[SNET LOGO]
SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION
227 CHURCH STREET
NEW HAVEN, CONNECTICUT 06510
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1997 ANNUAL REPORT
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WIRELINE
WIRELESS
INFORMATION AND
ENTERTAINMENT
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Highlights 1
Business Highlights 2
Letter to Shareowners 3
Financial Commentary 6
Report of Management 15
Report of Independent Accountants 15
Consolidated Statements of Income (Loss) 16
Consolidated Balance Sheets 17
Consolidated Statements of Changes in Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Financial Data (Unaudited) 32
Statistical Data (Unaudited) 33
Investor Information 34
Other Information 35
NOTICE OF ANNUAL MEETING 37
PROXY STATEMENT
Proxy Information 38
Beneficial Ownership of Common Stock 38
Election of Directors (Proposal 1) 39
Nominees for Election as Directors 39
Directors Continuing in Office 40
Compensation and Other Information Regarding Directors 41
Committees of the Board 41
Ratification of Appointment of Auditors (Proposal 2) 42
Shareholder Proposals 42
Other Matters to Come Before the Meeting 42
Report of Personnel and Board Affairs Committee
of the Board of Directors on Executive
Compensation 42
1997 Executive Compensation 43
CEO Compensation 43
Summary Compensation Table 44
Option/SAR Grants in the Last Fiscal Year 45
Aggregated Option/SAR Exercises in Last Fiscal
Year and Fiscal Year End Option/SAR Values 46
Pension Plan 46
Change-in-Control Agreements 47
Certain Transactions 47
Performance Graph 47
Financial Statements 47
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. In the latest J.D. Power
national customer satisfaction survey, SNET was ranked the number-one,
long-distance company in America among mainstream users.
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL HIGHLIGHTS
Dollars in Millions, Except as Noted 1997 1996 1995
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OPERATING RESULTS
Revenues and Sales $2,022.3 $1,941.9 $1,816.4
Annual Growth 4.1% 6.9% 5.7%
Costs and Expenses(1) $1,245.7 $1,203.6 $1,121.6
Net Income (Loss)(2) $ 193.8 $ 192.8 $ (518.3)
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PER SHARE INFORMATION (DOLLARS)
Basic Earnings Per Share
Income Before Extraordinary Charge $ 2.99 $ 2.95 $ 2.60
Net Income (Loss)(2) $ 2.93 $ 2.95 $ (7.99)
Diluted Earnings Per Share
Income Before Extraordinary Charge $ 2.98 $ 2.94 $ 2.60
Net Income (Loss)(2) $ 2.92 $ 2.94 $ (7.99)
Dividends Declared $ 1.76 $ 1.76 $ 1.76
Market Price (year-end) $ 50.313 $ 38.875 $ 39.750
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AT YEAR-END
Total Assets $2,770.9 $2,671.0 $2,724.2
Debt Ratio 69.2% 74.9% 80.0%
Total Employees 9,743 9,441 9,070
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STATISTICAL DATA
Network Access Lines in Service
thousands)(3) 2,286 2,163 2,073
Annual Growth(3) 5.7% 4.3% 3.2%
Second Residential Network
Access Lines in Service (thousands) 127 97 75
Annual Growth 30.9% 29.3% 25.0%
Network Interstate Access
Minutes of Use (millions) 8,291 7,906 7,298
Annual Growth 4.9% 8.3% 5.5%
Interstate and International
Toll Access Line Subscribers (thousands) 941 758 266
Annual Growth 24.1% 185.0% 127.4%
Cellular Subscribers (thousands)(4) 457 392 323
Annual Growth(4) 16.6% 21.4% 94.6%
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OTHER DATA
Operating Cash Flow(5) $ 776.6 $ 738.3 $ 694.8
Telephone Company Wireline Cost
Per Access Line (dollars)(6) $ 312 $ 332 $ 320
Net Cash Provided by Operating
Activities $ 616.0 $ 477.4 $ 442.6
Cash Expended for Capital Additions $ 472.4 $ 373.8 $ 357.4
Cash Dividends Paid $ 102.4 $ 100.2 $ 98.0
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(1) Excludes depreciation and amortization.
(2) 1997 includes a $6.4 before-tax extraordinary charge for the early
extinguishment of debt that reduced net income by $3.7 and both basic and
diluted earnings per share by $.06. 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 by
$687.1 and basic and diluted earnings per share by $10.59.
(3) Excluding the purchase of Woodbury Telephone Company ("Woodbury"), network
access lines in service would have increased 4.7% to 2,265,000 in 1997.
(4) Excluding the subscribers from the acquired cellular properties, cellular
subscribers would have increased 51.1% to 251,000 subscribers in 1995.
(5) 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.
(6) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses. Also, excludes costs and access lines
resulting from the purchase of Woodbury.
SNET Annual Report 1
BUSINESS HIGHLIGHTS
* On January 5, 1998, we announced a definitive agreement to merge with SBC
Communications Inc. This $4.4 billion transaction will combine companies
with complementary wireless businesses and strong local telephone company
operations.
* We earned $2.99 per share before an extraordinary charge, up 1.4% despite
rising competition, added costs resulting from regulatory decisions and
implementation expenses for the Year 2000.
* J.D. Power and Associates rated SNET the number one long-distance company
in America among mainstream users in a national survey. By year-end, we
served 41% of the lines in the long-distance market in Connecticut.
* Access lines company-wide rose 5.7%, an historical high, as people added
second lines for fax machines and internet use, combined with strong
business demand for centrex lines.
* We received DPUC approval to formally split the company into separate
wholesale and retail operations. In January 1998, our competitive local
exchange carrier ("CLEC") opened for business.
* Our historic launch of SNET americast, the company's cable-TV business,
occurred on March 11 in Farmington, Connecticut. We have achieved very
strong market share in a short period of time. SNET internet access market
share also registered solid gains to become the second-largest provider in
Connecticut.
* We began converting to Time Division Multiple Access ("TDMA") digital
wireless technology while continuing to improve financial performance. Our
wireless operating margin was 28%, up from 15% in 1996.
* We acquired Woodbury Telephone Company ("Woodbury") in July. The new
relationship with SNET will enable Woodbury to build on its sophisticated
fiber-optic and digital network capabilities to offer an expanded array of
new products and services.
2 SNET Annual Report
LETTER TO SHAREOWNERS
To Our Shareowners:
This was an extraordinary year at SNET with stellar market-share growth in key
market segments, prestigious national and international recognition, wireless
margins almost doubling from 15 percent to 28 percent, and the launch of an
unprecedented restructure of the business. And we capped all this off with the
announcement on January 5, 1998 of a planned merger with the world's most
admired global telecommunications company, SBC Communications Inc. The merger
will begin a new chapter in SNET's history.
I am very enthusiastic about this merger. SBC is an ideal match that will
maximize our significant local strengths and assure our future. That makes the
merger good news for you as well as our customers and employees. It will put us
in the best possible position to serve Connecticut's communications and
information needs for the next century, enhancing our ability to deliver
excellent customer service and an increasing array of exciting new products. The
merger will give our company the scale and scope needed to compete successfully
in a rapidly changing and consolidating industry.
This tax-free stock merger will give you 1.7568 shares of SBC stock for
every SNET share you own. That exchange ratio is adjusted for SBC's recently
announced 2 for 1 stock split. Although the price will fluctuate until the
merger is closed, this represented a 33 percent premium over the price of SNET
stock on the Friday before we announced the agreement. This premium is already
being reflected in our current stock price. When the merger is completed, you
will hold stock in SBC, a company that has produced one of the best rates of
total shareholder return in the industry, with a record of double-digit earnings
growth and annual dividend increases.
The first regulatory hurdle for the merger was cleared on February 21 when
the Department of Justice allowed the deadline for seeking additional
information about the merger to expire. In addition, we will need a green light
from you, our shareholders, as well as the Federal Communications Commission
(FCC), the Connecticut Department of Public Utility Control (DPUC), and other
state PUCs. With these approvals, we anticipate completing the merger by year's
end.
[Picture of Chairman]
Daniel J. Miglio
Chairman and Chief Executive Officer
SOLID FINANCIAL PERFORMANCE
The events that highlighted 1997 are reflected in our performance. Earnings were
very solid, considering increased competition and the impacts of some $47
million we had to absorb from new regulatory requirements and for expensive Year
2000 computer reprogramming.
In 1997, we had an extraordinary after-tax charge in the first quarter of
$0.06 per share to redeem debt. Income before the extraordinary charge was $198
million and basic earnings per share were $2.99, compared with last year's net
income of $193 million or basic earnings per share of $2.95.
Consolidated 1997 revenues and sales were up 4 percent to over $2 billion.
Wireline revenues were boosted by a 40 percent increase in our
interstate/international long-distance business and by a robust 5.7 percent
increase in access lines. The Woodbury acquisition contributed about 21,000
lines or 1 percent of the increase. We also had higher revenues from vertical
services like Caller ID, call blocking and missed-call dialing, as well as an
increase in network-access revenues. In-state toll revenues declined 15 percent,
reflecting the full annual impact of equal-access competition and competitive
discounting. Wireless revenues were up 4 percent on a 17 percent increase in
customers, largely offset by a decline in roaming rates. Information and
entertainment revenues grew 3
SNET Annual Report 3
percent, reflecting our thriving internet access business and our introduction
of cable-TV service.
Consolidated operating and maintenance expenses for 1997 were up nearly 4
percent to $1,193 million. Wireline expenses rose nearly 6 percent to support
the strong growth in our interstate/international long-distance business.
Wireless expenses dropped 12 percent or $22 million as a result of our
successful initiatives to reduce fraud and bad debt as well as to lower
customer-acquisition costs. Information and entertainment expenses rose 34
percent or $25 million largely to support the rollout of SNET americast and also
to help expand our internet access service. Depreciation and amortization
expenses were up 7 percent for the year because of higher levels of property,
plant and equipment. Interest expense was up slightly.
MAJOR ACHIEVEMENTS
Although the merger announcement created the biggest headlines, we scored big on
many fronts.
Superb market-share growth in the interstate/ international long-distance
business against formidable national competitors led the way. We now serve 41
percent of the lines in the Connecticut market. Not surprisingly, in a J.D.
Power national customer-satisfaction survey, we were rated the number-one
long-distance company among mainstream users. And the bundling of internet
access service with long-distance has proven to be a winning strategy. Internet
revenues tripled and we closed 1997 with more than 85,000 customers.
Nationwide, the growth of internet traffic has created bottlenecks for
frustrated users. One reason for the success of our internet service has been
SNET's ability to stay ahead of the explosive demand. We have done this by
deploying a new overlay network to enhance reliability and service for our
customers.
This was also the year of our historic entry into the cable-TV business
with SNET americast. We've been winning raves for our superior picture quality,
top-notch customer service, creative programming and unique on-screen navigator.
In the few months we've been in business, we've achieved excellent market share
in the towns we serve.
We've made major strides in our wireless business, significantly improving
profit margins. We will continue on this road, by aggressively reducing costs
and improving revenue per customer as we strive to reach and surpass industry
norms. We have also begun deploying digital technology, which opens the door to
truly advanced wireless communication. We plan to market our digital
capabilities aggressively in 1998.
Our wireline network organization won a major kudos in 1997 by gaining ISO
9002 certification for the provisioning and maintenance of digital special
services and ISDN. The International Organization for Standardization, based in
Geneva, Switzerland, publishes a set of operating standards that define
excellence. Achieving the standard gives us a competitive edge because it means
higher product quality, better customer service, faster response time and lower
costs. We are now expanding this standard to other key areas of our wholesale
business.
We modernized and retrofitted our network statewide so we could offer
broadly our popular new services like Caller ID with name. We're also expanding
our asynchronous transfer mode (ATM) and frame-relay network to meet the
increasing data demands of Connecticut customers.
Part of our network reliability program includes having one of the most
aggressive SONET ring deployment schedules in the country. SONET ring technology
improves network reliability dramatically by providing an alternate route for
calls if there is a problem. Today, we have 47 rings in place. In 1997, 99
percent of our central offices were connected with SONET rings and all will be
connected this year.
We are also expanding beyond traditional markets. Our new nationwide
Teleservices group is a small but fast-growing segment of our business. It
leverages our operators' unique people skills and SNET's call-handling
technology to provide customer-service functions that we are marketing to other
companies. I believe that Teleservices offer us significant new growth
potential.
In addition, we acquired Woodbury Telephone last year. Both SNET and
Woodbury have served Connecticut customers since the 1870s, and we have both
benefited from our cooperative working relationships during that time. The
acquisition has formalized that relationship.
REGULATORY DEVELOPMENTS
Our corporate restructure into wholesale and retail will enable each unit to
focus on its unique customers. It will allow our retail arm to compete on a
level playing field and enable our wholesale business to maximize resale
opportunities.
We were able to move ahead with the approval of the DPUC. A Federal court
has just ruled in our favor
4 SNET Annual Report
over challenges to this restructure by two competitors. There could be appeals
of this ruling and there are also court challenges on the state level.
Meanwhile, our own CLEC is ramping up. It just opened for business, serving
a small segment of our market, and it will lead our retail strategy. We will be
operating with the old and the new retail structure until the DPUC determines
that our wholesale operating support systems are available on a comparable basis
to all CLECs, which is a requirement of the Federal Telecommunications Act. We
are among those on the leading edge in fostering local competition through
access to comparable systems. Achieving this is a significant undertaking
involving millions of dollars and hundreds of people.
New regulations regarding our restructure allow large business customers to
take a "fresh look" at contracts for services like private line and
frame-relay data transmission. And, beginning in January 1999, Connecticut
consumers will undergo a balloting period where, if they have not already done
so, they will have the opportunity to choose a CLEC for their local service.
In a series of actions, the Eighth Circuit Court of Appeals (Eighth
Circuit) agreed with SNET and others, overturning the pricing rules and certain
provisions related to unbundled network elements that had been set by the FCC.
The Supreme Court decided recently that it would review the Eighth Circuit's
rulings, which still remain in effect. We don't anticipate a Supreme Court
decision until 1999.
SNET BRINGS A GREAT DEAL TO THE MERGER
It was 120 years ago that SNET took the concept of a telephone exchange and
created the very first one in the nation. Founding father, George Coy, put it
together with hoop-skirt wire and brainpower. The thread linking the innovation
of each of SNET's many "firsts" has been the hard work and commitment that
employees have dedicated to this company throughout its proud history. That
heritage has resulted in a very strong brand name and the broadest product line
in the industry. We will bring a great deal to the merger.
By joining the SBC family, SNET's future will be even brighter because the
constraints of scale and scope will no longer exist. As part of SBC, we will
gain a larger wireless footprint, more resources for marketing, product and
technology development, greater purchasing power and global reach.
As we begin to write a new chapter in our history, we are seizing the
opportunities that change offers; but we intend to preserve the core values that
have brought us so far: respect for employees, our most important assets; and
honesty and integrity in all of our relationships. SNET's merger with SBC will
only serve to bolster our commitment to support and enhance the quality of life
in Connecticut and contribute to its economic development. Even as we grow and
expand, our roots are firmly planted and our values are solidly in place.
/s/ DAN MIGLIO
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Daniel J. Miglio
Chairman and Chief Executive Officer
February 27, 1998
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 and paging
services and cellular equipment sales; and information and entertainment
includes publishing, internet and cable television services. Other activities,
such as real estate and holding company operations, are included with
eliminations and other sales.
PLANNED MERGER
On January 4, 1998, the Corporation's Board of Directors approved a definitive
merger agreement with SBC Communications Inc. ("SBC"). The Board's deliberations
focused on the complementary strengths and the possible advantages of a
combination.
The process leading to the Board's adoption of the merger began in late
1996 with a review of strategic goals in the context of rising costs (including
non-recurring items such as Year 2000 costs) and a rapidly changing regulatory
environment. As a result of this review, the Board concluded that the
Corporation would need to substantially increase the scale and scope of its
operations in order to continue to compete successfully and in a cost-effective
manner in the increasingly competitive telecommunications industry, and to
provide customers with the broad range of telecommunications products and
services they would demand and to meet the goals of its shareholders.
During 1997, management explored possibilities for various joint ventures
and business alliances in specific product areas with a view toward increasing
the scale and scope of operations. In the fall of 1997, management ultimately
concluded that a combination with a major telecommunications company was the
best alternative in order to achieve the Corporation's strategic and financial
objectives.
Management believes that the merger with SBC is in the best interest of
shareholders because it offers them the opportunity of becoming investors in a
company with global presence and a track record of success in growing long-term
value for shareholders. In addition, the merger will likely strengthen the
Corporation's ability to compete in the increasingly competitive
telecommunications industry [see Note 2].
OPERATING RESULTS
Income before extraordinary charge was $197.5, $192.8 and $168.8 in 1997, 1996
and 1995, respectively. The corresponding basic earnings per share for those
years were $2.99, $2.95 and $2.60 while the corresponding diluted earnings per
share amounts were $2.98, $2.94 and $2.60. The financial results are summarized
as follows:
For the Years Ended December 31, 1997 1996 1995
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Income before extraordinary
charge $197.5 $192.8 $ 168.8
Extraordinary charge, net of tax (3.7) -- (687.1)
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Net Income (Loss) $193.8 $192.8 $(518.3)
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Basic Earnings (Loss) Per Share:
Income before extraordinary
charge $ 2.99 $ 2.95 $ 2.60
Extraordinary charge (.06) -- (10.59)
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Basic Earnings (Loss) Per Share $ 2.93 $ 2.95 $ (7.99)
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Diluted Earnings (Loss) Per Share:
Income before extraordinary
charge $ 2.98 $ 2.94 $ 2.60
Extraordinary charge (.06) -- (10.59)
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Diluted Earnings (Loss) Per Share $ 2.92 $ 2.94 $ (7.99)
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Income before extraordinary charge increased $4.7 in 1997 primarily as a
result of growth in revenues from interstate and international toll, network
access and local service. The wireless margin rose to approximately 28% in 1997
from approximately 15% in 1996 due primarily to cost controls in the wireless
area. Offsets include a decline in intrastate toll revenues, increases in
expenses for the cable television offering, the Year 2000 compliance costs and
revenue reductions and cost increases associated with the implementation of
regulatory mandates.
Income before extraordinary charge increased $24.0 in 1996 due primarily to
strong revenues in interstate and international toll and wireless, offset
partially by an increase in wireline expenses.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031 by issuing short-term debt. The early extinguishment of debt
resulted in an extraordinary charge of $3.7, net of related tax benefits of
$2.7, or $.06 per share, for both basic and diluted earnings per share. As a
result of this charge, net income for 1997 was $193.8, or $2.93 basic earnings
per share and $2.92 diluted earnings per share.
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 in 1995.
In 1995, the Corporation recorded a non-cash extraordinary charge of
$1,202.6, $687.1 after-tax or
6 SNET Annual Report
$10.59 per share, for both basic and diluted earnings per share, related to the
discontinuance of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation." This non-cash
extraordinary charge consisted of the elimination of net regulatory assets and
the recognition of depreciation reserve deficiencies. As a result of this
charge, net loss for 1995 was $518.3, or $7.99 per share for both basic and
diluted earnings per share.
REVENUES AND SALES
Revenues and sales increased $80.4, or 4.1%, in 1997 and $125.5, or 6.9%, in
1996. The components of revenues and sales by product group are summarized as
follows:
For the Years Ended December 31, 1997 1996 1995
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Wireline:
Local service $ 701.9 $ 673.7 $ 641.6
Network access 429.2 388.1 369.4
Intrastate toll 213.0 251.2 266.4
Interstate and international toll 142.1 101.2 42.1
Premium services and equipment
sales 126.7 107.6 104.9
Other revenues 52.8 50.1 57.0
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Total Wireline 1,665.7 1,571.9 1,481.4
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Wireless:
Cellular service 213.7 203.0 153.1
Cellular equipment sales 7.2 10.1 7.8
Paging 6.5 6.1 12.2
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Total Wireless 227.4 219.2 173.1
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Information And Entertainment 189.4 184.2 180.9
Eliminations And Other Sales (60.2) (33.4) (19.0)
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Total Revenues and Sales $ 2,022.3 $ 1,941.9 $ 1,816.4
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Revenues increased due primarily to growth in interstate and international
toll, local service and network access, offset partially by declines in
intrastate toll due primarily to competition.
WIRELINE Local service revenues, derived from providing local exchange,
advanced calling features and local private line services, increased $28.2, or
4.2%, in 1997 and $32.1, or 5.0%, in 1996. Growth in 1997 and 1996 was primarily
attributable to increases of 5.7% and 4.3%, respectively, in the number of
access lines in service. Excluding the purchase of Woodbury Telephone Company
("Woodbury") [see Note 2], access lines would have increased 4.7%. The increases
in access lines for both years included significant growth in Centrex business
lines and second residential lines. Additionally, in 1997, local service
revenues increased due to compensation received as part of the pay telephone
reclassification and compensation provisions of the Federal Telecommunications
Act of 1996 ("Act") [see Regulatory Matters--Federal]. Local service
revenues also increased due to growth in vertical services. The increase in
local service revenues for 1997 was tempered by a decrease in revenues
recognized from wireless carriers (due to a decrease in the generic wireless
tariff in accordance with the Act) and customer migration from flat-rate
services to lower priced Centrex services. Management expects increased
competition to negatively impact local service revenues as other
telecommunications providers offer local service and as the Connecticut
Department of Public Utility Control ("DPUC")-mandated balloting process
commences, scheduled for early 1999 [see Competition].
Network access revenues represent charges assessed on interexchange
carriers and end users for access to the local exchange network. 1997 network
access revenues increased $41.1, or 10.6%, compared with an increase of $18.7,
or 5.1%, in 1996. Interstate access revenues increased $24.6, or 6.8%, in 1997
due primarily to the effects of the reversal of proposed 1996 tariff changes and
interconnection discount plans, and to growth in interstate minutes of use of
4.9% and an increase in access lines in service. Offsetting the impact of these
items was a decrease in annual tariff rates in accordance with the Corporation's
July 1997 Federal Communications Commission ("FCC") filing under price cap
regulation [see Regulatory Matters--Federal]. Interstate access revenues in 1996
increased $10.2, or 2.9%, due primarily to an 8.3% growth in interstate minutes
of use and an increase in access lines in service. Partially offsetting the
impact of the increase in minutes of use was a decrease in rates due to proposed
tariff changes and interconnection discount plans and reduced access tariff
rates. In 1997 and 1996, intrastate access revenues increased $15.4 and $8.5,
respectively, due primarily to an increase in intrastate minutes of use by
competitive providers of intrastate long-distance service. Management expects
continued increases in minutes of use as more competitors enter Connecticut's
fully competitive marketplace.
In 1997, intrastate toll revenues, which include primarily revenues from
toll and WATS "800" services, decreased $38.2, or 15.2%, compared with a
decrease of $15.2, or 5.7%, in 1996. The decrease in 1997 was due primarily to a
12.2% reduction in toll message volume, as well as reduced intrastate toll
rates. Lower toll volume was due primarily to the highly competitive toll market
as a result of a full year of intrastate equal access. The decrease in
intrastate toll revenues in 1996 was due primarily to a decline in intrastate
toll rates attributable to customer migration to several discount calling plans.
Also contributing to the decrease was a reduction in toll message volume of
approximately 1%. Competition and the offering of competitive discount calling
plans will continue to place downward pressure on intrastate toll revenues.
Interstate and international toll revenues increased $40.9 in 1997 and
$59.1 in 1996. In both 1997 and 1996, the increase was a result of significant
growth in the customer base. Long-distance access lines in service increased to
941,000 at the end of 1997 from 758,000 at the end of 1996. The growth was
primarily a result of customer migration to the SNET All Distance(R) product
SNET Annual Report 7
line which allows Connecticut customers to package and discount their entire
long-distance calling in one plan.
Premium services and equipment revenues increased $19.1, or 17.8%, in 1997
and $2.7, or 2.6%, in 1996. The 1997 increase was due primarily to revenues from
special one-time projects with other competitive local exchange carriers
("CLECs") and an increase in revenues from the Corporation's Gateway and Prime
Axxess product lines. These increases were partially offset by a decline in
leased telephone set revenue.
WIRELESS Cellular service revenues increased $10.7, or 5.3%, in 1997 and $49.9,
or 32.6%, in 1996. The increases in 1997 and 1996 were due primarily to growth
of 16.6% and 21.4%, respectively, in the subscriber base in response to
competitive marketing and pricing strategies. The Corporation's focus in 1997
was on customer retention and increased bundled packages. Also contributing to
the increase in 1996 was the impact from the first full year of revenues from
the cellular acquisitions completed in July 1995 [see Note 2].
Paging revenues were relatively flat in 1997, compared with a decrease of
$6.1 in 1996. The impact of the sale of paging network assets in June 1995
contributed to the 1996 reduction in sales. Wireless continues, as a reseller,
to market paging services under the Page 2000r brand name.
INFORMATION AND ENTERTAINMENT Information and entertainment revenues
increased $5.2 in 1997 and $3.3 in 1996. The increase in 1997 was due primarily
to growth in internet sales related to an increase in the customer base, from
approximately 35,000 in 1996 to over 85,000 in 1997. Additionally, SNET
americast, the Corporation's cable television offering, began operations in
1997.
COSTS AND EXPENSES
Total costs and expenses increased $65.1, or 4.2%, in 1997 and $92.1, or 6.3%,
in 1996. Total costs and expenses are summarized as follows:
For the Years Ended December 31, 1997 1996 1995
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Operating costs $ 1,192.6 $ 1,149.0 $ 1,065.1
Depreciation and amortization 379.1 356.1 346.0
Taxes other than income 53.1 54.6 56.5
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Total Costs and Expenses $ 1,624.8 $ 1,559.7 $ 1,467.6
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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 $43.6, or 3.8%, in 1997, compared with an increase of
$83.9, or 7.9%, in 1996. Operating costs increased to support growth in
interstate and international toll and internet, and to deploy the cable
television offering. Also contributing to the increase in operating costs were
expenses to comply with regulatory mandates and to address Year 2000 compliance.
These increases were offset by decreases in wireless expenses due to improved
cost controls.
The Year 2000 costs increased from approximately $2 in 1996 to
approximately $14 in 1997. These costs will continue to be incurred over the
next two to three years, with related expenses to be approximately $23 to $26 in
1998, with overall costs estimated to be $50 to $70. The Corporation has
established a plan which addresses the business risks and systems exposures of
Year 2000 compliance across business, communications, and technology systems and
processes. The plan covers Year 2000 compliance related to systems, telephone
equipment and infrastructure, vendors and suppliers, and internal company
operations. The Corporation anticipates all business-critical systems will be
converted and tested prior to the end of 1999, however, some work on other
systems is anticipated to continue into 2000.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued on March 4, 1998.
This SOP requires the capitalization of certain costs of computer software
developed or obtained for internal use and is effective for financial statements
for fiscal years beginning after December 15, 1998. Management currently
estimates that based on historical information, $20 to $40 of 1998 expenses
would be capitalized and amortized over lives ranging from 3 to 15 years.
WIRELINE Wireline operating costs increased $53.8, or 5.6%, in 1997 and
$99.9, or 11.6%, in 1996. The increase in both years was due primarily to an
increase in the direct costs of providing interstate and international toll
services. Also contributing to the increase in 1997 were the costs incurred in
connection with special one-time projects with other CLECs, costs related
to compliance with regulatory mandates [see Regulatory Matters] and Year 2000
compliance.
In addition to the increase in direct costs previously discussed, 1996
costs increased as a result of higher contract services, bad debts and marketing
expenses.
WIRELESS Wireless operating costs decreased $22.3, or 12.1%, in 1997 due
primarily to reduced fraud levels as a result of improved preventive control
measures. Also contributing to the decrease were lower customer acquisition
costs due to the mix of internal sales channels and third party distributor
payments and reduced bad debt expense.
1996 costs were relatively flat when compared to 1995. Costs from the first
full year of the expanded
8 SNET Annual Report
cellular area in 1996 were offset by lower customer acquisition costs and
roaming fraud due to preventive control programs.
INFORMATION AND ENTERTAINMENT Information and entertainment operating costs
increased $24.8, or 33.6%, in 1997 compared with a decrease of $4.4, or 5.6%, in
1996. The 1997 increase was due primarily to costs associated with deploying
SNET americast. Also contributing to the increase in expenses was the cost of
providing internet services to a larger customer base.
The decrease in 1996 expenses was due primarily to the discontinuance of a
multimedia trial, offset partially by costs of providing internet service and
development costs associated with the commercial deployment of the Corporation's
cable television offering.
Management expects information and entertainment operating costs to
continue to increase in 1998 as the Corporation further deploys its cable
television service and supports growth in internet service.
DEPRECIATION AND AMORTIZATION In 1997, depreciation and amortization expense
increased $23.0, or 6.5%, compared with an increase of $10.1, or 2.9%, in 1996.
The increase for both years was due primarily to an increase in the average
depreciable telecommunications property, plant and equipment. The amortization
of assets acquired in the cellular acquisitions, primarily cellular licenses,
also contributed to the 1996 increase.
INTEREST EXPENSE
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Interest Expense $89.8 $88.7 $85.9
- -------------------------------------------------------------------------------
Interest expense increased $1.1, or 1.2%, in 1997 and $2.8, or 3.3%, in 1996.
The 1997 increase was due primarily to a reduction in the amount of capitalized
interest and the issuance of $100.0 of 6.50% medium-term notes in February 1997.
Partially offsetting these increases were savings from the redemption of $80.0
of 8.70% medium-term notes, in February 1997 and the maturity of $20.0 of 7.61%
notes, during the fourth quarter of 1996.
The issuance of commercial paper and medium-term notes in connection with
the cellular acquisitions was the primary contributor to the increase in 1996
[see Note 2]. The increase was partially offset 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.
OTHER INCOME, NET
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Other Income, net $8.3 $6.9 $15.5
- -------------------------------------------------------------------------------
Other income, net is comprised primarily of interest income, income from
investments and gains or losses on the disposition of non-telephone property.
The 1997 increase was due primarily to the absence of a loss recognized in 1996
associated with certain leasing transactions.
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.
INCOME TAXES
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Income Taxes $118.5 $107.6 $109.6
- -------------------------------------------------------------------------------
The combined federal and state effective tax rate in 1997 was 37.5% compared
with 35.8% in 1996 and 39.4% in 1995. The higher 1997 effective tax rate was due
primarily to a lower level of state tax credits, which increased the effective
tax rate, when compared to 1996.
The recognition of a higher level of state tax credits lowered the
effective tax rate in 1996 when compared with 1995.
COMPETITION
As a result of legislative and regulatory reform, the Corporation continues to
experience an increasingly competitive environment. Competitors include
companies that construct and operate their own communications systems and
networks and/or companies that resell the telecommunications systems and
networks of underlying carriers.
In 1997, major interexchange carriers continued to intensify their
marketing efforts to sell intrastate long-distance services since The Southern
New England Telephone Company's ("Telephone Company's") full implementation of
intrastate equal access. Since the introduction of intrastate long-distance toll
competition, in excess of 230 telecommunications providers have received
approval from the DPUC to offer intrastate long-distance services with an
additional 70 filed and awaiting DPUC approval. The reduction in intrastate toll
rates and the increasingly competitive intrastate toll market continue to place
significant downward pressure on the Telephone Company's intrastate toll
revenues.
Thirty-five telecommunications providers have been granted approvals for
local service and twelve additional applications are pending before the DPUC.
These providers began offering local exchange service to business and
residential customers throughout the state. There has been growth in local
service competition in 1997 and continued growth is expected, particularly upon
commencement of the DPUC-mandated balloting process [see Regulatory
Matters--State], however, the financial impact cannot be predicted at this time.
Based on existing state and federal regulations,
SNET Annual Report 9
the Corporation 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. Management
supports bringing customers the benefits of competition and affording all
competitors the opportunity to compete fairly under reduced regulation.
The competitive environment also allows opportunities for the Corporation
to continue to increase its provision of interstate, international long-distance
and cable television services.
To provide competitive toll products, the Corporation's wireline business
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 use. The Corporation also
successfully promoted the one bill feature of SNET All Distance(R), a seamless
toll service which provides discount calling plans that include intrastate,
interstate and international calling. In 1998, the Corporation plans to add
wireless service to its one bill. The migration of Connecticut customers to
wireline's bundled calling plans resulted in significant growth for interstate
and international long-distance services.
In September 1996, the DPUC granted SNET Personal Vision, Inc. ("Personal
Vision") an 11-year license to operate a cable television system that will serve
the entire state of Connecticut. Personal Vision also became a partner in the
americast joint venture, along with The Walt Disney Company and several large
local exchange carriers. The partnership provides a full range of americast(TM)
programming and marketing services. Personal Vision began deploying its cable
service during the first quarter of 1997. The DPUC's decision granting the
statewide franchise was appealed to state Superior Court by members of the cable
industry. The Superior Court upheld the DPUC's decision and the cable industry
has now appealed to the state Appellate Court. A decision is anticipated in
1998.
The Corporation's ability to compete is dependent upon regulatory reform
that will allow pricing flexibility to meet competition and provide a level
playing field with similar regulation for similar services. In addition, the
Corporation's restructure into wholesale and retail affiliates will provide
additional flexibility to compete at the retail level (see Regulatory
Matters--State).
REGULATORY MATTERS
The Telephone Company is regulated by the FCC and the DPUC. Historically, the
FCC has regulated the Corporation's provision of interstate services, both at
the wholesale (access service provided by the Telephone Company) and retail
(long-distance toll charges provided by SNET America, Inc. ("SAI") as a
non-dominant carrier) levels. Since the passage of the Federal
Telecommunications Act ("Act") in 1996, the FCC has also been charged, by
Congress, with the implementation of many of the provisions of the Act designed
to foster local competition.
The DPUC regulates the Telephone Company's provision of services within the
state of Connecticut including local and in-state long-distance services. Since
the passage of state legislation in 1994, regarding local competition, as well
as the Act, the DPUC also regulates the provision of wholesale services within
the state that are required for interconnection to the Telephone Company's
network. A synopsis of key Federal and State regulatory decisions follows.
Federal
On February 8, 1996, Congress passed the Act which was designed to overhaul U.S.
telecommunications policy by removing barriers to local competition. The FCC's
First and Second Report and Order ("Order") implements the Act and contains
numerous provisions regarding the interconnection of the Telephone Company's
network with those of its competitors. The Order requires significant changes in
the way business is conducted, how the network is designed and the systems that
support it (including repair and service ordering). In addition, the Order
requires fundamental changes in the development of the prices that the Telephone
Company would charge competitors for purchasing regulated network products and
services. This order, as well as the orders discussed below, could have a
material adverse financial impact on the Telephone Company.
Certain provisions in the Order have been appealed by various local
telephone companies, including the Telephone Company, the National Association
of Regulatory Utility Commissioners and individual state regulatory commissions.
The Eighth Circuit Court of Appeals ("Eighth Circuit") issued a partial stay of
the Order, delaying the effectiveness of the pricing provisions and the rule
allowing competitors to "pick and choose" isolated terms out of negotiated
interconnection agreements and struck down those key provisions and other terms
under which potential competitors can lease pieces of the Telephone Company's
network. The Eighth Circuit declared that the FCC had overstepped its authority
and concluded that "the Act plainly grants the state commissions, not the FCC,
the authority to determine the rates involved in the implementation of the local
competition provisions of the Act." The Eighth Circuit's decision is a strong
endorsement of Congress' intention that the states play a primary role in
implementing local telecommunications competition. This decision should allow
the Corporation to implement local competition on the course mapped out by the
DPUC and the Connecticut state legislature.
The Eighth Circuit also vacated a portion of the FCC's rules which required
incumbent local exchange carriers ("ILECs") to provide combinations of network
10 SNET Annual Report
elements that effectively recreated the end-to-end service at a significant
discount to CLECs. The Eighth Circuit indicated that the Act requires ILECs to
provide access to unbundled network elements, not access to platforms used by
ILECs in which network elements are combined. The Eighth Circuit's decisions
have now been appealed to the Supreme Court which has agreed to review the case
in the fall 1998 session. A decision is expected in 1999.
The FCC also released its Third Report and Order requiring ILECs, including
the Telephone Company, to provide shared transport to new entrants as an
unbundled network element at cost-based prices. Several companies, including the
Telephone Company, have filed Petitions for Review, which will be heard by the
Eighth Circuit. A decision in this matter is expected in 1998.
In 1997, the FCC issued an order regarding Universal Service. The order
revises the current universal service programs for low income customers and high
cost areas and establishes new federal support for telecommunications services
provided to schools, libraries and rural health care facilities. The federal
universal service mechanisms are funded, beginning January 1, 1998, by an
assessment on the end user revenues of all telecommunications service providers.
Funding for the new federally supported services provided to schools, libraries
and rural healthcare facilities will come from both interstate and intrastate
end user revenues, while funding for the revised high cost support and low
income support programs will be from interstate end user revenues. ILECs can
recover their contributions to the federal universal service mechanisms through
their interstate access charges. The Universal Service Order is on appeal in the
Fifth Circuit Court. The Telephone Company has intervened in the appeal. The FCC
has no timeline currently to resolve this issue and the Corporation cannot
determine when it will be resolved.
The FCC also issued an order regarding access charge reform which changes
the way the Telephone Company recovers interstate access charges from interstate
toll providers, including SAI. Specifically, the order establishes flat-rated
per-call carrier access charges, rather than usage-based charges. This order
establishes a prescriptive mechanism to ensure that interstate access charges
will be driven toward the levels that competition would be expected to produce.
Management expects this order to pressure earnings but is currently unable to
quantify any such impact. The Access Reform Order is being appealed and is
pending in the Eighth Circuit. The Telephone Company has intervened in the
appeal. The FCC is also expected to release a Pricing Flexibility Order in 1998.
This order will establish a market-based approach to pricing.
Another major FCC order was its Price Cap Order revising its price cap plan
for regulating ILECs. This order establishes a single productivity factor of
6.5% and eliminates the sharing requirements of the prior rules. This order is
being appealed in the District of Columbia Circuit Court. On August 13, 1997,
the Telephone Company filed a Petition for Waiver from the 6.5% productivity
factor, requesting that the FCC establish a productivity factor of 5.3% for the
Telephone Company. A decision is still pending.
The Telephone Company filed its 1997 annual interstate access price cap
revisions, in which the Telephone Company elected to use a 6.5% productivity
factor, which took effect July 1, 1997. The FCC required all price cap ILECs,
including the Telephone Company, to adjust their Price Cap Indices, effective
July 1, 1997, to reflect the 6.5% productivity factor for both the 1996-1997 and
1997-1998 tariff years. The filing would decrease interstate network access
rates by approximately $28 for the period July 1, 1997 to June 30, 1998. The
Telephone Company expects that this decrease will be partially offset by
increased demand.
In addition, the FCC has released Reports and Orders on the Implementation
of the Pay Telephone Reclassification and Compensation Provisions of the Act.
The orders, among other things, mandate that all ILECs, including the Telephone
Company, unbundle payphone instruments, file tariffs on payphone service lines
and make them available on a non-discriminatory basis to Payphone Service
Providers ("PSPs"). Additionally, the orders establish mechanisms for the full
and fair compensation to PSPs, including per-call compensation for subscriber
"800" and access code calls from payphones. The Telephone Company has filed the
necessary revisions to its interstate access charges with the FCC and has filed
with the DPUC new retail and wholesale Pay Telephone Access Line Service
offerings in accordance with the FCC's order.
In December 1996, the FCC acted on an outstanding petition by the New
England Public Communications Council, Inc. and preempted a prior DPUC decision
which only authorized ILECs and CLECs to provide payphone service in
Connecticut. On July 1, 1997, the District of Columbia Circuit Court rendered
its decision in Illinois Public Telecommunications Association v. FCC remanding
back to the FCC its decision setting the per-call compensation rate for
subscriber "800" and access code calls. The FCC on August 5, 1997, established a
pleading and comment cycle on these remanded issues. The FCC released a
subsequent order setting the per-call compensation rate at $.284.
Noting the need to revise its jurisdictional separations rules as a result
of the increasingly competitive nature of the telecommunications industry, the
FCC initiated on October 7, 1997, a rulemaking proceeding to begin separations
reform. Jurisdictional separations
SNET Annual Report 11
assigns telecommunications property costs, revenues, expenses, taxes and
reserves to specific categories that are then allocated between the interstate
and intrastate jurisdictions. Comprehensive reform in this area could result in
changes to the structure of ILEC pricing. Management is currently unable to
determine the impact any change would have on the Telephone Company.
In accordance with the Act, the FCC requires ILECs, including the Telephone
Company, to implement a long-term solution for portability of local telephone
numbers. The Telephone Company is required to construct and operate a system
that will permit end user customers to retain their telephone numbers when they
elect a different carrier for local service. The system is to be operational by
mid-1998 for a large percentage of the Telephone Company's access lines. The
FCC, however, has not yet decided on a method to recover the substantial
investment and operating costs relating to the number portability system. Local
number portability expenditures were approximately $4 in 1997 and are estimated
to be $19 in 1998.
State
Effective April 1, 1996, the DPUC replaced traditional rate of return regulation
with alternative (price-based) regulation during the transition to full
competition. Alternative regulation includes a five-year monitoring period on
financial results and a price cap formula based on certain services categorized
as non-competitive. 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 plan 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 from non-competitive into the emerging-competitive and competitive
categories for pricing changes.
On June 25, 1997, the DPUC issued a final decision allowing the Corporation
to establish separate wholesale and retail affiliates. Under the decision, the
new retail organization, a CLEC, will compete under the same regulations as all
other retail telecommunications providers in the state. As such, the CLEC will
not be subject to price cap regulations. The wholesale organization, an ILEC,
will provide network services and functionality to retail providers, including
the Corporation's new CLEC, on comparable terms. The ILEC will be treated as a
public service company and will continue to be subject to alternative
regulation. The directory publishing operations were incorporated into a
separate subsidiary of the Corporation on January 1, 1998. As part of the
decision, however, the DPUC mandated that Connecticut customers must choose
their local exchange provider via a balloting process. Customers who do not
choose a carrier will be assigned a CLEC based on the proportion of votes in a
local service area. The specific details of the balloting process will be
addressed in further technical discussions among the participants and the DPUC.
The balloting process is scheduled to begin on January 4, 1999 and to be
completed by May 1999.
In order for the balloting process to commence, the ILEC must demonstrate
that the systems offered to CLECs provide full technical and operational support
as required by the Act. The DPUC will examine and critically evaluate the
respective Operations Support System ("OSS") platforms offered to the CLECs. The
DPUC's evaluation will establish a set of tests and standards that can be used
to determine the suitability of the ILEC's OSS to support a competitive local
exchange market and will determine if the interfaces proposed by the ILEC offer
the comparability required under the provisions of the Act. A final decision is
due on June 24, 1998. The DPUC's decision to allow the Corporation to establish
separate wholesale and retail affiliates has been challenged by other parties in
both state court and federal court. In an oral decision, the federal court has
denied the other parties' motion for summary judgment and granted the
Corporation's motion for summary judgment. A written decision is expected in the
first quarter of 1998. A decision is also expected from the state court in 1998.
On March 18, 1997, SAI filed an application with the DPUC to provide local
and intrastate toll services throughout Connecticut. The DPUC issued a final
decision granting approval on June 25, 1997. This grants SAI the authority to
operate as a CLEC in the state of Connecticut and to provide competitive retail
services to end user customers with the same regulatory and pricing flexibility
as all other CLECs in the state.
In compliance with the Act, the ILEC has filed with the DPUC numerous cost
studies supporting its proposed wholesale (i.e., resale) and unbundled rates for
interconnection services. On March 24, 1997, the DPUC issued a final decision
setting a uniform 17.8% discount rate off the Telephone Company's current retail
prices for telecommunications services sold to CLECs.
On April 23, 1997, the DPUC issued a final decision addressing the proposal
for allocation of Hybrid Fiber Coax ("HFC") network joint costs between
broadband and telephony and the Telephone Company's costs and rates associated
with unbundled loops, ports, multiplexing and inter-wire center transport. In
this decision, the DPUC approved the Telephone Company's proposed 50/50
allocation of HFC network joint costs between broadband and telephony. In
addition, the DPUC approved the cost studies based on Total Service Long Run
Incremental Cost ("TSLRIC"). Subsequently, the
12 SNET Annual Report
DPUC opened a new docket to determine appropriate TSLRIC-based rates for the
remaining unbundled elements (non-loop) defined by the FCC. The cost allocation
decision has been appealed by the cable television industry to state Superior
Court. A decision is expected in 1998.
On July 23, 1997, the DPUC approved the acquisition of Woodbury by the
Corporation. The Corporation completed its purchase of Woodbury on July 30,
1997.
EMPLOYEE RELATIONS
In January 1998, under the current union contract, bargaining-unit employees
received a general wage increase totaling 3.0%; made up of various forms and
combinations of basic wage increases, one-time cash payments and/or Cash Balance
Plan Account credits. The current labor agreement will expire on August 8, 1998.
Management and the union expect to begin negotiations on a new labor agreement
early in 1998.
In 1995, a U.S. District Court decision was issued in favor of the
Department of Labor against the Corporation and the Telephone Company. The
decision held that the Corporation and the Telephone Company violated certain
sections of the Fair Labor Standards Act and were liable for back wages and
liquidating damages. The Corporation and the Telephone Company appealed the
decision and on July 31, 1997, the Second Circuit Court of Appeals affirmed the
U.S. District Court's decision. As required by the Court's decision, in October
1997, the Corporation and the Telephone Company paid back wages, liquidating
damages and interest (from the date of the District Court's judgment) to the
employees involved in this action. In 1995, the Telephone Company recorded a
liability of $11.0 which was adequate to cover the cost of total damages for
this matter.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES The Corporation generated cash flows from operations
of $616.0 during 1997 compared with $477.4 during 1996 and $442.6 during 1995.
Cash flows from operations increased in 1997 compared with 1996 due primarily to
lower restructuring payments.
In 1997, the consolidated balance sheet changed as a result of operating
activities. The current portion of deferred taxes decreased due primarily to
costs incurred in 1997 under the restructuring program. The decrease in other
current assets is due primarily to a decrease in income taxes receivable
resulting from certain state income tax credits being reflected in estimated
income tax payments. In prior years, state tax law only allowed this credit upon
the filing of the final annual income tax return. Accounts payable and accrued
expenses increased due primarily to timing of cash payments.
Cash outlays relating to the Corporation's restructuring charge, originally
recorded in December 1993, totaled $15.0, $110.6 and $89.1 in 1997, 1996 and
1995, respectively. Costs incurred for employee separations of $5.0 in 1997,
$20.0 in 1996 and $9.0 in 1995 included primarily payments for severance and
related unemployment taxes and unused vacation. Incremental costs of $2.8 in
1997, $83.1 in 1996 and $74.2 in 1995 were incurred for executing numerous
reengineering programs. In addition, exit and other costs were $7.2 in 1997,
$7.5 in 1996 and $5.9 in 1995 and included expenses relating to the reduction of
overall corporate space requirements. All cash expenditures were funded with
cash flows from operations. In 1998, the Corporation expects to conclude its
restructuring program with approximately $7 of costs related to its space
consolidation program.
INVESTING ACTIVITIES The primary use of corporate funds continued to be
capital expenditures. Cash expended for capital additions was $472.4, $373.8 and
$357.4 in 1997, 1996 and 1995, respectively. Capital additions for all years
were funded entirely from cash flows from operations. The majority of these
additions were for construction of the wireline network.
Management anticipates that total capital expenditures for consolidated
telecommunications plant will approximate $475 in 1998 and will be funded from
cash flows from operations. Included in total capital expenditures in 1998 are
estimated additions of $290 to the wireline network as compared with actual 1997
expenditures of approximately $307. These additions include expenditures
primarily related to the modernization, growth and upgrading of wireline's
central office switching and circuit equipment, to meet customer demand for new
services. Additionally, to reduce maintenance costs and to meet access line
growth, increased focus is being placed on replacing and supplementing the
existing core network of twisted copper wire and fiber-optic and coaxial cable.
On July 30, 1997, the Corporation completed its acquisition of Woodbury by
issuing approximately 528,000 shares of the Corporation's treasury stock for the
remaining 63.5% of Woodbury's common stock not formerly held by the Corporation.
The total cost of completing the acquisition was $30.1, which includes the
assumption of $9.0 in long-term debt.
FINANCING ACTIVITIES In February 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.
With this issuance, the Corporation's unissued, unsecured debt securities
registered with the Securities and Exchange Commission ("SEC") decreased to
$125.0.
SNET Annual Report 13
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031 by issuing short-term debt.
The Corporation sponsors a Dividend Reinvestment and Stock Purchase Plan
("DRISPP"). Effective July 1, 1997, the Corporation's policy of issuing new
shares was modified to have its agent begin purchasing shares on the open market
(when market conditions merit) to meet the needs of the DRISPP. Beginning with
the January 15, 1998 dividend, the Corporation resumed issuance of new shares to
meet the needs of the DRISPP.
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.
Dividends paid totaled $102.4, $100.2 and $98.0 in 1997, 1996 and 1995,
respectively. The quarterly dividend rate of $.44 per share has remained
unchanged for the past eight years, consistent with the corporate plan to
reinvest in the business.
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. Debt service payments to the
ESOP totaled $13.7, $13.5 and $13.3 in 1997, 1996 and 1995, respectively. The
Corporation anticipates making equivalent cash payments during 1998.
DEBT RATIO The Corporation's ratio of debt to total capitalization at year-end
1997 was 69.2% compared with 74.9% at year-end 1996 and 80.0% at year-end 1995.
The ESOP represented 2.0% of the debt ratio at December 31, 1997 compared with
2.7% and 3.4% at December 31, 1996 and 1995, 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 $170.0 in lines of credit
provided by a syndicate of banks. The annual commitment fee is currently .045%
on the lines of credit. As of December 31, 1997, the entire $170.0 was
available.
As of December 31, 1997, the Corporation and the Telephone Company had
$125.0 and $95.0, respectively, of unissued, unsecured debt securities
registered with the SEC. 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 with cash
from operations during 1998. The Corporation also has access to external
resources including lines of credit and long-term shelf registration
commitments.
14 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 six
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 Audit 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 27, 1998
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, 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 27, 1998
SNET Annual Report 15
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Dollars in Millions, Except Per Share Amounts,
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
REVENUES AND SALES $ 2,022.3 $ 1,941.9 $ 1,816.4
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating and maintenance 1,192.6 1,149.0 1,065.1
Depreciation and amortization 379.1 356.1 346.0
Taxes other than income 53.1 54.6 56.5
- --------------------------------------------------------------------------------
Total Costs and Expenses 1,624.8 1,559.7 1,467.6
- --------------------------------------------------------------------------------
OPERATING INCOME 397.5 382.2 348.8
Interest expense 89.8 88.7 85.9
Other income, net 8.3 6.9 15.5
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 316.0 300.4 278.4
Income taxes 118.5 107.6 109.6
- --------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGE 197.5 192.8 168.8
Extraordinary charge, net of tax (3.7) -- (687.1)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ 193.8 $ 192.8 $ (518.3)
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS)
Basic 66,156 65,437 64,871
Assuming Dilution 66,322 65,604 64,903
- --------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share
Income before extraordinary charge $ 2.99 $ 2.95 $ 2.60
Extraordinary charge, net of tax (.06) -- (10.59)
- --------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ 2.93 $ 2.95 $ (7.99)
- --------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share
Income before extraordinary charge $ 2.98 $ 2.94 $ 2.60
Extraordinary charge, net of tax (.06) -- (10.59)
- --------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE $ 2.92 $ 2.94 $ (7.99)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in Millions, At December 31, 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Cash and temporary cash investments $ 12.3 $ 9.0
Accounts receivable, net of allowance for
uncollectibles of $32.5 and $27.4,
respectively 327.9 323.3
Materials, supplies and inventories 29.8 27.4
Prepaid publishing 35.9 35.2
Deferred income taxes 37.7 45.4
Other current assets 11.0 27.7
- --------------------------------------------------------------------------------
Total Current Assets 454.6 468.0
Property, plant and equipment, net 1,716.8 1,597.0
Intangible assets, net 394.7 400.3
Deferred income taxes 89.7 91.2
Leases and other assets 115.1 114.5
- --------------------------------------------------------------------------------
Total Assets $ 2,770.9 $ 2,671.0
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 266.8 $ 252.0
Short-term debt 186.3 215.2
Advance billings and customer deposits 64.4 60.9
Accrued compensated absences 33.3 31.9
Other current liabilities 106.8 107.0
- --------------------------------------------------------------------------------
Total Current Liabilities 657.6 667.0
Long-term debt 1,156.9 1,169.7
Accrued postretirement benefit obligation 267.0 288.9
Unamortized investment tax credits 14.0 15.5
Other liabilities and deferred credits 78.2 66.9
- --------------------------------------------------------------------------------
Total Liabilities 2,173.7 2,208.0
- --------------------------------------------------------------------------------
Common stock; $1.00 par value; 300,000,000
shares authorized; 68,896,854 and
68,407,669 issued, respectively 68.9 68.4
Proceeds in excess of par value 622.1 602.8
Retained earnings (deficit) 26.8 (55.7)
Treasury stock; at cost, 2,230,586
and 2,758,512 shares, respectively (84.7) (104.7)
Unearned compensation related to ESOP (35.9) (47.8)
- --------------------------------------------------------------------------------
Total Shareholders' Equity 597.2 463.0
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 2,770.9 $ 2,671.0
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 17
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, 1995 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
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 193.8 193.8
Common stock issued, at market:
Dividend reinvestment plan 190,928 .2 6.9 7.1
Savings and incentive plans 298,257 .3 10.9 11.2
Dividends declared ($1.76 per share) (116.5) (116.5)
Reduction of ESOP debt 13.2 13.2
Acquisition of Woodbury Telephone 1.0 4.5 20.0 25.5
Tax benefit of dividends declared
on unallocated shares held
in ESOP .7 .7
ESOP earned compensation
accrual (1.3) (1.3)
Other .5 .5
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 68,896,854 $ 68.9 $ 622.1 $ 26.8 $(84.7) $(35.9) $597.2
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions, For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 193.8 $ 192.8 $ (518.3)
Tax benefit of dividends on shares
held in ESOP .7 1.0 1.2
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 379.1 356.1 346.0
Extraordinary charge, net of tax 3.7 -- 687.1
Provision for uncollectible accounts 43.4 44.4 25.9
Restructuring payments (15.0) (110.6) (89.1)
Decrease in deferred income taxes 9.2 22.2 30.7
Decrease in investment tax credits (1.5) (2.1) (6.9)
Changes in operating assets and
liabilities, net (8.1) (30.3) (34.0)
Other, net 10.7 3.9 --
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 616.0 477.4 442.6
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash expended for capital additions (472.4) (373.8) (357.4)
Purchase of cellular properties -- -- (455.6)
Proceeds from asset sales 19.9 10.8 74.0
Other, net 7.6 16.6 16.5
- --------------------------------------------------------------------------------
Net Cash Used by Investing Activities (444.9) (346.4) (722.5)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt 100.0 -- 300.0
Repayments of long-term debt (94.8) (34.9) (108.3)
Cash dividends paid (102.4) (100.2) (98.0)
Net (payments) proceeds of commercial
paper (57.3) 2.0 192.9
Other, net (13.3) -- (2.3)
- --------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing
Activities (167.8) (133.1) 284.3
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and
Temporary Cash Investments 3.3 (2.1) 4.4
Cash and temporary cash investments
at beginning of year 9.0 11.1 6.7
- --------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Year $ 12.3 $ 9.0 $ 11.1
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 19
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") have been prepared 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; cable
television and internet; and advertising. The Corporation's operations and
customers are located primarily in Connecticut. In addition, its wireless
operations cover Rhode Island and portions of Massachusetts.
As appropriate, all periods presented 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. Estimates
are used when accounting for depreciation, taxes, employee benefits, allowance
for uncollectible accounts receivable, restructuring reserves and contingencies,
among others.
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, 1997
and 1996, accounts payable included drafts outstanding of $28.8 and $41.4,
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.
Effective January 1, 1996, as a result of the discontinuance of SFAS No.
71, the Corporation is using estimated useful lives 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 25
- --------------------------------------------------------------------------------
Under the composite group method, the cost of depreciable telephone plant
sold or 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 1995 and goodwill resulting from the Woodbury Telephone Company ("Woodbury")
acquisition completed in 1997. 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
20 SNET Annual Report
was $44.8 and $27.6 as of December 31, 1997 and 1996, 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.
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 ("SOP") 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 The Corporation accounts for capitalized interest in
accordance with SFAS No. 34, "Capitalization of 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. 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.
ADVERTISING COSTS Costs for advertising products and services or corporate image
are expensed as incurred.
COMPUTER SOFTWARE COSTS The Corporation capitalizes initial operating systems
for central office switching equipment. Right-to-use fees, additions, upgrades
and modifications to operating software programs, all applications and computer
software acquired or developed for internal use are expensed. SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," was issued on March 4, 1998. This SOP requires the capitalization
of certain costs of computer software developed or obtained for internal use and
is effective for financial statements for fiscal years beginning after December
15, 1998.
INCOME TAXES The Corporation files a consolidated federal income tax return and,
where allowable, combined state income tax returns.
The Corporation records 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 Effective December 31, 1997, the Corporation adopted SFAS No.
128, "Earnings per Share." Under SFAS No. 128, "basic" earnings per share is
computed by dividing income by the weighted average number of actual common
shares outstanding during the period. In order to compute "diluted" earnings per
share, the weighted average number of common shares is increased by the effect
of all potential common shares outstanding during the period. As required by
SFAS No. 128, all periods presented have been restated to conform to the
provisions of the new standard.
For the computation of diluted earnings per share, the weighted average
number of common shares outstanding has been adjusted for the effects of the
Corporation's stock options as follows:
In Thousands,
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Weighted average shares
outstanding 66,156 65,437 64,871
Stock options, net 166 167 32
- --------------------------------------------------------------------------------
Weighted average shares
outstanding assuming dilution 66,322 65,604 64,903
- --------------------------------------------------------------------------------
Stock options of 218 in 1997, 156 in 1996 and 391 in 1995, were not assumed
exercised because they were antidilutive in the periods presented.
NOTE 2: MERGER, ACQUISITION AND SALE OF ASSETS
On January 4, 1998, the Corporation and SBC Communications Inc. ("SBC") approved
a definitive merger
SNET Annual Report 21
agreement ("Agreement") whereby the Corporation will become a wholly-owned
subsidiary of SBC. Under the original terms of the Agreement, each share of the
Corporation's common stock was to be exchanged for 0.8784 shares of SBC common
stock. On January 30, 1998, SBC announced a two-for-one stock split, which
modified the exchange ratio to 1.7568. In addition, the Agreement does not
require any changes to the Corporation's quarterly dividend prior to closing.
The transaction is intended to be accounted for as a pooling-of-interests
and as a tax-free reorganization under the applicable provisions of the Internal
Revenue Code. The merger has been reviewed by the U.S. Department of Justice and
must still be approved by the Corporation's shareholders, the Department of
Public Utility Control ("DPUC") and the Federal Communications Commission
("FCC"). The Corporation is currently authorized to provide interexchange
services in 46 states. For the majority of these states these authorizations
have been utilized solely to provide calling card services to Connecticut-based
customers traveling in the respective states. The Corporation does, however,
provide long-distance service to a small number of customers in states where SBC
is an Incumbent Local Exchange Carrier ("ILEC"). The Corporation may be required
to modify or withdraw its interexchange authorizations in the states where SBC
is an ILEC. In addition, authorizations may be required from a number of other
states to allow the Corporation to transfer its existing long-distance
authorizations to SBC. Once the necessary approvals are obtained, the merger is
expected to close by December 31, 1998.
On July 30, 1997, the Corporation completed its acquisition of Woodbury by
issuing approximately 528,000 shares of the Corporation's treasury stock for the
remaining 63.5% of Woodbury's common stock not formerly held by the Corporation.
The total cost of completing the acquisition was $30.1, which includes the
assumption of $9.0 in long-term debt. Woodbury provides local exchange telephone
services, intrastate toll services and access to long-distance telephone
services in a number of central Connecticut towns. The acquisition was accounted
for under the purchase method and, accordingly, resulted in goodwill of $11.5
which is being amortized on a straight-line method over 15 years. Woodbury's
results have been included in the consolidated financial statements since the
date of acquisition. Had the acquisition taken place at the beginning of 1996,
consolidated revenues and sales, income before extraordinary charge, net income
and earnings per share would not have been materially different from the amounts
reported for 1997 and 1996.
In July 1995, the Corporation purchased from Bell Atlantic Corporation and
Richmond Telephone Company, for approximately $456, certain cellular properties
in Rhode Island and Massachusetts and an increased interest in Springwich
Cellular Limited Partnership ("Springwich"). The acquisitions were accounted for
under the purchase method and, 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, approximately $24, was assigned to goodwill and is being amortized on
a straight-line method over 15 years. The cellular acquisitions were financed
with approximately $456 of short-term debt. Short-term debt of approximately
$300 was replaced with medium-term notes in the third quarter of 1995.
NOTE 3: DISCONTINUANCE OF SFAS NO. 71
In the fourth quarter of 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 began following 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, for
both basic and diluted earnings per share, net of applicable tax benefits of
$515.5, in the fourth quarter of 1995.
The following table is a summary of the extraordinary charge for 1995:
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
22 SNET Annual Report
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 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
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 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. A 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 1997 and declines to 7.5% in 1999.
Pension cost (income) for all plans, computed using the projected unit
credit actuarial method, includes the following components:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 21.9 $ 20.2 $ 22.1
Interest cost on projected
benefit obligation 91.8 96.3 113.5
Amortizations and deferrals, net 225.9 65.8 249.6
Actual return on plan assets (338.7) (177.6) (393.3)
- --------------------------------------------------------------------------------
Net Pension Cost (Income)
Recorded to Expense .9 4.7 (8.1)
- --------------------------------------------------------------------------------
Settlement gain -- (76.1) (76.0)
Costs relating to special
termination benefits -- -- 137.5
Curtailment loss -- 10.8 16.8
- --------------------------------------------------------------------------------
Net (Settlement Gain)
Curtailment Loss -- (65.3) 78.3
- --------------------------------------------------------------------------------
Net Pension Cost (Income) $ .9 $ (60.6) $ 70.2
- --------------------------------------------------------------------------------
The 1997 decrease in net pension cost (income) recorded to expense was due
to strong investment performance and a change in the discount rate. The 1996 net
settlement gain and the 1995 net curtailment loss were associated with the
severance programs and were recorded to the restructuring reserve in the
respective years [see Note 6]. The 1996 increase 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, 1997 1996
- --------------------------------------------------------------------------------
Actuarial Present Value of Accumulated
Benefit Obligation, including vested
benefits of $1,336.9 and $1,253.3,
respectively $ 1,348.6 $ 1,289.3
- --------------------------------------------------------------------------------
Plan assets at fair value $ 1,905.9 $ 1,690.3
Actuarial present value of projected
benefit obligation (1,385.2) (1,337.3)
- --------------------------------------------------------------------------------
Assets in Excess of Projected
Benefit Obligation 520.7 353.0
Unrecognized prior service costs 116.2 129.2
Unrecognized transition asset (84.0) (98.4)
Unrecognized net gain (570.0) (401.3)
Adjustment required to recognize
minimum liability (4.7) (3.2)
- --------------------------------------------------------------------------------
Accrued Pension Cost $ (21.8) $ (20.7)
- --------------------------------------------------------------------------------
SNET Annual Report 23
Assumptions used to calculate the plans' funded status:
At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate for projected
benefit obligation 7.0% 7.5% 7.0%
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.
The Corporation's postretirement benefit cost includes the following
components:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 4.1 $ 4.4 $ 4.4
Interest cost of accumulated
benefit obligation 36.1 37.6 33.4
Amortizations and deferrals, net 41.2 19.8 21.0
Actual return on plan assets (56.4) (30.9) (31.5)
- --------------------------------------------------------------------------------
Net Postretirement Benefit Cost
Recorded to Expense 25.0 30.9 27.3
- --------------------------------------------------------------------------------
Costs relating to special
termination benefits -- -- 11.0
Curtailment loss -- .2 12.9
- --------------------------------------------------------------------------------
Net Curtailment Loss -- .2 23.9
- --------------------------------------------------------------------------------
Net Postretirement Benefit Cost $ 25.0 $ 31.1 $ 51.2
- --------------------------------------------------------------------------------
The 1996 and 1995 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, 1997 1996
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(423.9) $(458.6)
Fully eligible active plan participants (27.4) (15.5)
Other active plan participants (74.1) (66.3)
- --------------------------------------------------------------------------------
Total Accumulated Postretirement
Benefit Obligation (525.4) (540.4)
Plan assets at fair value 292.8 229.4
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets (232.6) (311.0)
Unrecognized net gain (65.6) (11.9)
Unrecognized prior service cost 10.8 13.6
- --------------------------------------------------------------------------------
Accrued Postretirement
Benefit Obligation $(287.4) $(309.3)
- --------------------------------------------------------------------------------
Assumptions used to calculate the plans' funded status:
At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate for projected
benefit obligation 7.0% 7.5% 7.0%
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 5.5% and declines to 4.5% 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
1997 net postretirement benefit cost by approximately $2 and the accrued
postretirement benefit obligation by approximately $21 as of December 31, 1997.
SAVINGS AND STOCK OWNERSHIP PLANS The Corporation sponsors employee savings
plans under section 401(k) of the Internal Revenue Code. The plans cover
substantially all employees. As part of the savings plans, the Corporation has
established an Employee Stock Ownership Plan ("ESOP"). The Corporation provides
matching contributions based on qualified employee contributions through its
ESOP plan. 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
24 SNET Annual Report
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, 1997 1996 1995
- --------------------------------------------------------------------------------
Compensation expense(1) $ 12.7 $ 11.0 $ 14.7
Interest expense incurred(1) 3.4 4.4 5.1
Interest income earned (.4) (.5) (.6)
- --------------------------------------------------------------------------------
Total Expense $ 15.7 $ 14.9 $ 19.2
- --------------------------------------------------------------------------------
Dividends Used for Debt Service $ 4.6 $ 5.1 $ 5.3
Cash Contributions Used for
Debt Service $ 13.7 $ 13.5 $ 13.3
- --------------------------------------------------------------------------------
(1) Net of applicable dividends used for debt service.
ESOP shares outstanding are as follows:
In Thousands, At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Allocated shares 1,602.1 1,389.1 1,508.0
Unreleased shares 904.8 1,206.4 1,301.5
- --------------------------------------------------------------------------------
Total ESOP Shares 2,506.9 2,595.5 2,809.5
- --------------------------------------------------------------------------------
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].
NOTE 5: INCOME TAXES
Income tax expense includes the following components:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
FEDERAL
Current $ 84.1 $ 79.4 $ 62.4
Deferred 15.8 16.1 27.4
Investment tax credits, net (1.5) (2.1) (6.9)
- --------------------------------------------------------------------------------
Total Federal 98.4 93.4 82.9
- --------------------------------------------------------------------------------
STATE
Current 16.0 9.8 17.3
Deferred 4.1 4.4 9.4
- --------------------------------------------------------------------------------
Total State 20.1 14.2 26.7
- --------------------------------------------------------------------------------
Total Income Taxes $ 118.5 $ 107.6 $ 109.6
- --------------------------------------------------------------------------------
In April 1995, new Connecticut state income tax rates were enacted to
accelerate the reduction of current rates. The 1997 Connecticut state income tax
rate of 10.5% will gradually decrease to 7.5% in 2000.
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, 1997 1996 1995
- --------------------------------------------------------------------------------
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
- --------------------------------------------------------------------------------
Federal income taxes at
statutory rate $ 110.6 $ 105.1 $ 97.4
State income taxes, net of federal
income tax effect 13.0 9.2 17.4
Depreciation of telephone plant
construction cost previously
deducted for tax purposes(1) -- -- 5.1
Amortization of investment
tax credits(1) (1.5) (2.1) (6.9)
Other differences, net (3.6) (4.6) (3.4)
- --------------------------------------------------------------------------------
Income Taxes $ 118.5 $ 107.6 $ 109.6
- --------------------------------------------------------------------------------
Effective Tax Rate 37.5% 35.8% 39.4%
- --------------------------------------------------------------------------------
(1) Telephone Company only.
Consolidated deferred income tax assets (liabilities) are comprised of the
following:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Postretirement benefits other
than pensions $ 120.1 $ 124.8
Software 24.7 13.9
Allowance for uncollectibles 15.0 11.9
Other 11.1 10.6
Compensated absences 9.3 13.1
Pension 7.8 9.2
Restructuring charge 2.8 12.8
Depreciation and amortization (31.1) (29.3)
Leveraged leases (30.4) (28.3)
Valuation allowance (1.9) (2.1)
- --------------------------------------------------------------------------------
Deferred Income Taxes $ 127.4 $ 136.6
- --------------------------------------------------------------------------------
SNET Annual Report 25
VALUATION ALLOWANCE The 1997 decrease in the valuation allowance was due
primarily to the reduction in state loss carryovers. 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 for both basic and diluted earnings 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 in 1995. 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.
A summary of costs incurred under the restructuring program is as follows:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Employee separation costs (gains) $ 5.0 $(45.1) $ 111.2
Process and systems reengineering 2.8 83.1 74.2
Exit and other costs 7.2 7.5 2.5
- --------------------------------------------------------------------------------
Total Costs Incurred $ 15.0 $ 45.5 $ 187.9
- --------------------------------------------------------------------------------
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 labor-intensive interfaces
between the existing systems.
As of December 31, 1997, the restructuring reserve balance of $6.5 is
adequate for the future residual costs, primarily 1998's exit costs relating to
the delayed reduction of overall corporate space requirements.
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, 1997 1996
- --------------------------------------------------------------------------------
Commercial paper $ 144.6 $ 201.9
Current maturities of long-term debt 41.7 13.3
- --------------------------------------------------------------------------------
Total Short-term Debt $ 186.3 $ 215.2
- --------------------------------------------------------------------------------
Weighted Average Interest Rate
on Commercial Paper at Year-End 5.9% 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 $170.0 in lines of credit provided by a
syndicate of banks. At December 31, 1997, the entire line remained available.
The annual commitment fee is currently .045% of the total lines of credit.
NOTE 8: LONG-TERM DEBT
The components of long-term debt are as follows:
At December 31, Maturing 1997 1996
- --------------------------------------------------------------------------------
Unsecured notes:
6.13%-8.00% 1998-2007 $ 820.0 $ 720.0
7.25%-8.70% 2031-2033 245.0 325.0
Guaranteed ESOP:
9.35% 1997-2000 44.2 56.4
Debentures:
4.38% 2001 45.0 45.0
Mortgage notes:
9.00%-9.90% 1997-2007 25.5 17.2
Bank notes:
10.50% 1997-2009 23.9 24.4
- --------------------------------------------------------------------------------
Total Long-term Debt 1,203.6 1,188.0
Unamortized discount
and premium, net (5.1) (5.1)
Capital lease obligations .1 .1
Current maturities (41.7) (13.3)
- --------------------------------------------------------------------------------
Long-term Debt $1,156.9 $1,169.7
- --------------------------------------------------------------------------------
Scheduled maturities of total long-term debt include $41.7 in 1998, $17.4
in 1999, $125.6 in 2000, $66.7 in 2001, $101.9 in 2002 and $850.3 thereafter.
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 in 1995.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031, by issuing short-term debt. The early extinguishment of debt
resulted in an extraordinary charge of $3.7, net of tax benefits of $2.7, or
$.06 per share, for both basic and diluted earnings per share.
At December 31, 1997, the Corporation and the Telephone Company had
remaining securities, registered with the Securities and Exchange Commission, to
issue up to $125.0 and $95.0, respectively, of medium-term unsecured notes
through shelf registrations.
26 SNET Annual Report
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 $19.8, $21.0 and $23.7 for 1997, 1996 and 1995, respectively. Future
minimum rental commitments under third-party, noncancelable operating leases
include $14.2 in 1998, $13.1 in 1999, $11.7 in 2000, $5.7 in 2001, $4.5 in 2002
and $10.5 thereafter, for a total of $59.7. Capital leases were not significant.
The Corporation expects total capital expenditures of approximately $475
for additions to property, plant and equipment during 1998. In connection with
the capital program, the Corporation has made certain commitments for the
purchase of material and equipment.
In 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 appealed the
decision and on July 31, 1997, the Second Circuit Court of Appeals affirmed the
U.S. District Court's decision. As required by the Court's decision, in October
1997, the Corporation and the Telephone Company paid back wages, liquidating
damages and interest (from the date of the District Court's judgment) to the
employees involved in this action. In 1995, the Telephone Company recorded a
liability of $11.0 which was adequate to cover the cost of total damages for
this matter.
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.
The carrying amount and estimated fair value of the Corporation's financial
instruments are as follows:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Cash and Temporary
Cash Investments $ 12.3 $ 12.3 $ 9.0 $ 9.0
Long-term
Investments $ 2.9 $ 2.1 $ 4.1 $ 13.2
Debt $(1,343.1) $(1,371.5) $(1,384.8) $(1,381.0)
- --------------------------------------------------------------------------------
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 in short-term, high quality commercial paper which is rated at least
A-1 by Standard and Poor's and P-1 by Moody's Investors Services, Inc.
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 include, 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, 1997 1996
- --------------------------------------------------------------------------------
Direct- Direct-
Financing Leveraged Financing Leveraged
Leases Leases Leases Leases
- --------------------------------------------------------------------------------
Minimum rentals
receivable $ 58.9 $ 24.5 $ 61.7 $ 25.4
Unearned income (24.1) (12.9) (26.9) (14.0)
Estimated,
unguaranteed
residual value of
leased assets 10.3 30.6 10.3 30.6
Initial direct costs .2 -- .2 --
Allowance for losses (11.0) -- (11.0) --
- --------------------------------------------------------------------------------
Lease Notes
Receivable $ 34.3 42.2 $ 34.3 42.0
Deferred taxes arising
from leveraged leases (30.4) (28.3)
- --------------------------------------------------------------------------------
Net Investment in
Leveraged Leases $ 11.8 $ 13.7
- --------------------------------------------------------------------------------
Future minimum receipts under third-party direct-financing leases include
$5.4 in 1998, $4.8 in 1999, $3.1 in 2000, $3.8 in 2001, $3.8 in 2002 and $38.0
thereafter.
SNET Annual Report 27
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 dividends for 1997 and 1995 were declared out of retained
earnings, while the dividends for 1996 were declared out of proceeds in excess
of par value.
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. On January 4,
1998, the Board of Directors amended the Rights Plan to provide that the pending
merger with SBC would not invoke the provisions of the plan.
The Corporation sponsors a Dividend Reinvestment and Stock Purchase Plan
("DRISPP"). Effective July 1, 1997, the Corporation's policy of issuing new
shares was modified to have its agent begin purchasing shares on the open market
(when market conditions merit) to meet the needs of the DRISPP. Beginning with
the January 15, 1998 dividend, the Corporation resumed issuance of new shares to
meet the needs of the DRISPP.
NOTE 13: STOCK-BASED COMPENSATION PLANS
During 1997, the Corporation sponsored an employee stock option plan and a
restricted stock plan for non-employee directors. In prior years, the
Corporation also sponsored the SNET 1986 Stock Option Plan ("1986 Plan"). The
1986 Plan, which expired on June 30, 1996, provided stock options to certain key
employees at the discretion of a committee of the Board of Directors
("Committee").
The SNET 1995 Stock Incentive Plan ("1995 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 the 1986 Plan and the 1995 Plan, 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. Both the 1986 Plan and the
1995 Plan 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," net income (loss) and earnings (loss)
per share would approximate the pro forma amounts below:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Net Income (Loss) $190.7 $189.4 $(518.9)
Basic Earnings (Loss)
Per Share $2.88 $2.90 $(8.00)
Diluted Earnings (Loss)
Per Share $2.87 $2.89 $(7.99)
- --------------------------------------------------------------------------------
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.
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 5.8% to 6.7%; 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 $6.79, $7.85 and $6.13 in
1997, 1996 and 1995, respectively.
28 SNET Annual Report
Information with respect to plan activity is as follows:
- --------------------------------------------------------------------------------
Options Shares
Available Under Average
for Grant Option SARs Price
- --------------------------------------------------------------------------------
Balance at 1/1/95 785,300 861,725 162,700 $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
- ---------------------------------------------------------------------
1986 Plan unused (64,950) -- -- --
Granted (868,500) 868,500 -- $36.98
SARs exercised -- (22,400) (22,400) $31.33
Options exercised -- (222,149) -- $35.64
Canceled 214,150 (214,150) -- $37.39
- ---------------------------------------------------------------------
Balance at 12/31/97 2,240,250 3,453,901 31,850 $36.93
- --------------------------------------------------------------------------------
Options exercisable were 2,114,777, 1,334,388 and 403,850 at December 31,
1997, 1996 and 1995, respectively. The respective weighted average exercise
prices were $37.37, $36.72 and $33.67. All outstanding SARs were exercisable at
each year-end. All outstanding SARs as of January 4, 1998 were canceled.
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, 1997 Shares Price Life
- --------------------------------------------------------------------------------
Stock Options Outstanding:
$24.69 to $36.94 1,737,901 $34.71 7.5 years
$37.06 to $44.94 1,716,000 $39.19 8.2 years
- --------------------------------------------------------
$24.69 to $44.94 3,453,901 $36.93 7.8 years
- --------------------------------------------------------------------------------
Stock Options Exercisable:
$24.69 to $36.94 730,151 $34.09 --
$37.06 to $44.94 1,384,626 $39.11 --
- --------------------------------------------------------
$24.69 to $44.94 2,114,777 $37.37 --
- --------------------------------------------------------------------------------
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, 1997 1996 1995
- --------------------------------------------------------------------------------
Shares available for grant,
beginning of period 196,400 143,852 147,152
New shares approved
for issuance -- 200,000 --
1994 Plan unused -- (141,619) --
Shares granted (2,489) (5,833) (3,300)
- --------------------------------------------------------------------------------
Shares Available for Grant,
End of Period 193,911 196,400 143,852
- --------------------------------------------------------------------------------
Weighted Average Market
Value of Stock on Grant Date $ 37.41 $ 41.21 $ 35.02
Compensation Expense
Recorded for Restricted
Stock Grants $ .1 $ .2 $ .1
- --------------------------------------------------------------------------------
SNET Annual Report 29
NOTE 14: SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL INCOME STATEMENT INFORMATION
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Advertising Expense $ 38.8 $ 42.1 $ 38.8
- --------------------------------------------------------------------------------
Depreciation and amortization:
Depreciation $351.7 $331.1 $328.1
Amortization 27.4 25.0 17.9
- --------------------------------------------------------------------------------
Total Depreciation and Amortization $379.1 $356.1 $346.0
- --------------------------------------------------------------------------------
Taxes other than income:
Property $ 48.1 $ 48.0 $ 43.7
Other 5.0 6.6 12.8
- --------------------------------------------------------------------------------
Total Taxes Other Than Income $ 53.1 $ 54.6 $ 56.5
- --------------------------------------------------------------------------------
Interest expense:
Long-term debt $ 80.9 $ 83.0 $ 74.7
Short-term debt 10.1 10.0 8.5
Capitalized interest (4.6) (7.2) --
Other 3.4 2.9 2.7
- --------------------------------------------------------------------------------
Total Interest Expense $ 89.8 $ 88.7 $ 85.9
- --------------------------------------------------------------------------------
SUPPLEMENTAL BALANCE SHEET INFORMATION
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Materials, supplies and inventories:
Materials and supplies $ 14.7 $ 14.3
Inventories 15.1 13.1
- --------------------------------------------------------------------------------
Total Materials, Supplies and Inventories $ 29.8 $ 27.4
- --------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Telephone plant:
Land $ 16.5 $ 16.8
Buildings 398.4 386.4
Central office equipment 1,850.8 1,743.0
Outside plant facilities and equipment 1,798.4 1,732.4
Furniture and office equipment 255.5 310.0
Station equipment and connections 24.9 22.5
Plant under construction 85.5 98.0
Telecommunications property and
equipment 487.0 398.2
- --------------------------------------------------------------------------------
Total Property, Plant and Equipment,
at cost 4,917.0 4,707.3
Accumulated Depreciation (3,200.2) (3,110.3)
- --------------------------------------------------------------------------------
Total Property, Plant and Equipment, net $ 1,716.8 $ 1,597.0
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Interest Paid, net of amounts
capitalized $ 88.3 $ 89.2 $ 79.7
- --------------------------------------------------------------------------------
Income Taxes Paid $ 78.8 $ 84.0 $ 87.8
- --------------------------------------------------------------------------------
Changes in operating assets
and liabilities, net:(1)
Increase in accounts
receivable, net $(44.7) $(18.5) $(78.3)
Increase in materials, supplies
and inventories (1.8) (1.2) (.1)
Increase (decrease) in accounts
payable, accrued expenses
and compensated absences 16.6 (18.2) 65.0
Changes in other assets and
liabilities, net 21.8 7.6 (20.6)
- --------------------------------------------------------------------------------
Changes in Operating Assets and
Liabilities, net $ (8.1) $(30.3) $(34.0)
- --------------------------------------------------------------------------------
(1) Reflects the Corporation's acquisition of Woodbury, on July 30, 1997, in a
non-cash transaction [see Note 2].
NOTE 15: OPERATING CASH FLOW(1) (UNAUDITED)
The following 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, 1997 1996 1995
- --------------------------------------------------------------------------------
Wireline(2) $ 607.2 $ 564.8 $ 569.0
Wireless(3) 61.1 31.3 (10.8)
Information and Entertainment(4) 90.2 110.2 102.6
Other(5) 18.1 32.0 34.0
- --------------------------------------------------------------------------------
Total Operating Cash Flow $ 776.6 $ 738.3 $ 694.8
- --------------------------------------------------------------------------------
(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., SNET America, Inc. and Woodbury Telephone Company.
(3) Includes the wholesale and retail cellular operations, SNET Cellular, Inc.
and SNET Mobility, Inc., net of cellular intercompany amounts and its
paging operations.
(4) Includes publishing, internet and cable television operations.
(5) Includes SNET Real Estate, Inc. and holding company operations.
30 SNET Annual Report
NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1st QTR 2nd QTR 3rd QTR 4th QTR Full Year
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ----
Revenues and Sales $482.7 $501.6 $509.7 $528.3 $2,022.3
Operating Income $ 96.4 $ 98.5 $ 99.2 $103.4 $ 397.5
Income before extraordinary charge $ 46.1 $ 50.0 $ 49.1 $ 52.3 $ 197.5
Extraordinary charge [see Note 8] (3.7) -- -- (3.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 42.4 $ 50.0 $ 49.1 $ 52.3 $ 193.8
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income before extraordinary charge $ .70 $ .76 $ .74 $ .79 $ 2.99
Extraordinary charge (.06) -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ .64 $ .76 $ .74 $ .79 $ 2.93
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Income before extraordinary charge $ .70 $ .76 $ .74 $ .78 $ 2.98
Extraordinary charge (.06) -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ .64 $ .76 $ .74 $ .78 $ 2.92
- ------------------------------------------------------------------------------------------------------------------------------------
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
Basic Earnings Per Share $ .80 $ .77 $ .70 $ .68 $ 2.95
Diluted Earnings Per Share $ .80 $ .77 $ .70 $ .67 $ 2.94
- -----------------------------------------------------------------------------------------------------------------------------------
SNET Annual Report 31
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL DATA (UNAUDITED)
Dollars in Millions, Except as Noted 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues and sales $ 2,022 $ 1,942 $ 1,816 $ 1,718 $ 1,655
Costs and expenses(1) $ 1,246 $ 1,204 $ 1,121 $ 1,015 $ 1,367
Interest expense $ 90 $ 89 $ 86 $ 75 $ 91
Income taxes $ 119 $ 108 $ 110 $ 122 $ (44)
Income (loss) from continuing operations(2) $ 198 $ 193 $ 169 $ 178 $ (44)
Net income (loss) $ 194 $ 193 $ (518) $ 178 $ (318)
Basic earnings (loss) per share (dollars):
From continuing operations(2) $ 2.99 $ 2.95 $ 2.60 $ 2.77 $ (.68)
Net income (loss) $ 2.93 $ 2.95 $ (7.99) $ 2.77 $ (4.99)
Diluted earnings (loss) per share (dollars):
From continuing operations(2) $ 2.98 $ 2.94 $ 2.60 $ 2.77 $ (.68)
Net income (loss) $ 2.92 $ 2.94 $ (7.99) $ 2.77 $ (4.99)
Dividends declared per share (dollars) $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76
Net cash provided by operating activities $ 616 $ 477 $ 443 $ 424 $ 481
Cash expended for capital additions $ 472 $ 374 $ 357 $ 283 $ 269
Depreciation and amortization $ 379 $ 356 $ 346 $ 329 $ 291
Property, plant and equipment, net $ 1,717 $ 1,597 $ 1,565 $ 2,712 $ 2,770
Total assets $ 2,771 $ 2,671 $ 2,724 $ 3,505 $ 3,762
Short-term debt $ 186 $ 215 $ 232 $ 40 $ 290
Long-term debt $ 1,157 $ 1,170 $ 1,182 $ 952 $ 984
Shareholders' equity $ 597 $ 463 $ 353 $ 953 $ 855
- ------------------------------------------------------------------------------------------------------------------------------------
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 for both basic and diluted earnings per share,
for restructuring.
(2) 1997 excludes an extraordinary charge of $3.7 or $.06 for both basic and
diluted earnings per share resulting from the early extinguishment of debt.
1995 excludes an extraordinary charge of $687.1, or $10.59 for both basic
and diluted earnings 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 (basic and diluted), an
extraordinary charge of $44.0, or $.69 per share (basic and diluted) and
the cumulative effect of accounting changes of $220.2, or $3.46 per share
(basic and diluted).
32 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
STATISTICAL DATA (UNAUDITED)
Dollars in Millions, Except as Noted 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Network access lines in service (thousands)(1) 2,286 2,163 2,073 2,009 1,964
Annual growth(1) 5.7% 4.3% 3.2% 2.3% 1.4%
Network interstate access minutes of use (millions) 8,291 7,906 7,298 6,917 6,522
Annual growth 4.9% 8.3% 5.5% 6.1% 4.7%
Interstate and international toll access line
subscribers (thousands) 941 758 266 117 10
Annual growth 24.1% 185.0% 127.4% -- --
Cellular subscribers (thousands)(2) 457 392 323 166 88
Annual growth 16.6% 21.4% 94.6% 88.6% 29.4%
Operating cash flow(3) $ 777 $ 738 $ 695 $ 703 $ 288
Telephone Company wireline cost per access
line (dollars)(4) $ 312 $ 332 $ 320 $ 340 $ 365
Return on average total capital 14.9% 15.9% --(5) 12.8% --(6)
Return on average equity 36.3% 45.6% --(5) 19.4% --(6)
Debt ratio(7) 69.2% 74.9% 80.0% 51.0% 59.9%
Pre-tax interest coverage (times) 4.3 4.1 4.2 5.0 .1
Average total debt cost 6.5% 6.6% 6.9% 6.8% 7.7%
Current ratio (times) .69 .70 .73 .88 .82
Average dividend yield 4.4% 4.4% 5.1% 5.4% 4.9%
Payout ratio 60.1% 59.9% --(5) 63.5% --(6)
Market price per share (dollars):
High $51.500 $45.500 $40.250 $36.250 $38.375
Low $34.750 $36.000 $31.750 $28.250 $33.625
Book value per share (dollars) $ 8.96 $ 7.05 $ 5.42 $ 14.77 $ 13.38
Average market price per share (dollars) 39.96 $ 40.07 $ 34.47 $ 32.63 $ 35.70
Average book value per share (dollars) $ 8.08 $ 6.44 $ 15.14 $ 14.26 $ 17.69
Average price/earnings ratio (times) 14 14 --(5) 12 --(6)
Average trading volume 153,200 105,028 91,797 59,437 79,086
Number of shareholders 48,720 50,917 53,332 55,693 57,352
Total employees 9,743 9,441 9,070 9,797 10,476
- ------------------------------------------------------------------------------------------------------------------------------------
Certain amounts have been restated to conform to the current year presentation.
(1) Excluding the purchase of Woodbury Telephone Company ("Woodbury"), network
access lines in service would have increased 4.7% to 2,265,000 in 1997.
(2) Excluding the subscribers from the acquired cellular properties, cellular
subscribers would have increased 51.1% to 251,000 subscribers in 1995.
(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 $643 in 1993.
(4) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses. Also, excludes costs and access lines
acquired from the purchase of Woodbury. 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 33
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 The Form 10-K may be For Shareholder
Shareholders: obtained Information
May 13, 1998, 11:30 a.m. by contacting the Transfer including quarterly
Italian Center of Agent and Registrar: results, latest
Stamford State Street Bank recorded news and
1620 Newfield Avenue and Trust Company information, call
Stamford, CT 06905 P.O. Box 8200 1-800-SNG-6220 or visit
Boston, MA 02266-8200 our Internet web site
From anywhere in the at www.snet.com
continental U.S.:
1-800-243-1110
Security Analysts and Dividend Reinvestment
Portfolio Managers and Stock Purchase Plan
- --------------------------------------------------------------------------------
Direct inquiries to: Mr. All owners of common Shareholders do not pay
James A. Magrone stock are eligible for any brokerage or
Director-Investor the plan, which allows administrative fees when
Relations 227 Church participants to apply purchasing additional
Street New Haven, CT dividends and/or optional shares through the plan.
06510 (203) 771-4662 cash payments toward You can obtain a
increased investment in prospectus and enrollment
the Corporation. forms by contacting State
Street Bank and Trust
Company, Plan
Administrator.
Market and Dividend Data
- --------------------------------------------------------------------------------
Market information was
obtained from the
composite tape, which
encompasses trading on
the principal U.S. stock
exchanges as well as
offboard trading. Cash
dividends of $.44 per
share were declared for
each quarter in 1997 and
1996. The number of
holders of SNET stock at
February 27, 1998 was
47,787.
Market Price
- --------------------------------------------------------------------------------------------------------
1997 1996
Quarter High Low Close Quarter High Low Close
- --------------------------------------------------------------------------------------------------------
First $ 39.125 $ 34.750 $ 35.875 First $ 43.750 $ 37.500 $ 40.250
Second $ 42.375 $ 35.625 $ 38.875 Second $ 45.500 $ 40.500 $ 42.000
Third $ 41.500 $ 38.250 $ 40.875 Third $ 42.750 $ 36.750 $ 36.875
Fourth $ 51.500 $ 41.000 $ 50.313 Fourth $ 41.125 $ 36.000 $ 38.875
34 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
OTHER INFORMATION
Executive Officers of the Corporation
- --------------------------------------------------------------------------------
Daniel J. Miglio Chairman and Chief Executive Officer
Madelyn M. DeMatteo Senior Vice President--General Counsel and Secretary
Karin D. Mayhew 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 We Go Beyond The Call(R), americast(TM) is a
trademark and I-SNET is a SmartLink(R) and All trademark of the
servicemark of Southern Distance(R) are americast partnership.
New England registered trademarks of
Telecommunications The Southern New England
Corporation. Telephone Company. Page
2000r is a registered
trademark of SNET
Mobility, Inc.
SNET Annual Report 35