1997
Report of Independent Accountants
To the Shareholders of Southern New England
Telecommunications Corporation:
We have audited the consolidated balance sheets of Southern New England
Telecommunications Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southern New
England Telecommunications Corporation as of December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Corporation discontinued accounting for the operations of its telephone
subsidiary in accordance with Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation," effective
January 1, 1996.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Hartford, Connecticut
January 21, 1997
SNET Annual Report 13
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Statements of Income (Loss)
Dollars in Millions, Except Per Share Amounts,
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
REVENUES AND SALES $1,941.9 $1,816.4 $1,717.8
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating 777.9 732.3 633.4
Maintenance 371.1 332.8 325.3
Depreciation and amortization 356.1 346.0 328.6
Taxes other than income 54.6 56.5 56.2
- --------------------------------------------------------------------------------
Total Costs and Expenses 1,559.7 1,467.6 1,343.5
- --------------------------------------------------------------------------------
OPERATING INCOME 382.2 348.8 374.3
Interest expense 88.7 85.9 74.9
Other income, net 6.9 15.5 .1
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 300.4 278.4 299.5
Income taxes 107.6 109.6 121.9
- --------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGE 192.8 168.8 177.6
Extraordinary charge, net of tax -- (687.1) --
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ 192.8 $ (518.3) $ 177.6
================================================================================
Weighted Average Common Shares
Outstanding (thousands) 65,589 64,888 64,209
================================================================================
EARNINGS (LOSS) PER SHARE
Income before extraordinary charge $ 2.94 $ 2.60 $ 2.77
Extraordinary charge -- (10.59) --
- --------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ 2.94 $ (7.99) $ 2.77
================================================================================
The accompanying notes are an integral part of these financial statements.
14 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Balance Sheets
Dollars in Millions, At December 31, 1996 1995
- ----------------------------------------------------------------------------
ASSETS
Cash and temporary cash investments $ 9.0 $ 11.1
Accounts receivable, net of allowance
for uncollectibles of $27.4 and $34.2,
respectively 323.3 347.3
Materials, supplies and inventories 27.4 26.1
Prepaid publishing 35.2 37.3
Deferred income taxes 45.4 66.8
Other current assets 27.7 46.3
- ----------------------------------------------------------------------------
Total Current Assets 468.0 534.9
Property, plant and equipment, net 1,597.0 1,565.2
Intangible assets, net 400.3 414.9
Deferred income taxes 91.2 92.0
Leases and other assets 114.5 117.2
- ----------------------------------------------------------------------------
Total Assets $2,671.0 $2,724.2
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 252.0 $ 261.9
Short-term debt 215.2 232.2
Advance billings and customer deposits 60.9 58.0
Accrued compensated absences 31.9 36.6
Restructuring charge 14.5 59.0
Other current liabilities 92.5 87.9
- ----------------------------------------------------------------------------
Total Current Liabilities 667.0 735.6
Long-term debt 1,169.7 1,182.4
Accrued postretirement benefit obligation 288.9 310.8
Unamortized investment tax credits 15.5 17.6
Other liabilities and deferred credits 66.9 124.9
- ----------------------------------------------------------------------------
Total Liabilities 2,208.0 2,371.3
- ----------------------------------------------------------------------------
Common stock; $1.00 par value; 300,000,000
shares authorized; 68,407,669 and
67,881,159 issued, respectively 68.4 67.9
Proceeds in excess of par value 602.8 697.9
Retained deficit (55.7) (249.5)
Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (47.8) (58.7)
- ----------------------------------------------------------------------------
Total Shareholders' Equity 463.0 352.9
- ----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,671.0 $2,724.2
============================================================================
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 15
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Unearned
Compen- Total
Common Stock Issued Proceeds in Retained sation Share-
Dollars in Millions, ---------------------- Excess of Earnings Treasury Related holders'
Except Per Share Amounts Number Par Value Par Value (Deficit) Stock to ESOP Equity
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1994 66,608,360 $66.6 $656.7 $ 315.7 $(104.7) $(79.7) $854.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 177.6 177.6
Common stock issued, at market:
Dividend reinvestment plan 474,441 .5 15.2 15.7
Savings and incentive plans 181,634 .2 5.9 6.1
Dividends declared ($1.76 per share) (113.0) (113.0)
Reduction of ESOP debt 10.1 10.1
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.5 1.5
ESOP earned compensation
accrual .3 .3
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 67,264,435 67.3 677.8 381.8 (104.7) (69.3) 952.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss (518.3) (518.3)
Common stock issued, at market:
Dividend reinvestment plan 466,498 .5 15.4 15.9
Savings and incentive plans 150,226 .1 4.7 4.8
Dividends declared ($1.76 per share) (114.2) (114.2)
Reduction of ESOP debt 11.0 11.0
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.2 1.2
ESOP earned compensation
accrual (.4) (.4)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 67,881,159 67.9 697.9 (249.5) (104.7) (58.7) 352.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 192.8 192.8
Common stock issued, at market:
Dividend reinvestment plan 367,183 .4 14.3 14.7
Savings and incentive plans 159,327 .1 5.8 5.9
Dividends declared ($1.76 per share) (115.2) (115.2)
Reduction of ESOP debt 12.1 12.1
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.0 1.0
ESOP earned compensation
accrual (1.2) (1.2)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 68,407,669 $68.4 $602.8 $ (55.7) $(104.7) $(47.8) $463.0
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
16 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows
Dollars in Millions, For the Years Ended December 31, 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 192.8 $(518.3) $ 177.6
Tax benefit of dividends on shares held in ESOP 1.0 1.2 1.5
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 356.1 346.0 328.6
Extraordinary charge, net of tax -- 687.1 --
Provision for uncollectible accounts 44.4 25.9 23.0
Restructuring payments (110.6) (89.1) (63.6)
Increase in deferred income taxes 22.2 30.7 30.0
Decrease in investment tax credits (2.1) (6.9) (7.9)
Changes in operating assets and liabilities, net (30.3) (34.0) (74.1)
Other, net (3.3) (3.4) 7.5
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 470.2 439.2 422.6
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash expended for capital additions (366.6) (354.0) (282.3)
Purchase of cellular properties -- (455.6) --
Proceeds from asset sales 10.8 74.0 --
Other, net 16.6 16.5 27.3
----------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (339.2) (719.1) (255.0)
----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of long-term debt (34.9) (108.3) (294.7)
Proceeds from long-term debt -- 300.0 --
Cash dividends paid (100.2) (98.0) (97.2)
Net proceeds of commercial paper 2.0 192.9 6.3
Other, net -- (2.3) (.1)
----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (133.1) 284.3 (385.7)
----------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Temporary Cash Investments (2.1) 4.4 (218.1)
Cash and temporary cash investments at beginning of year 11.1 6.7 224.8
----------------------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Year $ 9.0 $ 11.1 $ 6.7
============================================================================================================================
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 17
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
NOTE 1: Summary of Significant
Accounting Policies
BASIS OF PRESENTATION The consolidated financial statements of Southern New
England Telecommunications Corporation ("Corporation") are in conformity with
generally accepted accounting principles ("GAAP"). Effective January 1, 1996,
the Corporation's telephone operating subsidiary, The Southern New England
Telephone Company ("Telephone Company"), discontinued using Statement of
Financial Accounting Standard ("SFAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation" [see Note 3].
The consolidated financial statements include the accounts of the
Corporation, all wholly-owned subsidiaries and partnerships in which the
Corporation effectively has control. All significant intercompany transactions
and accounts have been eliminated.
The Corporation derives substantially all of its revenues from the
telecommunications service industry by providing wireline, wireless and
information and entertainment services, including local, national and
international communications; network services; mobile communications; and
advertising. The Corporation's operations and customers are located primarily in
Connecticut.
The 1995 and 1994 consolidated financial statements have been reclassified
to conform to the current year presentation.
USE OF ESTIMATES The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
As a result of the increasingly competitive environment, management revised
its procedure to write-off uncollectible accounts receivable within a shorter
time frame in 1996. In addition, management enhanced its evaluation of the
adequacy of the allowance for uncollectibles by placing additional emphasis on
the risks associated with an increasingly competitive environment.
CASH AND TEMPORARY CASH INVESTMENTS Cash and temporary cash investments include
all highly liquid investments, with original maturities of three months or less.
The Corporation records payments made by draft as accounts payable until the
banks honoring the drafts have presented them for payment. At December 31, 1996
and 1995, accounts payable included drafts outstanding of $41.4 and $45.9,
respectively.
MATERIALS, SUPPLIES AND INVENTORIES Materials and supplies, which are carried at
original cost, are primarily for the construction and maintenance of telephone
plant. Inventories, principally telephone sets, wireless equipment and telephone
systems, are carried at the lower of weighted average cost or market value.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost.
Depreciation is calculated on telephone plant using either the equal life group
straight-line depreciation method or the composite vintage group method.
Property and equipment other than telephone plant is depreciated primarily using
the straight-line method.
As a result of the discontinuance of SFAS No. 71, the Corporation is using
estimated useful lives, effective January 1, 1996, that are shorter than the
economic lives historically prescribed by regulators. A comparison of average
asset lives before and after the discontinuance of SFAS No. 71, for the most
significantly affected categories of telephone plant, is as follows:
Asset Category Before After
- -----------------------------------------------------------
Digital Switch 17 10.5
Digital Circuit 11.5 8.2
Conduit 55 55
Copper 22-26 10.5-16
Fiber 32-40 30
===========================================================
Under the composite group method, the cost of depreciable telephone plant
retired, net of removal costs and salvage (i.e., gains or losses), is charged to
accumulated depreciation. When depreciable property and equipment other than
telephone plant are sold or retired, the resulting gain or loss is recognized
currently as an element of income. All long-lived assets are reviewed for
impairment whenever events or changes in circumstance indicate that the carrying
amount may not be recoverable, and any necessary adjustment is made.
Replacements, renewals and betterments that materially increase an asset's
useful or remaining life are capitalized. Minor replacements and all repairs and
maintenance are charged to expense.
INTANGIBLE ASSETS Intangible assets consist primarily of cellular licenses,
customer lists and goodwill resulting from the cellular acquisitions completed
in July 1995. The intangible assets are stated at cost and are being amortized
using the straight-line method over periods ranging from 5 to 40 years.
Accumulated amortization was $27.6 and $10.9 as of December 31, 1996 and 1995,
respectively. Intangible assets are reviewed for impairment whenever events or
changes in circumstance indicate that the carrying amount may not be
recoverable, and any necessary adjustment is made.
18 SNET Annual Report
LEASE NOTES RECEIVABLE Direct-financing and leveraged lease contracts are
accounted for by recording the total minimum lease payments receivable, plus the
estimated residual value, less the unearned lease income and, for leveraged
leases, less the associated aggregate non-recourse debt obligation. The unearned
lease income for direct-financing leases represents the excess of total minimum
lease payments, plus estimated residual value expected to be realized, over the
cost of the related equipment. For leveraged leases, the unearned income
reflects the net positive cash flow to be generated from the lease.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation accounts for its Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 76-3, as
amended. Accordingly, compensation expense is measured as the cost of shares
allocated from the trust, plus the amount required to purchase any additional
shares allocated to employee accounts, less a percentage of dividends received
by the plan. Dividends on stock held by the ESOP are recorded as a reduction of
retained earnings, and all ESOP shares are treated as outstanding for earnings
per share calculations. Debt of the ESOP that has been guaranteed by the
Corporation is recorded as long-term debt and as a reduction of shareholders'
equity. As the ESOP repays the debt, a corresponding reduction in long-term debt
and an increase in shareholders' equity is recorded.
REVENUE RECOGNITION Revenues are recognized when earned regardless of the period
in which billed. Revenues for directory advertising are recognized over the life
of the related directory, normally one year.
CAPITALIZED INTEREST COST Upon the discontinuance of SFAS No. 71, effective
January 1, 1996, the Telephone Company reports capitalized interest as a cost of
telephone plant and a reduction in interest expense, in accordance with SFAS No.
34, "Capitalization of Interest Cost." Prior to the discontinuance of SFAS No.
71, the Telephone Company included in its telephone plant accounts an imputed
cost of debt and equity for funds used during the construction of telephone
plant. The Corporation's other subsidiaries account for capitalized interest in
accordance with SFAS No. 34.
ADVERTISING COSTS Costs for advertising products and services or corporate image
are expensed as incurred.
COMPUTER SOFTWARE COSTS The Telephone Company capitalizes initial operating
systems for central office switching equipment. Right-to-use fees, additions,
upgrades and modifications to operating software programs and applications are
expensed. Computer software acquired or developed for internal use by all other
subsidiaries are expensed when incurred.
INCOME TAXES The Corporation files a consolidated federal income tax return and,
where allowable, combined state income tax returns.
The Corporation computes income taxes under SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are determined based on all
temporary differences between the financial statement and tax bases of assets
and liabilities using the currently enacted rates. Additionally, the Corporation
will recognize deferred tax assets if it is more likely than not that the
related benefit will be realized.
Investment tax credits realized in prior years by the Telephone Company are
being amortized as a reduction to the provision for income taxes over the life
of the related plant.
EARNINGS PER SHARE Earnings per common share are computed by dividing net income
by the weighted average number of common stock and common stock equivalents
outstanding during the period.
NOTE 2: Acquisitions and Sale of Assets
On October 22, 1996, the Corporation entered into a definitive agreement to
acquire the remaining 63.5% of Woodbury Telephone Company ("Woodbury") which it
does not already own. Under the terms of the agreement, common shareholders of
Woodbury will exchange each outstanding share of Woodbury common stock for an
amount of the Corporation's common stock having a market value of $43 per share
at the closing of the transaction, subject to certain conditions. The
acquisition will be accounted for under the purchase method, and is expected to
close in mid-1997, pending approval by 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.
In July 1995, the Corporation purchased from Bell Atlantic Corporation,
NYNEX Corporation and Richmond Telephone Company, for approximately $456 in the
aggregate, certain cellular properties in Rhode Island and New Bedford and
Pittsfield, Massachusetts, and an increased interest in Springwich Cellular
Limited Partnership ("Springwich"). In total, these acquisitions expanded
wireless' service area by 2.3 million POPs (population equivalents) along the
Boston to New York corridor.
The cellular acquisitions were financed with approximately $456 of
short-term debt issued in June 1995. Short-term debt of $300.0 was replaced with
medium-term notes 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 were included in
the consolidated financial statements subsequent to the acquisition date. The
excess of the purchase price over the estimated fair value of the net assets
acquired of approximately $24 was assigned to goodwill with an amortization
period of 15 years.
SNET Annual Report 19
In June 1995, the Corporation completed the sale, for approximately $25, of
substantially all of its paging network assets to Paging Network of New York,
Inc. Wireless continues, as a reseller, to market paging services under the Page
2000(RM) brand name. The net loss from the sale represented costs incurred as a
direct result of exiting the paging network business and was charged against the
restructuring reserve [see Note 6].
NOTE 3: Discontinuance of SFAS No. 71
In the fourth quarter 1995, the Telephone Company determined it was no longer
eligible for application of SFAS No. 71, which specifies accounting standards
required for public utilities and certain other regulated companies. Effective
January 1, 1996, the Telephone Company follows accounting principles which are
more appropriate for a competitive environment. This determination was made
based on the significant changes in technology and the increase in
telecommunications competition in Connecticut brought about by legislative and
regulatory policy changes. This accounting change is for financial reporting
purposes only and does not affect the Telephone Company's accounting and
reporting for regulatory purposes. As a result of the discontinued use of SFAS
No. 71, in accordance with the provisions of SFAS No. 101, "Accounting for the
Discontinuance of Application of FASB Statement No. 71," the Corporation
recorded a non-cash, extraordinary charge of $687.1, or $10.59 per share, net of
applicable tax benefits of $515.5, in the fourth quarter of 1995.
The following table is a summary of 1995's extraordinary charge:
Before-tax After-tax
- ------------------------------------------------------------
Adjustment to net telephone plant $(1,178.0) $(703.9)
Elimination of net regulatory assets (24.6) (14.3)
Tax-related net regulatory liabilities -- 20.1
Accelerated amortization of
investment tax credits -- 11.0
- ------------------------------------------------------------
Total Non-cash, Extraordinary Charge $(1,202.6) $(687.1)
============================================================
The adjustment of $1,178.0 to net telephone plant was necessary since
estimated useful lives and depreciation methods historically prescribed by
regulators did not reflect the rapid pace of technological development and
differed significantly from those economic useful lives used by unregulated
companies. Plant balances were adjusted by increasing the accumulated
depreciation reserve. The increase to the accumulated depreciation reserve was
determined by a discounted cash flow analysis which considered technological
replacement and the estimated impact of future competition. To support this
analysis, a depreciation reserve study was also performed that identified, by
asset categories, inadequate accumulated depreciation levels (i.e.,
deficiencies) that had developed over time.
The discontinuance of SFAS No. 71 also required the Corporation to
eliminate from its consolidated balance sheet, prepared for financial reporting
purposes, the effects of any actions of regulators that had been recognized as
assets and liabilities pursuant to SFAS No. 71, but would not have been
recognized as assets and liabilities by unregulated companies. The elimination
of net regulatory assets relates principally to vacation pay costs and gross
earnings tax which were being amortized as they were recognized in the
ratemaking process.
Additionally, upon the discontinuance of SFAS No. 71, the tax-related
regulatory assets and liabilities were eliminated and the related deferred tax
balances were adjusted to reflect application of SFAS No. 109, consistent with
other unregulated companies.
As asset lives were shortened, the related investment tax credits
associated with those assets were also adjusted for the shortened lives and the
result ($11.0) was included in the extraordinary charge as a credit to income,
net of associated deferred income taxes.
NOTE 4: Employee Benefits
SEPARATION OFFERS In April 1995, the Corporation ratified a contract with the
Connecticut Union of Telephone Workers, Inc. which included a voluntary
early-out offer ("EOO"). The EOO provided enhanced pension benefits by adding
six years to the age and to the length of service of employees for purposes of
determining pension and postretirement health care benefits eligibility. The
employees also had the option to select a pension distribution method (i.e.,
lump-sum, monthly pension or a combination of both) at the time of separation.
The EOO was available to the bargaining-unit work force during July 1995 and
approximately 2,700 employees, or 40.7% of the total bargaining-unit work force,
accepted the offer and left the Corporation through June 1996. In addition,
approximately 500 management employees accepted a severance plan with enhanced
benefits during 1996. The 1996 net settlement gains and the 1995 net curtailment
losses related to these separation offers were recorded to the restructuring
reserve in the respective years [see Note 6].
PENSION PLANS The Corporation sponsors several non-contributory, defined benefit
pension plans: one for management employees and one for bargaining-unit
employees; and one supplementary non-qualified, unfunded plan for all employees.
The supplementary non-qualified plan provides a benefit equal to any pension
amount above which would otherwise be payable under the defined benefit pension
plans in the absence of Internal Revenue Code limitations. Prior to July 1,
1995, benefits for bargaining-unit employees were based on years of service and
pay during 1987 to 1991 as well as a cash balance component. Prior to 1996,
benefits for management employees were based on an adjusted career average pay
plan. The bargaining-unit and management pension plans were converted to cash
balance plans effective July 1, 1995 and January 1, 1996, respectively.
Accordingly, pension benefits are determined as a single account balance
20 SNET Annual Report
and grow each year with pay and interest credits. Prior to the conversion to the
cash balance plans, the benefits for the employees' supplementary plans were
based on years of service and average eligible pay. Effective with the
conversion to the cash balance plans, the benefits are based on pay and interest
credits. The supplementary non-qualified, unfunded plan for non-employee
directors was terminated in 1996 with pension benefits payable only to current
and retired directors and with the amount of accrued pension benefits being
frozen.
Funding of the management and bargaining-unit plans is achieved through
irrevocable contributions made to a trust fund. Plan assets consist primarily of
listed stocks, corporate and governmental debt and real estate. The
Corporation's policy is to fund the pension cost for these plans in conformity
with the Employee Retirement Income Security Act of 1974 using the aggregate
cost method. For purposes of determining contributions, the assumed investment
earnings rate on plan assets was 9.5% in 1996 and declines to 7.5% in 1998.
Pension (income) cost for all plans, computed using the projected unit
credit actuarial method, includes the following components:
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
Service cost $ 20.2 $ 22.1 $ 30.9
Interest cost on projected
benefit obligation 96.3 113.5 107.0
Amortizations and deferrals, net 65.8 249.6 (136.4)
Actual return on plan assets (177.6) (393.3) 1.0
- --------------------------------------------------------------------
Net Pension Cost (Income)
Recorded to Expense 4.7 (8.1) 2.5
- --------------------------------------------------------------------
Settlement gain (76.1) (76.0) --
Costs relating to special
termination benefits -- 137.5 --
Curtailment loss 10.8 16.8 13.4
- --------------------------------------------------------------------
Net (Settlement Gain)
Curtailment Loss (65.3) 78.3 13.4
- --------------------------------------------------------------------
Net Pension (Income) Cost $ (60.6) $ 70.2 $ 15.9
====================================================================
The 1996 net settlement gain and the 1995 and 1994 net curtailment losses
were associated with the severance programs and were recorded to the
restructuring reserve in the respective years [see Note 6]. The 1996 increase in
net pension cost (income) recorded to expense was due primarily to lower returns
on plan assets, reflecting a combination of a lower asset base and a generally
weaker capital market return when compared with 1995.
The following table sets forth the plans' funded status:
At December 31, 1996 1995
- --------------------------------------------------------------------
Actuarial Present Value of Accumulated
Benefit Obligation, including vested
benefits of $1,253.3 and $1,405.8,
respectively $ 1,289.3 $ 1,475.6
====================================================================
Plan assets at fair value $ 1,690.3 $ 1,847.8
Actuarial present value of projected
benefit obligation (1,337.3) (1,565.2)
====================================================================
Assets in Excess of Projected
Benefit Obligation 353.0 282.6
Unrecognized prior service costs 129.2 151.7
Unrecognized transition asset (98.4) (130.5)
Unrecognized net gain (401.3) (383.4)
Adjustment required to recognize
minimum liability (3.2) (2.7)
- --------------------------------------------------------------------
Accrued Pension Cost $ (20.7) $ (82.3)
====================================================================
Assumptions used to calculate the plans' funded status:
At December 31, 1996 1995 1994
- -----------------------------------------------------------------
Discount rate for projected
benefit obligation 7.5% 7.0% 8.0%
Expected rate of increase in future
management compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets 8.0% 8.0% 8.0%
=================================================================
The Corporation periodically amends the benefit formulas under its pension
plans. Accordingly, pension cost has been determined in such a manner as to
anticipate that modifications to the pension plans would continue in the future.
POSTRETIREMENT HEALTH CARE BENEFITS The Corporation provides health care and
life insurance benefits for retired employees. Substantially all of the
Corporation's employees may become eligible for these benefits if they meet
certain age and service requirements. In addition, an employee's spouse and
dependents may be eligible for health care benefits. Effective July 1, 1996, all
bargaining-unit employees who retire after December 31, 1989 and all management
employees who retire after December 31, 1991 may have to share with the
Corporation the premium costs of postretirement health care benefits if these
costs exceed certain limits.
The Corporation funds trusts for postretirement health insurance benefits
using Voluntary Employee Beneficiary Association. Plan assets consist primarily
of investments in domestic corporate equity and government and corporate debt
securities.
SNET Annual Report 21
The Corporation's postretirement benefit cost includes the following
components:
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------
Service cost $ 4.4 $ 4.4 $ 5.4
Interest cost of accumulated
benefit obligation 37.6 33.4 32.2
Amortizations and deferrals, net 19.8 21.0 (5.4)
Actual return on plan assets (30.9) (31.5) (2.6)
- -------------------------------------------------------------
Net Postretirement Benefit Cost
Recorded to Expense 30.9 27.3 29.6
- -------------------------------------------------------------
Costs relating to special
termination benefits -- 11.0 --
Curtailment loss .2 12.9 .8
- -------------------------------------------------------------
Net Curtailment Loss .2 23.9 .8
- -------------------------------------------------------------
Net Postretirement Benefit Cost $ 31.1 $ 51.2 $30.4
=============================================================
The 1996, 1995 and 1994 net curtailment losses were associated with the
severance programs and were recorded to the restructuring reserve in the
respective years [see Note 6].
The following table sets forth the plans' funded status:
At December 31, 1996 1995
- -------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(458.6) $(447.5)
Fully eligible active plan
participants (15.5) (21.1)
Other active plan participants (66.3) (74.2)
- -------------------------------------------------------------
Total Accumulated Postretirement
Benefit Obligation (540.4) (542.8)
Plan assets at fair value 229.4 178.6
- -------------------------------------------------------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets (311.0) (364.2)
Unrecognized net (gain) loss (11.9) 16.7
Unrecognized prior service cost 13.6 16.3
- -------------------------------------------------------------
Accrued Postretirement
Benefit Obligation $(309.3) $(331.2)
=============================================================
Assumptions used to calculate the plans' funded status:
At December 31, 1996 1995 1994
- -------------------------------------------------------------
Discount rate for projected
benefit obligation 7.5% 7.0% 8.0%
Expected rate of increase in future
compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of
return on plan assets:
Management health trust 7.0% 7.0% 7.0%
Bargaining-unit health trust 7.5% 7.5% 7.5%
Retiree life insurance trust 7.5% 7.5% 7.5%
- -------------------------------------------------------------
The assumed health care cost trend rate used to measure the expected cost
of these benefits for 1997 was 6.9% and declines to 3.8% by 2001. A one
percentage point increase in the assumed health care cost trend rate would have
increased the estimated aggregate service and interest cost components of the
1996 net postretirement benefit cost by approximately $2 and the accrued
postretirement benefit obligation by approximately $24 as of December 31, 1996.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation has established a leveraged ESOP
for substantially all employees as part of its existing savings plans. Under the
ESOP, the Corporation's matching contributions are invested entirely in common
stock of the Corporation and are held by the ESOP.
In January 1990, the Corporation loaned the ESOP $10.0 and in February
1990, the ESOP borrowed an additional $110.0, which the Corporation guaranteed,
through a third party. The proceeds of the $10.0 loan were used to acquire
shares of the Corporation's common stock through open market purchases. The
proceeds of the $110.0 loan were used to purchase shares of both unissued common
stock and treasury stock from the Corporation. All shares purchased by the ESOP
were originally pledged as collateral for its debt. The Corporation periodically
makes cash payments to the ESOP that, together with dividends received on shares
held by the ESOP, are used to make interest and principal payments on both
loans. As these payments are made, shares are released from collateral and made
available for distribution to employees' accounts, based on the proportion of
debt service paid in the year.
ESOP expense and ESOP trust activity are as follows:
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
Compensation expense(1) $11.0 $14.7 $14.3
Interest expense incurred(1) 4.4 5.1 5.9
Interest income earned (.5) (.6) (.7)
- -----------------------------------------------------------
Total Expense $14.9 $19.2 $19.5
===========================================================
Dividends Used for Debt Service $ 5.1 $ 5.3 $ 5.3
Cash Contributions Used for
Debt Service $13.5 $13.3 $13.2
===========================================================
(1) Net of applicable dividends used for debt service.
ESOP shares outstanding are as follows:
In Thousands, At December 31, 1996 1995 1994
- -----------------------------------------------------------
Allocated shares 1,389.1 1,508.0 1,164.4
Unreleased shares 1,206.4 1,301.5 1,809.6
- -----------------------------------------------------------
Total ESOP Shares 2,595.5 2,809.5 2,974.0
===========================================================
22 SNET Annual Report
NOTE 5: Income Taxes
Income tax expense includes the following components:
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
Federal
Current $ 79.4 $ 62.4 $ 74.7
Deferred 16.1 27.4 19.5
Investment tax credits, net (2.1) (6.9) (7.9)
- -----------------------------------------------------------
Total Federal 93.4 82.9 86.3
- -----------------------------------------------------------
State
Current 9.8 17.3 31.1
Deferred 4.4 9.4 4.5
- -----------------------------------------------------------
Total State 14.2 26.7 35.6
- -----------------------------------------------------------
Total Income Taxes $107.6 $109.6 $121.9
===========================================================
Deferred income tax expense resulted primarily from restructuring program
costs incurred in 1996, 1995 and 1994.
In April 1995, new Connecticut state income tax rates were enacted to
accelerate the reduction of current rates. The 1996 Connecticut state income tax
rate of 10.75% will gradually decrease to 7.5% in 2000. Income taxes in 1995
included a provision to adjust deferred tax balances for the effect of the
change in state income tax rates.
A reconciliation between income taxes and taxes computed by applying the
statutory federal income tax rate to pre-tax income is as follows:
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
===========================================================
Federal income taxes at
statutory rate $105.1 $ 97.4 $104.8
State income taxes, net of federal
income tax effect 9.2 17.4 23.1
Depreciation of telephone plant
construction cost previously
deducted for tax purposes(1) -- 5.1 5.1
Amortization of investment
tax credits(1) (2.1) (6.9) (7.9)
Other differences, net (4.6) (3.4) (3.2)
- -----------------------------------------------------------
Income Taxes $107.6 $109.6 $121.9
===========================================================
Effective Tax Rate 35.8% 39.4% 40.7%
===========================================================
(1) Telephone Company only.
Consolidated deferred income tax assets (liabilities) are comprised of the
following:
At December 31, 1996 1995
- -----------------------------------------------------------
Postretirement benefits other
than pensions $124.8 $124.1
Software 13.9 15.1
Compensated absences 13.1 12.4
Restructuring charge 12.8 32.1
Allowance for uncollectibles 11.9 14.5
Pension 9.2 31.3
Other 10.6 (2.2)
Depreciation and amortization (29.3) (34.8)
Leveraged leases (28.3) (30.4)
Valuation allowance (2.1) (3.3)
- -----------------------------------------------------------
Deferred Income Taxes $136.6 $158.8
===========================================================
The 1996 decrease in the valuation allowance was due primarily to the
disposition of certain nonregulated operations. The allowance will continue to
be evaluated based on evidence of realization of all deferred tax assets.
NOTE 6: Restructuring Charge
In December 1993, the Corporation recorded a restructuring charge of $355.0,
$204.2 after-tax or $3.21 per share, to provide for a comprehensive
restructuring program. The charge included: $170.0 for employee separation
costs; $145.0 for process and systems reengineering; and $40.0 for exit and
other costs.
Costs incurred for employee separations included payments for severance,
unused vacation and health care continuation, as well as non-cash net pension
and postretirement settlement gains of $65.1 in 1996 and curtailment losses of
$102.2 and $14.2 in 1995 and 1994, respectively. Process and systems
reengineering costs included incremental costs incurred in connection with the
execution of numerous reengineering programs. Exit and other costs included
expenses related to the reduction of overall corporate space requirements and
the cost incurred as a direct result of exiting the paging network business
[see Note 2].
A summary of costs incurred under the restructuring program is as follows:
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------
Employee separation (gains) costs $(45.1) $111.2 $41.8
Process and systems reengineering 83.1 74.2 35.0
Exit and other costs 7.5 2.5 13.3
- -------------------------------------------------------------
Total Costs Incurred $ 45.5 $187.9 $90.1
=============================================================
Total employee separations under the restructuring program approximated
4,300 employees utilizing the EOO and severance plans: 970 employees through the
end of 1994; 2,195 employees in 1995; and 1,135 employees in 1996. Total
employee separations were substantially offset by an increase in provisional
employees to support greater demand for services and expanding businesses. The
hiring of provisional employees also provides flexible work force levels as
business needs change in the future.
The Telephone Company has implemented network operations, customer service,
repair and support programs and developed new processes to reduce the costs of
business while improving quality and customer service. 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 of December 31, 1996, the restructuring reserve balance of $31.5 is
adequate for the future residual costs under the 1993 restructuring program,
primarily exit costs relating to the delayed reduction of overall corporate
space requirements and timing of remaining charges.
SNET Annual Report 23
NOTE 7: Short-term Debt
Short-term debt, which includes commercial paper used to meet temporary cash
needs and long-term debt maturing within one year, consists of the following:
At December 31, 1996 1995
- ---------------------------------------------------------
Commercial paper $201.9 $199.9
Current maturities of
long-term debt 13.3 32.3
- ---------------------------------------------------------
Total Short-term Debt $215.2 $232.2
- ---------------------------------------------------------
Weighted Average Interest Rate
on Commercial Paper at Year-End 5.8% 5.8%
=========================================================
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 $300.0 in lines of credit provided by a
syndicate of banks. At December 31, 1996, the entire line remained available.
The annual commitment fee is currently .05% of the total lines of credit.
NOTE 8: Long-term Debt
The components of long-term debt are as follows:
At December 31, Maturing 1996 1995
- -------------------------------------------------------------
Unsecured notes:
6.13%-8.00% 1996-2007 $ 720.0 $ 740.0
7.25%-8.70% 2031-2033 325.0 325.0
Guaranteed ESOP:
9.35% 1996-2000 56.4 67.5
Debentures:
4.38% 2001 45.0 45.0
Bank notes:
10.00%-10.50% 1996-2009 24.4 24.9
Mortgage notes:
9.14%-9.90% 1996-2000 17.2 17.9
- -------------------------------------------------------------
Total Long-term Debt 1,188.0 1,220.3
Unamortized discount
and premium, net (5.1) (5.7)
Capital lease obligations .1 .1
Current maturities (13.3) (32.3)
- -------------------------------------------------------------
Long-term Debt $1,169.7 $1,182.4
=============================================================
Scheduled maturities of total long-term debt include $13.3 in 1997, $41.8
in 1998, $16.9 in 1999, $125.1 in 2000, $66.2 in 2001 and $924.7 thereafter.
At December 31, 1996, the Corporation and the Telephone Company had
remaining securities registered with the Securities and Exchange Commission to
issue up to $225.0 and $95.0, respectively, of medium-term unsecured notes
through shelf registrations. Subsequent to year-end, the Corporation's total
decreased to $125.0 as a result of the February 4, 1997 issuance of $100.0 of
6.50% medium-term notes due 2002. The proceeds from the issuance were used to
replace a portion of short-term debt related to the cellular acquisitions
discussed previously.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031, which were satisfied with the issuance of short-term debt. The
early extinguishment of debt will result in an extraordinary charge to the
Corporation's first quarter 1997 earnings of approximately $3.7 after-tax, or
$.06 per share.
NOTE 9: Commitments and Contingencies
The Corporation has entered into both operating and capital leases for
facilities and equipment used in its operations. Rental expense under operating
leases was $21.0, $23.7 and $24.4 for 1996, 1995 and 1994, respectively. Future
minimum rental commitments under third-party, noncancelable operating leases
include $15.3 in 1997, $14.9 in 1998, $13.2 in 1999, $11.2 in 2000, $5.6 in 2001
and $14.1 thereafter, for a total of $74.3. Capital leases were not significant.
The Corporation expects total capital expenditures of approximately $435
for additions to property, plant and equipment during 1997. In connection with
the capital program, the Corporation has made certain commitments for the
purchase of material and equipment.
In June 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 was liable for back wages and
liquidating damages. The Corporation and the Telephone Company are appealing
this decision. The Telephone Company recorded a liability of $11.0 as its
anticipated cost of total damages for this and other litigation matters, which
was recorded to expenses in 1995.
NOTE 10: Financial Instruments
FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which
it was practicable to estimate that value:
Cash and Temporary Cash Investments The carrying amount approximates fair value
because of the short maturity of those instruments.
Long-term Investments The fair value of equity investments was estimated based
on quoted market prices for those or similar investments.
Debt The carrying amount of the Corporation's short-term debt approximates fair
value because of the short maturity of those instruments. The fair value of
long-term debt (excluding capital leases) was estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Corporation for debt of the same remaining maturities.
24 SNET Annual Report
The carrying amount and estimated fair value of the Corporation's financial
instruments are as follows:
At December 31, 1996 1995
- ---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------
Cash and Temporary
Cash Investments $ 9.0 $ 9.0 $ 11.1 $ 11.1
Long-term
Investments $ 4.1 $ 13.2 $ 4.1 $ 9.6
Debt $(1,384.8) $(1,381.0) $(1,414.5) $(1,474.4)
=====================================================================
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Corporation to concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. The Corporation places its temporary cash
investments primarily with one financial institution, a New England regional
bank. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers in the Corporation's customer base.
NOTE 11: Lease Notes Receivable
Lease notes receivable includes, on an investment basis, a portfolio of
leveraged and direct-financing leases. The gross investment in these leases has
been recorded on the consolidated balance sheet in leases and other assets.
Investments in leveraged leases are in a coal-fired, electric generating
facility and other equipment. The investment in direct-financing leases are in a
commercial aircraft and other equipment.
The components of the lease notes receivable are as follows:
At December 31, 1996 1995
- -----------------------------------------------------------------
Direct- Direct-
Financing Leveraged Financing Leveraged
Leases Leases Leases Leases
- -----------------------------------------------------------------
Minimum rentals
receivable $ 61.7 $ 25.4 $ 70.1 $ 25.3
Unearned income (26.9) (14.0) (30.2) (15.7)
Estimated,
unguaranteed
residual value of
leased assets 10.3 30.6 10.3 31.5
Initial direct costs .2 -- .3 --
Allowance for losses (11.0) -- (9.7) --
- -----------------------------------------------------------------
Lease Notes
Receivable $ 34.3 42.0 $ 40.8 41.1
====== ======
Deferred taxes arising
from leveraged leases (28.3) (30.4)
- -----------------------------------------------------------------
Net Investment in
Leveraged Leases $ 13.7 $ 10.7
=================================================================
Future minimum receipts under third-party direct-financing leases include
$4.1 in 1997, $4.1 in 1998, $4.8 in 1999, $3.1 in 2000, $3.8 in 2001 and $41.8
thereafter.
NOTE 12: Shareholders' Equity
COMMON, PREFERRED AND PREFERENCE SHARES The Corporation is authorized to issue
up to 300,000,000 shares of common stock at a par value of $1.00 per share
("Common Stock") as well as 2,000,000 preferred shares at a par value of $50.00
per share and 50,000,000 preference shares at a par value of $1.00 per share. No
preferred or preference shares have been issued pursuant to these
authorizations.
DIVIDENDS DECLARED The 1996 dividends were declared out of proceeds in excess of
par value, while 1995 and 1994 dividends were declared out of retained earnings.
SHAREHOLDERS' RIGHTS PLAN On December 11, 1996, the Board of Directors approved
the 1997 shareholders' rights plan ("Rights Plan") which became effective
February 11, 1997 upon the expiration of the previous plan. Under the 1997
Rights Plan, each share of Common Stock has a purchase right that entitles the
holder to purchase 1/100 of a preference share (equivalent of one share of
Common Stock) at an exercise price of $180.00. The rights are not exercisable or
transferable apart from the Common Stock until a person or group has acquired,
or has made an offer for, 20% or more of the outstanding Common Stock. In the
event that a person or group acquires 20% or more of the outstanding Common
Stock, each outstanding right, other than those held by the 20% acquirer, is
entitled to purchase, at the exercise price of the rights, a number of shares of
Common Stock having a market value of two times the exercise price of the right.
The Board also may exchange the rights generally at an exchange ratio of one
share of Common Stock per right. The Rights Plan may be amended by the Board of
Directors to reduce the threshold at which the rights are triggered to not less
than 10% of the then outstanding Common Stock. Additionally, if the person or
group acquires the Corporation in a merger or other business combination
transaction, each right will entitle the owner to purchase common stock of the
acquirer having a market value of two times the exercise price of the right. The
rights are redeemable at one cent each prior to public announcement that a
person or group has acquired beneficial ownership of 20% or more of the
outstanding Common Stock. The rights expire on February 11, 2007.
NOTE 13: Stock-Based Compensation Plans During 1996, the Corporation sponsored
two employee stock option plans, and a restricted stock plan for non-employee
directors.
The SNET 1986 Stock Option Plan ("1986 Plan") provided stock options to
certain key employees at the discretion of a committee of the Board of Directors
("Committee"). Options are no longer granted under the 1986 Plan, as it expired
on June 30, 1996. The SNET 1995 Stock Incentive Plan is a stock-based
compensation plan which enables the awarding of incentive compensation,
including stock options, to all employees at the discretion of the Board of
Directors or the Committee. Under both plans, the exercise price of each option
may not be less than 100% of the fair market value of the shares on the date of
grant. All options are exercisable no earlier than one year after the date of
grant, with most options vesting ratably over two or four years, and have a
maximum life of ten years.
SNET Annual Report 25
The plans allow stock appreciation rights ("SARs") to be granted in tandem with
the related stock option. No SARs have been granted since 1992 and the
Corporation presently does not intend to grant additional SARs in the future.
The Corporation has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock-based compensation plans.
Accordingly, no compensation cost has been recognized for the plans. Had the
Corporation adopted the cost recognition method provided under SFAS No. 123,
"Accounting for Stock-Based Compensation" for 1996 and 1995, the Corporation's
net income (loss) and earnings (loss) per share would approximate the pro forma
amounts below:
For the Years Ended
December 31, 1996 1995
- ---------------------------------------------------------------
As Pro As Pro
Reported Forma Reported Forma
- ---------------------------------------------------------------
Net Income (Loss) $192.8 $189.4 $(518.3) $(518.9)
Earnings (Loss)
Per Share $ 2.94 $ 2.90 $ (7.99) $ (8.00)
===============================================================
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
The Black-Scholes option pricing model was used to estimate the options'
grant date fair value with the following assumptions: 20% volatility; risk free
interest rate ranging from 5.2% to 7.9%; dividends of $1.76 per share per year;
and an estimated period to exercise of three or five years. The weighted average
fair value of options granted during the year was $7.85 and $6.13 in 1996 and
1995, respectively.
Information with respect to plan activity is as follows:
Options Shares
Available Under Average
for Grant Option SARs Price
- -------------------------------------------------------------
Balance at 1/1/94 1,112,200 544,025 172,600 $34.20
Granted (360,500) 360,500 -- $31.86
SARs exercised -- (8,100) (8,100) $29.82
Options exercised -- (1,100) -- $24.69
Canceled 33,600 (33,600) (1,800) $34.78
- ---------------------------------------------------
Balance at 12/31/94 785,300 861,725 162,700 $33.25
- ---------------------------------------------------
Approved for grant 4,600,000 -- -- --
Granted (2,535,950) 2,535,950 -- $37.59
SARs exercised -- (41,475) (41,475) $28.44
Options exercised -- (15,775) -- $30.86
Canceled 34,500 (34,500) -- $33.15
- ---------------------------------------------------
Balance at 12/31/95 2,883,850 3,305,925 121,225 $36.65
- ---------------------------------------------------
1986 Plan unused (65,525) -- -- --
Granted (223,500) 223,500 -- $42.48
SARs exercised -- (66,975) (66,975) $32.60
Options exercised -- (53,625) -- $33.37
Canceled 364,725 (364,725) -- $38.04
- ---------------------------------------------------
BALANCE AT 12/31/96 2,959,550 3,044,100 54,250 $37.05
=============================================================
Options exercisable were 1,334,388, 403,850 and 310,475 at December 31,
1996, 1995 and 1994, respectively. The respective weighted average exercise
prices were $36.72, $33.67 and $32.74. All outstanding SARs were exercisable at
each year-end.
The following table summarizes information with regard to stock options
outstanding and exercisable by ranges of exercise prices:
Weighted
Weighted Average
Average Remaining
Exercise Contractual
At December 31, 1996 Shares Price Life
- -----------------------------------------------------------
Stock Options Outstanding:
$24.69 to $35.99 1,035,500 $33.21 7.4 years
$36.00 to $43.38 2,008,600 $39.03 8.7 years
- ------------------------------------
$24.69 to $43.38 3,044,100 $37.05 8.3 years
===========================================================
Stock Options Exercisable:
$24.69 to $35.99 416,950 $32.80 --
$36.00 to $39.00 917,438 $38.50 --
- ------------------------------------
$24.69 to $39.00 1,334,388 $36.72 --
===========================================================
The 1994 SNET Non-Employee Director Stock Plan ("1994 Plan"), which was
terminated upon ratification of the 1996 Non-Employee Director Stock Plan ("1996
Plan"), allowed each director to receive between 25% and 100% of their annual
retainer in shares of Common Stock. The 1996 Plan, approved on May 8, 1996,
provides each non-employee director with 300 shares of Common Stock in lieu of
cash compensation. A director may also elect to receive up to 100% of his or her
cash retainer in shares. All shares distributed have voting and dividend rights,
and are subject to restrictions on transferability. Upon granting of the shares,
compensation expense is recorded in the amount of the market value of the
shares.
A summary of restricted stock activity is as follows:
At December 31, 1996 1995 1994
- -----------------------------------------------------------
Shares available for grant,
beginning of period 143,852 147,152 --
New shares approved
for issuance 200,000 -- 150,000
1994 Plan unused (141,619) -- --
Shares granted (5,833) (3,300) (2,848)
- -----------------------------------------------------------
Shares Available for Grant,
End of Period 196,400 143,852 147,152
===========================================================
Weighted Average Market
Value of Stock on Grant Date $41.21 $35.02 $29.91
Compensation Expense Recorded
for Restricted Stock Grants $ .2 $ .1 $ .1
===========================================================
26 SNET Annual Report
NOTE 14: Supplemental Financial Information
SUPPLEMENTAL INCOME STATEMENT INFORMATION
For the Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Advertising Expense $ 42.1 $ 38.8 $ 32.4
============================================================
Depreciation and amortization:
Depreciation $331.1 $328.1 $ 320.6
Amortization 25.0 17.9 8.0
- ------------------------------------------------------------
Total Depreciation and Amortization $356.1 $346.0 $ 328.6
============================================================
Taxes other than income:
Property $ 48.0 $ 43.7 $ 45.5
Other 6.6 12.8 10.7
- ------------------------------------------------------------
Total Taxes Other Than Income $ 54.6 $ 56.5 $ 56.2
============================================================
Interest expense:
Long-term debt $ 83.0 $ 74.7 $ 70.3
Short-term debt 10.0 8.5 2.2
Capitalized interest (7.2) -- --
Other 2.9 2.7 2.4
- ------------------------------------------------------------
Total Interest Expense $ 88.7 $ 85.9 $ 74.9
============================================================
During 1996, 1995 and 1994, revenues earned from providing services to AT&T
Corp. accounted for 7.9%, 9.2% and 10.2%, respectively, of total revenues and
sales.
SUPPLEMENTAL BALANCE SHEET INFORMATION
At December 31, 1996 1995
- ------------------------------------------------------------
Materials, supplies and inventories:
Materials and supplies $ 14.3 $ 10.6
Inventories 13.1 15.5
- ------------------------------------------------------------
Total Materials, Supplies and
Inventories $ 27.4 $ 26.1
============================================================
Property, plant and equipment, at cost:
Telephone plant:
Land $ 16.8 $ 17.5
Buildings 386.4 396.2
Central office equipment 1,743.0 1,657.2
Outside plant facilities and equipment 1,732.4 1,640.3
Furniture and office equipment 310.0 310.6
Station equipment and connections 22.5 22.7
Plant under construction 98.0 122.4
Telecommunications property
and equipment 398.2 365.2
- ------------------------------------------------------------
Total Property, Plant and Equipment,
at cost 4,707.3 4,532.1
Accumulated Depreciation (3,110.3) (2,966.9)
- ------------------------------------------------------------
Total Property, Plant and Equipment,
net $ 1,597.0 $1,565.2
============================================================
Leases and other assets:
Lease notes receivable $ 76.3 $ 81.9
Prepaid pension cost 7.3 --
Other assets 30.9 35.3
- ------------------------------------------------------------
Total Leases and Other Assets $ 114.5 $ 117.2
============================================================
Other current liabilities:
Dividends payable $ 28.9 $ 28.7
Accrued postretirement benefit
obligation 20.4 20.4
Accrued interest 19.2 19.8
Other current liabilities 24.0 19.0
- ------------------------------------------------------------
Total Other Current Liabilities $ 92.5 $ 87.9
============================================================
Other liabilities and deferred credits:
Accrued pension cost $ 28.0 $ 82.3
Restructuring charge 17.0 18.0
Other liabilities 21.9 24.6
- ------------------------------------------------------------
Total Other Liabilities and Deferred
Credits $ 66.9 $ 124.9
============================================================
SUPPLEMENTAL CASH FLOW INFORMATION
For the Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Interest Paid, net of
amounts capitalized $ 89.2 $ 79.7 $ 81.2
============================================================
Income Taxes Paid $ 84.0 $ 87.8 $109.5
============================================================
Changes in operating assets and
liabilities, net:
Increase in accounts
receivable, net $(18.5) $(78.3) $(48.9)
Increase in materials,
supplies and inventories (1.2) (.1) (4.9)
(Decrease) increase in accounts
payable, accrued expenses and
compensated absences (18.2) 65.0 11.0
Changes in other assets and
liabilities, net 7.6 $(20.6) (31.3)
- ------------------------------------------------------------
Changes in Operating Assets and
Liabilities, net $(30.3) $(34.0) $(74.1)
============================================================
OPERATING CASH FLOW(1) The following unaudited financial data on the
Corporation's product groups is not required by generally accepted accounting
principles and is provided for informational purposes only:
For the Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Wireline(2) $564.8 $569.0 $531.3
Wireless(3) 31.3 (10.8) 14.8
Information and Entertainment(4) 110.2 102.6 114.7
Other(5) 32.0 34.0 42.1
- ------------------------------------------------------------
Total Operating Cash Flow $738.3 $694.8 $702.9
===========================================================
(1) Represents operating income before depreciation and amortization. Operating
cash flow is not a generally accepted accounting principle measurement.
(2) Includes Telephone Company's telecommunications operations, SNET
Diversified Group, Inc. and SNET America, Inc.
(3) Includes the wholesale and retail cellular operations, SNET Cellular, Inc.
and SNET Mobility, Inc., net of cellular intercompany amounts. Also
includes paging operations which have changed from a network-based service
to a resale service in 1995.
(4) Includes publishing and SNET Personal Vision, Inc.
(5) Includes SNET Real Estate, Inc. and holding company operations.
SNET Annual Report 27
NOTE 15: Quarterly Financial Information (Unaudited)
1st QTR 2nd QTR 3rd QTR 4th QTR Full Year
- -----------------------------------------------------------------------------------------------------------------------------
1996
- ----
Revenues and Sales $474.0 $487.8 $488.2 $ 491.9 $1,941.9
Operating Income $102.1 $100.2 $ 90.5 $ 89.4 $ 382.2
Net Income $ 52.2 $ 50.5 $ 45.8 $ 44.3 $ 192.8
Earnings Per Share $ .80 $ .77 $ .70 $ .67 $ 2.94
=============================================================================================================================
1995
- ----
Revenues and Sales $440.4 $447.5 $464.9 $ 463.6 $1,816.4
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income $ 93.7 $ 86.0 $ 83.4 $ 85.7 $ 348.8
- -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge $ 46.7 $ 40.1 $ 41.3 $ 40.7 $ 168.8
Extraordinary charge [see Note 3] -- -- -- (687.1) (687.1)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 46.7 $ 40.1 $ 41.3 $ (646.4) $ (518.3)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share:
Income before extraordinary charge $ .72 $ .62 $ .64 $ .62 $ 2.60
Extraordinary charge(1) -- -- -- (10.54) (10.59)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share $ .72 $ .62 $ .64 $ (9.92) $ (7.99)
=============================================================================================================================
(1) Earnings (loss) per share is computed independently for the quarter based
on weighted average common shares outstanding for the quarter. The
calculations resulted in a difference of $.05 between loss per share for
the quarter and for the year.
28 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL AND STATISTICAL DATA (UNAUDITED)
Dollars in Millions, Except as Noted 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
Financial Data
Revenues and sales $ 1,942 $ 1,816 $ 1,718 $ 1,657 $ 1,629
Costs and expenses(1) $ 1,204 $ 1,121 $ 1,015 $ 1,361 $ 1,004
Interest expense $ 89 $ 86 $ 75 $ 91 $ 97
Income taxes $ 108 $ 110 $ 122 $ (44) $ 110
Income (loss) from continuing operations(2) $ 193 $ 169 $ 178 $ (44) $ 159
Net income (loss) $ 193 $ (518) $ 178 $ (318) $ 151
Earnings (loss) per share (dollars):
From continuing operations(2) $ 2.94 $ 2.60 $ 2.77 $ (.68) $ 2.56
Net income (loss) $ 2.94 $ (7.99) $ 2.77 $ (4.99) $ 2.44
Dividends declared per share (dollars) $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76
Net cash provided by operating activities $ 470 $ 439 $ 423 $ 479 $ 504
Cash expended for capital additions $ 367 $ 354 $ 282 $ 267 $ 290
Depreciation and amortization $ 356 $ 346 $ 329 $ 291 $ 250
Property, plant and equipment, net $ 1,597 $ 1,565 $ 2,712 $ 2,770 $ 2,767
Total assets $ 2,671 $ 2,724 $ 3,505 $ 3,762 $ 3,485
Shareholders' equity $ 463 $ 353 $ 953 $ 855 $ 1,254
Long-term debt $ 1,170 $ 1,182 $ 952 $ 984 $ 1,048
========================================================================================================================
Statistical Data
Network access lines in service (thousands) 2,163 2,073 2,009 1,964 1,937
Annual growth 4.3% 3.2% 2.3% 1.4% .8%
Network interstate access minutes
of use (millions) 7,906 7,298 6,917 6,522 6,230
Annual growth 8.3% 5.5% 6.1% 4.7% 4.0%
Cellular subscribers (thousands) 392 323 166 88 68
Annual growth 21.4% 94.6% 88.6% 29.4% 19.3%
Operating cash flow(3) $ 738 $ 695 $ 703 $ 296 $ 625
Telephone Company wireline cost per
access line (dollars)(4) $ 332 $ 320 $ 340 $ 365 $ 359
Return on average total capital 15.9% --(5) 12.8% --(6) 10.3%
Return on average equity 45.6% --(5) 19.4% --(6) 12.5%
Debt ratio(7) 74.9% 80.0% 51.0% 59.9% 47.4%
Pre-tax interest coverage (times) 4.1 4.2 5.0 .1 3.8
Average total debt cost 6.6% 6.9% 6.8% 7.7% 7.8%
Current ratio (times) .70 .73 .88 .82 .84
Average dividend yield 4.4% 5.1% 5.4% 4.9% 5.4%
Payout ratio 59.9% --(5) 63.5% --(6) 72.1%
Market price per share (dollars):
High $45.500 $40.250 $36.250 $38.375 $38.000
Low $36.000 $31.750 $28.250 $33.625 $28.250
Book value per share (dollars) $ 7.05 $ 5.42 $ 14.77 $ 13.38 $ 19.79
Average market price per share (dollars) $ 40.07 $ 34.47 $ 32.63 $ 35.70 $ 32.70
Average book value per share (dollars) $ 6.44 $ 15.14 $ 14.26 $ 17.69 $ 19.49
Average price/earnings ratio (times) 14 --(5) 12 --(6) 13
Average trading volume 105,028 91,797 59,437 79,086 60,360
Number of shareholders 50,917 53,332 55,693 57,352 59,089
Telephone Company wireline employees 8,167 7,742 8,604 9,087 9,532
Total employees 9,441 9,070 9,797 10,476 11,216
========================================================================================================================
Certain amounts have been restated to conform to the current year
presentation.
(1) Excludes depreciation and amortization. 1993 includes a charge of $355.0,
$204.2 after-tax or $3.21 per share, for restructuring.
(2) 1995 excludes an extraordinary charge of $687.1, or $10.59 per share,
related to the discontinuance of SFAS No. 71. 1993 includes the after-tax
restructuring charge and excludes discontinued operations of $10.3, or $.16
per share, an extraordinary charge of $44.0, or $.69 per share and the
cumulative effect of accounting changes of $220.2, or $3.46 per share.
(3) Represents operating income before depreciation and amortization. Operating
cash flow is not a generally accepted accounting principle measurement.
Management provides this measurement for informational purposes only.
Excluding the impact of the 1993 before-tax restructuring charge, operating
cash flow would have been $650 in 1993.
(4) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses. 1993 also excludes the before-tax
restructuring charge.
(5) Not presented for 1995 based upon a loss per share. A return on average
total capital of 11.6%, a return on average equity of 17.2%, a payout ratio
of 67.7% and an average price/earnings ratio of 13 were calculated
excluding the loss per share impact of the extraordinary charge of $10.59.
(6) Not presented for 1993 based upon a loss per share. A return on average
total capital of 10.4%, a return on average equity of 12.3%, a payout ratio
of 69.6% and an average price/earnings ratio of 14 were calculated
excluding the loss per share impact of the restructuring charge of $3.21,
discontinued operations of $.16, extraordinary charge of $.69 and the
cumulative effect of accounting changes of $3.46.
(7) Excluding the effect of the non-cash extraordinary charge related to the
discontinuance of SFAS No. 71, the 1995 debt ratio would have been 57.6%.
Excluding the combined effect of the charge related to SFAS No. 71 and the
debt issued to acquire the cellular properties, the 1995 debt ratio would
have been 48.0%.
SNET Annual Report 29
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
INVESTOR INFORMATION
Corporate Information
- ---------------------------------------------------------------------------------------------------------------------
Executive Office: Stock Exchange Listings: Auditors:
SNET New York Stock Exchange Coopers & Lybrand L.L.P.
227 Church Street Pacific Stock Exchange Independent Accountants
New Haven, CT 06510 Symbol: SNG 100 Pearl Street
(203) 771-5200 Hartford, CT 06103
Shareholder Information
- ---------------------------------------------------------------------------------------------------------------------
Annual Meeting of Shareholders: The Form 10-K may be obtained For Shareholder Information
May 14, 1997, 10:00 a.m. by contacting the Transfer Agent including quarterly results,
Oakdale Theatre and Registrar: latest recorded news
95 South Turnpike Road State Street Bank and Trust Company and information, call
Wallingford, CT 06492 P.O. Box 8200 1-800-SNG-6220 or visit
Boston, MA 02266-8200 our Internet web site
From anywhere in the continental at www.snet.com
U.S.: 1-800-243-1110
Security Analysts and Dividend Reinvestment
Portfolio Managers and Stock Purchase Plan
- ---------------------------------------------------------------------------------------------------------------------
Direct inquiries to: All owners of common stock are Shareholders do not pay any
Mr. James A. Magrone eligible for the plan, which allows brokerage or administrative fees
Director-Investor Relations participants to apply dividends and/or when purchasing additional shares
227 Church Street optional cash payments toward through the plan. You can obtain a
New Haven, CT 06510 increased investment in the prospectus and enrollment forms by
(203) 771-4662 Corporation. contacting State Street Bank and
Trust Company, Plan Administrator.
Market and Dividend Data
- ---------------------------------------------------------------------------------------------------------------------
Market information was obtained Market Price
from the composite tape, which ----------------------------------------------------------------------------------
encompasses trading on the 1996 1995
principal U.S. stock exchanges Quarter High Low Close Quarter High Low Close
as well as offboard trading. Cash ----------------------------------------------------------------------------------
dividends of $.44 per share were First $43.750 $37.500 $40.250 First $34.500 $31.750 $33.375
declared for each quarter in 1996 Second $45.500 $40.500 $42.000 Second $35.500 $32.375 $35.250
and 1995. The number of holders Third $42.750 $36.750 $36.875 Third $36.125 $32.625 $35.375
of SNET stock at February 28, Fourth $41.125 $36.000 $38.875 Fourth $40.250 $35.125 $39.750
1997 was 50,458.
30 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
OTHER INFORMATION
Executive Officers of the Corporation
- ---------------------------------------------------------------------------------------------------------------------
Daniel J. Miglio Chairman and Chief Executive Officer
Jean M. LaVecchia Senior Vice President--Organization Development
Fred T. Page Senior Vice President--Network Services
Ronald M. Serrano Senior Vice President--Communication, Information and Entertainment Group
Donald R. Shassian Senior Vice President and Chief Financial Officer
Representative Servicemarks and Trademarks
- ---------------------------------------------------------------------------------------------------------------------
SNET(r) is a registered trademark We Go Beyond The Call(r), SmartLink(r) americast is a trademark of the
and I-SNET is a servicemark of and All Distance(r) are registered trademarks americast partnership.
Southern New England of The Southern New England Telephone
Telecommunications Corporation. Company. Page 2000(r) is a registered
trademark of SNET Mobility, Inc.
SNET Annual Report 31