INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the registrant /x/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/x/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
- ------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
- ------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/x/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or Rule
14a-6(i)(2).
/ / $500 per each party per Exchange Act Rule 14a-6(i)(3), or Rule
14a-6(i)(2).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
[SNET LOGO]
Southern New England
Telecommunications Corporation
227 Church Street
New Haven, Connecticut 06510
PROXY STATEMENT
1995 ANNUAL REPORT
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Dear Shareholder:
The Annual Meeting of Shareholders of Southern New England Telecommunications
Corporation will be held in the Corporation's general office building, 300
George Street, New Haven, Connecticut, on Wednesday May 8, 1996 at 10:00 a.m.
for the following purposes:
1. To elect Class I Directors for a term of three years;
2. To ratify the appointment of independent auditors for the current
calendar year;
3. To act upon the proposed SNET 1996 Non-Employee Director Stock Plan;
4. To act upon the shareholder proposal as set forth in the Proxy
Statement, if such proposal is properly presented at the meeting; and
5. To transact any other business that may properly come before the
meeting or any adjournment thereof.
Only holders of the common stock of the Corporation at the close of business on
March 8, 1996 will be entitled to vote at the meeting or any adjournment
thereof.
THE VOTE OF EACH SHAREHOLDER IS IMPORTANT, WHATEVER THE NUMBER OF SHARES HELD.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND
RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES.
Madelyn M. DeMatteo
Secretary
March 20, 1996
TABLE OF CONTENTS
PROXY STATEMENT
Proxy Information 1
Beneficial Ownership of Common Stock 1
Election of Directors (Proposal 1) 2
Compensation and Other Information Regarding Directors 4
Committees of the Board 4
Ratification of Appointment of Auditors (Proposal 2) 5
Approval of SNET 1996 Non-Employee Director Stock Plan (Proposal 3) 5
Shareholder Proposal (Proposal 4) 6
Submission of Shareholder Proposals 7
Other Matters to Come Before the Meeting 7
Report of Personnel Resources Committee of the Board of Directors on Executive Compensation 7
Summary Compensation Table 8
Option/SAR Grants in the Last Fiscal Year 9
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values 10
Pension Plan Table 10
Change-in-Control Agreements 11
Performance Graph 11
Certain Transactions 11
Financial Statements 11
Exhibit A--SNET 1996 Non-Employee Director Stock Plan 12
FINANCIAL INFORMATION
Financial Highlights 18
Business Highlights 19
Letter to Shareowners 20
Financial Commentary 22
Report on Consolidated Financial Statements 28
Report of Audit Committee 29
Report of Independent Accountants 29
Statements of (Loss) Income 30
Balance Sheets 31
Statements of Changes in Shareholders' Equity 32
Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34
Financial and Statistical Data (Unaudited) 46
Investor Information 47
Other Information 48
OUR NEW ANNUAL REPORT/PROXY STATEMENT
The new 1995 annual report is combined with the proxy statement. It is
another example of how SNET is examining every aspect of the business for ways
to streamline, become more effective and provide better service.
We hope you find the new approach for our annual report and proxy statement
both useful and informative.
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
PROXY STATEMENT
1996 ANNUAL MEETING
- --------------------------------------------------------------------------------
PROXY INFORMATION
This proxy statement and the accompanying proxy are being mailed to
shareholders of Southern New England Telecommunications Corporation
("Corporation") on or about March 20, 1996, in connection with the solicitation
of proxies by the Corporation's Board of Directors ("Board") for the Annual
Meeting of Shareholders. The Corporation will bear the cost of soliciting
proxies. In addition to solicitations by mail, a number of the Corporation's
regular employees may solicit proxies in person or by telephone, at no
additional compensation. Georgeson & Co. has been retained to assist in the
solicitation of proxies from brokers, banks, and other nominee and institutional
holders for a fee of $8,500, plus expenses.
SHAREHOLDERS ARE URGED TO MARK THEIR PROXIES WITH THEIR PREFERENCES SO THAT
THE SHARES WILL BE VOTED ACCORDINGLY. IF NO INSTRUCTION IS GIVEN FOR ANY MATTER
TO BE VOTED UPON, THE SHARES REPRESENTED BY THE SIGNED PROXY WILL BE VOTED AS
RECOMMENDED BY THE BOARD.
Shares cannot be voted unless the owner is present or represented by proxy.
A properly executed proxy that is not revoked will be voted according to the
instructions on the proxy. Under state law, "withheld" votes, abstentions and
votes which brokers elect not to cast under their discretionary authority are
not counted as votes in favor of any proposal. A shareholder submitting a proxy
may revoke it at any time before it is voted, either by attending the meeting
and voting in person, or by executing and delivering a later dated proxy or
written instrument revoking such proxy. If a shareholder wishes to give a proxy
to someone other than the named attorneys, the three names appearing on the
proxy must be crossed out and the name of another person or persons (not more
than three) inserted.
All proxies, ballots and voting materials that identify the votes of
shareholders are kept permanently confidential, except where disclosure is
needed to communicate with shareholders who have forwarded proxies with written
comments, in election contests should the opposing party choose not to agree in
writing to abide by this policy, or as required by law.
BENEFICIAL OWNERSHIP OF COMMON STOCK
On March 8, 1996 there were issued and outstanding 65,263,218 shares of
common stock of the Corporation ("Common Stock"), all of one class and each
share having one vote on all matters properly brought before the meeting. To the
best knowledge of the Corporation, the only beneficial owner of more than 5% of
the outstanding Common Stock is Sprint Corporation, 2330 Shawnee Mission
Parkway, Westwood, Kansas 66205 ("Sprint") who, together with a wholly-owned
affiliate, owned beneficially as of the record date, with sole voting and
dispositive powers, 4,362,998 shares or approximately 6.6% of the outstanding
Common Stock.
The following table sets forth the beneficial ownership of Common Stock
(including certain family holdings) as of March 8, 1996 for each Director,
Executive Officers named in the Summary Compensation Table on page 8, and all
Directors and Executive Officers as a group. The percentage of Common Stock
owned beneficially by any Director, or by all Directors and Executive Officers
as a group is less than 1% of the shares of Common Stock outstanding.
Shares Beneficially
Owned as of
Name of Beneficial Owner March 8, 1996
- ------------------------ -------------------
William F. Andrews .................................... 1,525
Richard H. Ayers ...................................... 1,207(1)(2)
Zoe Baird ............................................. 1,093
Robert L. Bennett ..................................... 921
Dr. Barry M. Bloom .................................... 1,881(1)
Frank J. Connor ....................................... 1,405(1)
William R. Fenoglio ................................... 1,170(1)
Dr. Claire L. Gaudiani ................................ 721(1)
James R. Greenfield ................................... 1,124
Ira D. Hall ........................................... 476(1)
Dr. Burton G. Malkiel ................................. 891(1)(3)
Frank R. O'Keefe, Jr .................................. 1,714(1)
Daniel J. Miglio ...................................... 151,738(4)
Jean M. LaVecchia ..................................... 34,231(4)
Ronald M. Serrano ..................................... 85,188(4)
Donald R. Shassian .................................... 75,237(4)
Madelyn M. DeMatteo ................................... 44,925(4)
Directors and Executive Officers
as a group ........................................... 435,274(4)
- ----------
(1) Includes shares deferred for which neither investment nor voting power is
held as follows: Mr. Ayers 510; Dr. Bloom 510; Mr. Connor 243; Mr. Fenoglio
510; Dr. Gaudiani 137; Mr. Hall 372; Dr. Malkiel 137; and Mr. O'Keefe 270.
(2) Voting and investment powers are shared with spouse with respect to 200
shares.
(3) 754 shares are held in trust for benefit of a family member.
(4) Includes shares that may be acquired within 60 days through the exercise of
stock options as follows: Mr. Miglio 143,000; Ms. LaVecchia 32,200; Mr.
Serrano 83,250; Mr. Shassian 72,500; Ms. DeMatteo 32,050; and Executive
Officers as a group 387,100.
ELECTION OF DIRECTORS
(PROPOSAL 1)
In accordance with the By-Laws, the number of directorships is set by the
Board. The Board has set the number of directorships at thirteen. The
directorships are divided into three classes with each class having a term of
three years. These classes are kept as equal in size as possible considering
retirements and other circumstances.
Nominations will be made at the Annual Meeting to reelect the five current
Class I Directors whose terms expire this year. The nominees are William F.
Andrews, Dr. Barry M. Bloom, William R. Fenoglio, Dr. Claire L. Gaudiani and
Daniel J. Miglio. The terms of office for all elected Class I Directors will run
until 1999 and until their successors are elected and qualified. Shares
represented by proxies will be voted for the nominees, except where authority to
do so is specifically withheld. Proxies cannot be voted for a greater number of
persons than the number of nominees named.
All nominees have been selected on the recommendation of the Committee on
Board Affairs and Public Policy. If one or more of such nominees should at the
time of the Annual Meeting be unavailable as a candidate, the shares represented
by the proxies will be voted for the remaining nominees and any substitute
nominee or nominees designated by the Board on recommendation of the Committee,
or, if none, the size of the Board will be reduced. The Committee knows of no
reason why any such nominee will be unavailable or unable to serve. The
Committee deliberates on nominees at the end of the year prior to each annual
meeting. Shareholders who wish to nominate persons for election to the Board
must comply with the procedures set forth in Article II of the By-Laws and
should direct correspondence to the Secretary.
The affirmative vote of the holders of a majority of the shares of Common
Stock represented at the meeting in person or by proxy is required to elect
Class I Directors.
Nominees for Election as Directors
CLASS I
(Term Expires in 1996)
- --------------------------------------------------------------------------------
[PHOTO]
William F. Andrews, 64, Chairman, Schrader, Inc. (manufacturer of tire valves,
cores, caps, tire pressure gauges and pressure maintenance systems) (1995 to
date). Chairman, Scovill Fasteners (manufacturer of apparel and industrial
fasteners) (1995 to date). Chairman and Chief Executive Officer, Amdura
Corporation (manufacturer and distributor of hardware and industrial machinery
and equipment) (1993-1995). Advisor, Investor International (U.S.) (investment
company) (1992-1994). President and Chief Executive Officer, UNR Industries,
Inc. (manufacturer of steel pipe and tubing for commercial and industrial
products) (1990-1991). Director of MB Communications, PT Holdings, Inc.,
Navistar International Corporation, Johnson Controls, Inc., Katy Industries,
Corrections Corporation of America, Northwestern Steel and Wire and Black Box
Corporation. Director since 1982.
- --------------------------------------------------------------------------------
[PHOTO]
Barry M. Bloom, 67, Formerly Executive Vice President-Research and Development,
Pfizer Inc (research-based, diversified health care company with global
operations) (1992-1993); Senior Vice President (1990-1992); Vice President
(1971-1990). Director of Neurogen Corporation, Vertex Pharmaceuticals Inc.,
Incyte Pharmaceuticals Inc. and Cubist Pharmaceuticals Inc. Member of Board of
Managers and Trustee, Lawrence & Memorial Hospital. Member of Connecticut
Academy of Science and Engineering. Director since 1987.
- --------------------------------------------------------------------------------
[PHOTO]
William R. Fenoglio, 56, President and Chief Executive Officer, Augat Inc.
(designer and manufacturer of interconnection components and subsystems) (1995
to date); President and Chief Operating Officer (1994). President and Chief
Executive Officer, Barnes Group, Inc. (diversified manufacturer and distributor
of precision springs and custom metal parts for industrial and heavy equipment
markets, and turbine engine and airframe parts for the aerospace industry)
(1991-1993); President (1985-1991). Director of Augat, Inc. Trustee of
Rose-Hulman Institute of Technology. Director since 1993.
- --------------------------------------------------------------------------------
[PHOTO]
Dr. Claire L. Gaudiani, 51, President, Connecticut College (1988 to date).
Acting Associate Director, Joseph H. Lauder Institute for Management and
International Studies, University of Pennsylvania (1984-1988); Senior Fellow,
Department of Romance Languages (1981-1988). Director of Municipal Bond
Insurance Association (MBIA) and Public Radio International. Chair, Campus
Compact. Member of Council on Foreign Relations and former member of NCAA
Presidents Commission. Director since 1989.
2
SNET Proxy Statement
[PHOTO]
Daniel J. Miglio, 55, Chairman of the Board, President and Chief Executive
Officer of the Corporation and its principal subsidiary, The Southern New
England Telephone Company (January 1994 to date); President and Chief Executive
Officer (1993); President and Chief Operating Officer (1992). Director of
Aristotle Corporation, New Haven Symphony Orchestra, Connecticut Public
Broadcasting and the 1995 Special Olympics World Games. Chairman, International
Festival of Arts and Ideas. 1995 Chairman of United States Telephone
Association. Director since 1990.
Directors Continuing in Office
CLASS II
(Term Expires in 1997)
- --------------------------------------------------------------------------------
[PHOTO]
Zoe Baird, 43, Senior Vice President and General Counsel, Aetna Life & Casualty
Company (life, group, accident and health insurances, pensions, bonds and
casualty and property insurance) (1990 to date). Counsellor and Staff Executive,
General Electric Company (diversified manufacturer of consumer and industrial
products, financial services) (1986-1990). Partner, O'Melveny & Myers,
Washington, D.C. (attorneys at law) (previously associate) (1981-1986). Member,
American Bar Association. Director of Zurn Industries, Inc. Director since 1991.
- --------------------------------------------------------------------------------
[PHOTO]
Robert L. Bennett, 58, Principal, Bennett, Fisher, Giuliano and Gottsman: The
Electronic Publishing Group (consultation and management services for electronic
publishing businesses) (1993 to date). President and Chief Executive Officer,
Mirror Systems, Inc. (subsidiary of The Times Mirror Company providing
consultation and research and development on electronic publishing for parent's
operating companies) (1983-1992). Director of Raytech Corporation. Member of
American Bar Association, Section of Science and Technology, and California Bar
Association. Director since 1994.
- --------------------------------------------------------------------------------
[PHOTO]
James R. Greenfield, 69, Senior Partner, Greenfield & Murphy (attorneys at law)
(1990 to date). Principal and Director of law firm of Greenfield, Krick &
Jacobs, P.C. and senior partner of predecessor firm (1958-1990). Director of New
Haven Symphony Orchestra and Friends of Legal Services. Member of American Bar
Association, Connecticut Bar Association, Association of Trial Lawyers of
America, American Academy of Matrimonial Lawyers and International Academy of
Matrimonial Lawyers. Director since 1980.
CLASS III
(Term Expires in 1998)
- --------------------------------------------------------------------------------
[PHOTO]
Richard H. Ayers, 53, Chairman and Chief Executive Officer, The Stanley Works
(diversified manufacturer of consumer, builder and industrial products) (1989 to
date); President and Chief Executive Officer (1987-1989); President and Chief
Operating Officer (1985-1987); Executive Vice President (1984-1985). Director of
The Stanley Works, Perkin-Elmer Corporation, Connecticut Mutual Investment
Accounts, Inc., Connecticut Mutual Financial Services Series Fund I, Inc. and
New Britain General Hospital. Director since 1986.
- --------------------------------------------------------------------------------
[PHOTO]
Frank J. Connor, 65, Founder and President, Nortay Associates, Inc. (business
investment and operations management) (1987 to date). President and Member of
the Office of the Chairman, American Can Company (packaging, specialty retailing
and financial services) (1981-1987). Chairman Emeritus of Southwestern Area
Commerce & Industry Association of Connecticut and the Connecticut Business and
Industry Association. Director since 1986.
- --------------------------------------------------------------------------------
[PHOTO]
Ira D. Hall, 51, Director of International Operations, International Business
Machines Corporation (developer, manufacturer and marketer of advanced
information processing products including computers and microelectronic
technology, software, networking systems and information technology-related
services) (1993 to date); Treasurer, IBM United States (1990-1993); IBM
Assistant Treasurer (1987-1990); Chairman and Chief Executive Officer, IBM WTC
Insurance Company (1988-1994). Director of the Jackie Robinson Foundation.
Member of the Advisory Council of the Stanford University Graduate School of
Business. Director since 1995.
- --------------------------------------------------------------------------------
[PHOTO]
Dr. Burton G. Malkiel, 63, Chemical Bank Chairman's Professor of Economics,
Princeton University (1988 to date). Professor and Dean, Yale University School
of Organization and Management (1981-1988). Professor and Chairman, Department
of Economics, Princeton University (1968-1981). Director of Baker, Fentress and
Company, Amdahl Corpora-
3
SNET Proxy Statement
tion, Prudential Insurance Company of America, Vanguard Group and The Jeffrey
Co. Director since 1984.
- --------------------------------------------------------------------------------
[PHOTO]
Frank R. O'Keefe, Jr., 66, Formerly President of Long Wharf Capital Partners,
Inc. (business investments) (1988-1990) and Chairman, President and Chief
Executive Officer, Armtek Corporation (rubber chemicals, heat exchange
components and systems, automotive and industrial belts and hoses) (1986-1988);
President and Chief Operating Officer (1980-1986). Director of Aetna Life and
Casualty Company and The United Illuminating Company. Trustee of University of
Massachusetts Chancellor's Council. Director since 1984.
Compensation and Other Information
Regarding Directors
Directors currently receive an annual retainer of $18,000, of which at
least 25% is payable in Common Stock under the SNET Non-Employee Director Stock
Plan (the "1994 Plan"). Upon shareholder approval of the SNET 1996 Non-Employee
Director Stock Plan presented at this meeting, the 1994 Plan will terminate and
the annual retainer will be reduced to $13,500 which Directors may also elect to
receive in Common Stock. Directors receive a meeting fee of $1,000 for each
Board and Committee meeting and Committee Chairs receive an annual retainer of
$2,500. Directors may elect to defer the receipt of all or a part of their fees
and retainers.
Also, in contemplation of the new Director Stock Plan, the pension plan for
Directors has been terminated with pension benefits payable only to current and
retired Directors and with the amount of accrued pension benefits being frozen.
In 1995, several Directors received payments as reimbursement for travel
expenses in connection with attendance at meetings. The Corporation also
provides life insurance, accidental death and dismemberment insurance and a
telephone service concession for each Director. Directors who are also employees
receive no additional compensation or benefits for serving as Directors.
The Board held 9 meetings in 1995. All Directors attended in excess of 75%
of the aggregate number of meetings of the Board and the Committees on which
they served.
Committees of the Board
The Committees established by the Board to assist it in the discharge of
its responsibilities are described below.
Audit Committee reviews the adequacy of the Corporation's system of
internal control and the reliability of its financial reporting. It meets with
appropriate financial management, internal auditors and external auditors in
connection with these reviews. This Committee recommends to the Board the
appointment of the external auditors for ratification by the shareholders at the
Annual Meeting. Both the internal auditors and the external auditors
periodically meet with the Audit Committee and have unrestricted access to the
Committee. The Committee met 5 times in 1995. Directors Bloom (Chair), Andrews,
Baird, Fenoglio and O'Keefe are members of this Committee.
Committee on Board Affairs and Public Policy advises the Board with respect
to nomination and compensation of Directors, consults with the Chairman on the
functioning of the Board and examines the Board's performance in various areas
of public policy. In selecting Board candidates, the Committee seeks individuals
of proven judgment and competence, outstanding in their chosen fields, and
considers factors such as anticipated participation in Board activities,
education, geographic location and other special talents or attributes. The
Committee met 4 times in 1995. Directors Gaudiani (Chair), Baird, Bloom and
Greenfield are members of this Committee.
Executive Committee meets on call of the Chairman or the Chief Executive
Officer and has authority to act on matters during the intervals between Board
meetings. There were no meetings of the Executive Committee in 1995. Directors
Miglio (Chair), Ayers, Bloom, Connor, Gaudiani and Malkiel are members of this
Committee.
Employee Benefits Plan Committee determines whether the actions of
management in administering the employee benefit, pension, savings and stock
ownership plans are in the best interests of the participants and beneficiaries
of such plans. The Committee, which met 6 times in 1995, makes periodic reports
to the Board on its activities and reviews all material changes in the plans
prior to the presentation of such changes to the Board for approval. Directors
Malkiel (Chair), Andrews, Ayers, Fenoglio, and Greenfield are members of this
Committee.
Financial Resources Committee reviews and reports to the Board regarding
the Corporation's financial condition and plans, and assists the Board in
assuring responsible and effective utilization of financial resources. The
Committee, which met 6 times in 1995, makes recommendations to the full Board
for action on such matters as financial plans and objectives, dividend policy,
specific plans for raising outside capital and the commitment of capital to the
Corporation's various businesses. Directors Ayers (Chair), Bennett, Connor,
Hall, Malkiel and O'Keefe are members of this Committee.
4
SNET Proxy Statement
Personnel Resources Committee reviews management performance, makes
specific recommendations to the Board regarding executive salary treatment, and
administers executive incentive compensation plans. The Committee also examines
management staffing and recommends to the Board the election of corporate
officers. The Committee met 3 times in 1995. Directors Connor (Chair), Bennett,
Hall and Gaudiani are members of this Committee.
- --------------------------------------------------------------------------------
RATIFICATION OF APPOINTMENT OF AUDITORS
(PROPOSAL 2)
Subject to shareholder ratification, the Board, upon recommendation of the
Audit Committee, has appointed the firm of Coopers & Lybrand L.L.P. ("Coopers &
Lybrand"), Certified Public Accountants, as independent auditors to examine the
accounts of the Corporation for the year 1996.
The Board recommends a vote FOR the proposal to ratify the appointment of
Coopers & Lybrand as independent auditors for the current year. If a majority of
the voting power represented at the meeting fails to ratify the appointment of
Coopers & Lybrand, the Board, upon recommendation of the Audit Committee, will
consider the appointment of another accounting firm.
One or more members of Coopers & Lybrand will attend the Annual Meeting,
have an opportunity to make a statement, and be available to respond to
questions.
The affirmative vote of the holders of a majority of the shares of Common
Stock represented at the meeting in person or by proxy is required to ratify the
appointment of Coopers & Lybrand as independent auditors for the current year.
- --------------------------------------------------------------------------------
APPROVAL OF SNET 1996 NON-EMPLOYEE DIRECTOR STOCK PLAN
(PROPOSAL 3)
Introduction
On February 14, 1996, the Board adopted the SNET 1996 Non-Employee Director
Stock Plan (the "Plan") subject to shareholder approval. The effective date of
the Plan, if so approved, will be June 1, 1996.
The proposed Plan provides that each Director will receive annually 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. An aggregate of
200,000 shares of Common Stock will be available for issuance under the Plan. As
noted in the Directors Compensation section, the current Directors stock plan
will be terminated.
Summary of Plan Provisions
The following Plan summary is qualified in its entirety by the text of the
Plan, a copy of which is included as Exhibit A.
Eligibility. Each non-employee Director will be eligible to participate in
the Plan. At present, twelve Directors are eligible.
Amount of Shares. Each eligible Director will receive annually, in lieu of
cash compensation, 300 shares of Common Stock on the last business day of the
first calendar year quarter ("Stock Compensation"). Directors can elect to be
paid an additional percent of their cash retainer, up to a maximum of 100% in 5%
increments, in the form of shares ("Elective Stock Retainer"). Fractional shares
will be paid in cash. Stock Compensation shares are non-transferable until the
Director ceases to serve as a Director. Elective Stock Retainer shares are
subject to a six month restriction on transferability.
Voting and Dividend Rights. All shares distributed will have voting and
dividend rights.
Amendment and Termination. No shares will be issued after May 31, 2006. The
Board at any time may amend, suspend, or terminate the Plan, but no such
amendments will permit Directors who are employees to participate in the Plan
and no such amendment will affect the rights of any participating Director
without his or her consent.
In addition, the Board of Directors may not, without shareholder approval,
increase the number of shares issuable under the Plan, materially increase the
benefits accruing to Plan participants, or materially modify Plan eligibility
requirements. Certain provisions of the Plan governing eligibility, the formula
for determining the shares that may be received under the Plan, and the timing
of such distributions may not be amended more often than once every six months.
Required Vote. The affirmative vote of the holders of a majority of the
Common Stock present or represented at the meeting in person or by proxy is
required for approval of the proposed Plan.
Set forth below is a New Plan Benefits Table describing the number of
shares of Common Stock that non-employee Directors could have received in 1995
under the provisions of the Plan.
5
SNET Proxy Statement
NEW PLAN BENEFITS
SNET 1996 NON-EMPLOYEE DIRECTOR
STOCK PLAN
Number of
Name and Position Dollar Value* Units*
- ----------------- ------------- ----------
Non-Executive $121,500-$283,500 3,600-8,130
Director Group
- ----------
* Range based upon receipt of minimum of 300 shares each and election to
receive a maximum of 100% of retainer paid in Common Stock.
Recommendation of the Board of Directors
The Board believes that the proposed Plan will promote a greater identity
of interest between Directors and shareholders by enabling Directors to acquire
ownership through the payment of compensation in Common Stock.
Therefore, the Board of Directors recommends a vote FOR this proposal:
RESOLVED: That the SNET 1996 Non-Employee Director Stock Plan is hereby
approved and adopted.
- --------------------------------------------------------------------------------
SHAREHOLDER PROPOSAL
(PROPOSAL 4)
Mr. Kenneth Steiner of 14 Stoner Avenue Suite 2-M, Great Neck, NY, who
states that he is the owner of 200 shares of Common Stock, has notified the
Corporation of his intent to present a proposal at the Annual Meeting. The text
of the proposal and a supporting statement are provided as follows:
"RESOLVED, that the stockholders of the Company request that the Board of
Directors take the necessary steps, in accordance with state law, to declassify
the Board of Directors so that all directors are elected annually, such
declassification to be effected in a manner that does not affect the unexpired
terms of directors previously elected."
SUPPORTING STATEMENT
"The election of directors is the primary avenue for stockholders to
influence corporate governance policies and to hold management accountable for
it's implementation of those policies. I believe that the classification of the
Board of Directors, which results in only a portion of the Board being elected
annually, is not in the best interests of the Company and it's stockholders.
The Board of Directors of the Company is divided into three classes serving
staggered three-year terms. I believe that the Company's classified Board of
Directors maintains the incumbency of the current Board and therefore of current
management, which in turn limits accountability to stockholders.
The elimination of the Company's classified Board would require each new
director to stand for election annually and allow stockholders an opportunity to
register their views on the performance of the Board collectively and each
director individually. I believe this is the one of the best methods available
to stockholders to insure that the Company will be managed in a manner that is
in the best interests of the stockholders.
I am a founding member of the Investors Rights Association of America and I
believe that concerns expressed by companies with classified boards that the
annual election of all directors could leave companies without experienced
directors in the event that all incumbents are voted out by stockholders, are
unfounded. In my view, in the unlikely event that stockholders vote to replace
all directors, this decision would express stockholder dissatisfaction with the
incumbent directors and reflect the need for change.
I URGE YOUR SUPPORT, VOTE FOR THIS RESOLUTION."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS RESOLUTION FOR THE
FOLLOWING REASONS:
The Board of Directors strongly disagrees with the proponent's contention
that a classified board system limits management's accountability to
shareholders. The classified board system, approved by shareholders in 1986 with
over 70% of outstanding shares voting in favor, provides that approximately
one-third of the Corporation's Directors stand for re-election annually. This
provision ensures that the Corporation will always have a majority of
experienced Directors acting on your behalf to carry out the Corporation's
strategies and policies.
The Board also believes that the classified board system allows the Board
to protect and enhance the long-term value of your investment in the Corporation
should it be faced with an unsolicited takeover attempt. By limiting the ability
to quickly assume control of the Board, an acquiror will be encouraged to
negotiate, thereby allowing the Board to weigh alternatives and, if takeover is
the best option, obtain the best price for the Corporation, ensuring that all
shareholders share equally and fairly in any takeover premium.
The affirmative vote of the holders of 80% of the issued and outstanding
shares of Common Stock is required for the shareholders to adopt this proposal.
YOUR BOARD URGES THAT SHAREHOLDERS VOTE AGAINST THIS PROPOSAL.
6
SNET Proxy Statement
- --------------------------------------------------------------------------------
SHAREHOLDER PROPOSALS
Proposals intended for inclusion in next year's proxy statement should be
sent to the Secretary, Room 1500, 227 Church Street, New Haven, Connecticut
06510 and must be received by November 20, 1996.
OTHER MATTERS TO COME
BEFORE THE MEETING
If any business not described herein should properly come before the
meeting for shareholder action, the shares represented by proxies will be voted
in accordance with the best judgment of the persons voting them. At the time
this Proxy Statement went to press on March 14, 1996, the Corporation knew of no
other matters which may be properly presented for a vote to the shareholders at
the meeting. Shareholders who wish to submit a proposal for business to be
conducted at the Annual Meeting of Shareholders must comply with the procedures
set forth in Article I of the By-Laws.
REPORT OF PERSONNEL RESOURCES
COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION
Decisions on executive compensation are reviewed and approved by the
Personnel Resources Committee ("Committee") of the Board of Directors, which is
composed entirely of non-employee Directors who have no direct or indirect
material interest in the Corporation or relationship with the top executives.
The Committee recommends compensation levels of the top executives including the
Chief Executive Officer (CEO) for approval by the entire Board. Executive
compensation policy is designed to motivate and reward contribution to the
Corporation's business mission and accomplishments and to enhance shareholder
value.
1995 Executive Compensation
Executive compensation paid in 1995 included base salary, annual short term
incentive awards and long term compensation in the form of stock options.
Compensation levels are set relative to a group of comparator companies that
includes many of the S&P Telephone Index companies as well as other companies
similar to the Corporation in size, location and industry.
Executive compensation is based on individual contribution, the executive's
salary grade, and the attainment of corporate and unit goals. In 1995, no
executives were granted salary increases, in light of the Corporation's cost
reduction efforts, which included significant downsizing and no general salary
increases for management employees.
Corporate goals for short term incentive compensation consisted of
aggressive financial, service, and corporate effectiveness objectives with a
relative weighting of 50%, 25%, and 25%, respectively. Threshold levels of
minimum performance had to be met in all three categories for a payout to occur.
In 1995, short term awards, in aggregate, for executives were below targeted
levels. The Corporation achieved its financial objective for operating earnings.
It fell short of its service objective, which was to significantly improve
quality, as measured by customer surveys, and on balance met its corporate
effectiveness objectives encompassing specific marketing, competitive
positioning, culture change, business development and public policy goals.
Long term incentives, in the form of stock options, were awarded above
guideline levels to strengthen linkage with shareholder interests and further
emphasize increasing shareholder value. Option grants were based on scope of
responsibility, the number of options previously granted, and individual
performance.
During 1995, the Corporation was one of nine regulated companies that
participated in a Connecticut Department of Public Utility Control (DPUC) review
of executive compensation. The DPUC's decision cited the Corporation for "best
practices" in setting executive compensation.
CEO Compensation
Mr. Miglio's annual compensation is based on corporate performance and his
contribution to that performance as well as market survey information for
comparable positions in other companies. In 1995, as for other executives, his
base salary was unchanged. He received a short term incentive award which was
below target, based on performance against the Board approved corporate
objectives. His long term incentive, in the form of stock option grants, was
above guideline level to further emphasize the importance of increasing
shareholder value.
Submitted by:
Robert L. Bennett
Frank J. Connor
Dr. Claire L. Gaudiani
Ira D. Hall
7
SNET Proxy Statement
The following table covers compensation for the Chief Executive Officer and
the other four most highly compensated executive officers at the end of the last
fiscal year.
SUMMARY COMPENSATION TABLE
Long-term
Compensation
-------------
Annual Compensation Awards
- ---------------------------------------------------------------------------------------------
Other Securities
Annual Underlying All Other
Name and Compen- Options/ Compen-
principal Salary Bonus sation SARs sation
position Year ($) (1) ($) (2) ($) (#) ($) (3)
- --------------------------------------------------------------------------------------------------------------
Daniel J. Miglio 1995 $404,380 $176,000 $ 4,668 150,000 $11,568
Chairman, President and 1994 404,380 240,000 7,484 75,000 11,341
Chief Executive Officer 1993 400,934 180,000 8,593 60,000 15,247
Jean M. LaVecchia 1995 178,449 54,000 4,532 40,000 7,092
Senior Vice President-- 1994 167,926 59,300 7,021 15,000 6,992
Organization Development
Ronald M. Serrano 1995 303,469 92,400 8,027 70,000 7,200
Senior Vice President-- 1994 298,455 124,000 10,779 40,000 6,600
Corporate Development 1993 267,395 84,500 93,598 61,000 0
Donald R. Shassian 1995 303,469 92,400 8,766 60,000 6,600
Senior Vice President and 1994 302,891 126,000 7,933 40,000 0
Chief Financial Officer 1993 25,000 0(4) 0 50,000 0
Madelyn M. DeMatteo 1995 183,580 55,500 4,680 40,000 9,234
Vice President, General 1994 178,969 73,700 4,783 10,000 9,129
Counsel and Secretary 1993 161,897 43,700 4,362 10,000 9,594
- --------------------------------------------------------------------------------------------------------------
(1) Includes imputed income for benefits provided under the Corporation's
employee benefit plans.
(2) Represents incentive compensation under the SNET Short Term Incentive Plan
for achieving performance-based objectives.
(3) In 1995, for Mr. Miglio, Ms. LaVecchia, Mr. Serrano, Mr. Shassian and Ms.
DeMatteo, respectively, includes the following dividend equivalents earned
on shares deferred under the SNET Long Term Incentive Plan; $4,368, $0, $0,
$0 and $2,034; and matching company contributions credited to participants'
accounts under the SNET Management Retirement Savings Plan; $7,200, $7,092,
$7,200, $6,600 and $7,200.
(4) Mr. Shassian was not eligible to participate.
8
SNET Proxy Statement
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
Individual Grants
----------------------------------
Number of % of Total
Securities Options/SAR Grant Date
Underlying Granted to Exercise or Present
Options/SARs Employees in Base Price Expiration Value
Name Granted (#)(1) Fiscal Year ($/Sh) Date ($) (2)
- ---------------------------------------------------------------------------------------------------------------
Daniel J. Miglio 150,000 5.92 $34.00 2-08-05 $979,500
Chairman, President and
Chief Executive Officer
Jean M. LaVecchia 40,000 1.58 34.00 2-08-05 261,200
Senior Vice President--
Organization Development
Ronald M. Serrano 70,000 2.76 34.00 2-08-05 457,100
Senior Vice President--
Corporate Development
Donald R. Shassian 60,000 2.37 34.00 2-08-05 391,800
Senior Vice President and
Chief Financial Officer
Madelyn M. DeMatteo 40,000 1.58 34.00 2-08-05 261,200
Vice President, General
Counsel and Secretary
- -----------------------------------------------------------------------------------------------------------------------
(1) Under the SNET 1986 Stock Option Plan, executive officers and other key
employees are eligible to receive option grants to purchase Common Stock as
Incentive Stock Options or as Non-qualified Stock Options. The exercise
price of each option must be equal to or greater than the fair market value
of Common Stock on the date of grant of the option. The term of an option
cannot exceed ten years from the date of grant. Options vest annually in
twenty-five percent installments beginning one year after the grant date.
Upon a change in control, all options previously granted become immediately
exercisable and remain exercisable and non-cancellable for a period of six
months and seven days following a termination of employment provided those
options do not expire within the ten-year period established under the
plan. Executive officers subject to Section 16 who held options for at
least six months prior to the change in control shall have options
cancelled in exchange for a cash payment equal to the excess of the change
in control price per share of Common Stock over the purchase price per
share under the option multiplied by the number of shares of Common Stock
granted under the option being cancelled, with such payment to be made by
the Corporation within 30 days of the date of the change in control.
(2) The Black-Scholes option pricing model was used to estimate the options'
grant date present value. Assumptions for options granted are as follows:
20% volatility; risk free rate of return of 7.45% based on five-year U.S.
Treasury securities; dividend yield of 5.176%; and an estimated period to
exercise of 5 years.
9
SNET Proxy Statement
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexericsed In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)*
-----------------------------------------------
Shares Acquired Exercisable/ Exercisable/
Name On Exercise(#) Value Realized ($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------
Daniel J. Miglio -- -- 71,750/236,250 $450,244/$1,422,422
Chairman, President and
Chief Executive Officer
Jean M. LaVecchia -- -- 15,950/56,250 91,778/338,672
Senior Vice President--
Organization Development
Ronald M. Serrano -- -- 40,500/130,500 217,279/783,531
Senior Vice President--
Corporate Development
Donald R. Shassian -- -- 35,000/115,000 161,562/670,312
Senior Vice President
and Chief Financial Officer
Madelyn M. DeMatteo -- -- 17,050/52,500 118,478/307,969
Vice President, General
Counsel and Secretary
- -------------------------------------------------------------------------------------------------------------------------
* Based upon 1995 fiscal year end stock price of $39.75.
Pension Plan
The following table shows the estimated annual benefits payable as a single
life annuity under the SNET Management Pension Plan ("Pension Plan") and the
SNET Pension Benefit Plan ("Non-Qualified Plan") on retirement at age 65 to
persons in the earnings classifications and with the years of service shown.
Effective January 1, 1996, the Pension Plan was amended to convert to a
Cash Balance system, using a formula to create an opening cash balance account
and providing for the annual accrual of pay and interest credits. The plan as
amended permits a participant to receive a distribution, either as a lump sum
payment or an annuity, at the time the participant terminates service,
regardless of age. Also effective January 1, 1996, the Non-Qualified Plan was
amended to provide that the total pension benefit payable to the executive is
computed pursuant to the formula under the Pension Plan.
PENSION PLAN TABLE
- -------------------------------------------------------------------------------------------------------------
Years of Service and Pension Amount(2)(3)
- -------------------------------------------------------------------------------------------------------------
Compensation(1) 15 years 20 years 25 years 30 years 35 years 40 years 45 years
- -------------------------------------------------------------------------------------------------------------
$175,000 $ 37,824 $ 54,820 $ 71,919 $ 93,454 $114,653 $141,831 $168,577
250,000 56,746 82,244 107,898 140,205 172,010 212,784 252,911
325,000 75,667 109,668 143,877 186,957 229,367 283,737 337,244
400,000 94,589 137,093 179,856 233,709 286,724 354,690 421,578
475,000 113,511 164,517 215,835 280,460 344,081 425,643 505,911
550,000 132,433 191,942 251,814 327,212 401,438 496,596 590,244
625,000 151,355 219,366 287,793 373,964 458,795 567,549 674,578
700,000 170,277 246,791 323,772 420,716 516,152 638,502 758,911
- -------------------------------------------------------------------------------------------------------------
(1) Compensation included in determining annual pay credits includes the
participant's annual salary and eligible incentive pay.
(2) The amounts shown in the table are not subject to any deduction for Social
Security or other offset amounts.
(3) As of December 31, 1995, Mr. Miglio, Ms. LaVecchia, Mr. Serrano, Mr.
Shassian and Ms. DeMatteo had accrued 33, 22, 2, 2 and 22 years of service,
respectively.
10
SNET Proxy Statement
Change-in-Control Agreements
Change-in-Control agreements have been entered into with certain executives
designed to afford these executives limited employment and compensation
protection in the event of a substantial change in ownership of the Corporation.
The Corporation has agreed to continue to employ the affected executives for a
period of two years following such a change in ownership, and, in the event of
early termination of such an executive, to pay severance benefits of no greater
than two times the executive's salary and incentive compensation. The agreements
contain other provisions designed to prevent the loss of retirement, insurance,
and other benefits arising from a termination before the end of the term of
employment and to reimburse the executive for any excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended. The Corporation has
entered into such agreements with Mr. Miglio, Ms. LaVecchia, Mr. Serrano, Mr.
Shassian and Ms. DeMatteo who are listed in the Summary Compensation Table.
- --------------------------------------------------------------------------------
PERFORMANCE GRAPH
The following line graph compares the Corporation's five-year cumulative
total return to shareholders, including the reinvestment of dividends, to that
of the Standard and Poor's 500 Index and the Telephone segment of the Standard
and Poor's Utility Index.
--GRAPHICAL REPRESENTATION OF DATA TABLE BELOW--
1990 1991 1992 1993 1994 1995
---- ------ ------ ------ ------ ------
S&P 500 100 130.47 140.41 154.56 156.60 215.45
SNET 100 101.95 120.66 128.96 122.21 157.57
S&P TELEPHONE INDEX 100 107.54 118.01 136.29 130.66 196.82
CERTAIN TRANSACTIONS
Effective February 1, 1994, the Corporation's major subsidiary entered into
a new services agreement with North Supply Company ("North Supply"), a
subsidiary of Sprint, a beneficial owner of more than 5% of the outstanding
Common Stock, for the purchase of general materials and supplies supporting the
Corporation's telephone operations, including warehousing. North Supply also
entered into agreements with other subsidiaries of the Corporation for general
equipment purchases and warehousing services. During 1995 total purchases from
North Supply were approximately $54,200,000.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of the Corporation for 1995 are
included herein in the Corporation's 1995 Annual Report to Shareholders. A COPY
OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K, INCLUDING FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES, ON FILE WITH THE SECURITIES AND EXCHANGE
COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1995, WILL BE FURNISHED, WITHOUT
CHARGE, ON REQUEST DIRECTED TO THE CORPORATION'S TRANSFER AGENT AND REGISTRAR,
STATE STREET BANK AND TRUST COMPANY, P.O. BOX 8200, BOSTON, MASSACHUSETTS
02266-8200.
By Order of the Board of Directors
MADELYN M. DEMATTEO
Secretary
March 20, 1996
11
SNET Proxy Statement
EXHIBIT A
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
1996 NON-EMPLOYEE DIRECTOR STOCK PLAN
1. Establishment of Plan
There is hereby established a plan (the "Plan") effective on the Effective
Date, as defined herein, whereby Directors of the Company, in consideration
for services rendered to the Company, shall receive shares of the common
stock of the Company. The Plan is intended to promote a greater identity of
interest between the Company's Directors and its shareholders and to
attract and retain Directors by enabling such Directors to share in the
growth of the Company.
2. Definitions
The following defined terms are used in the Plan:
2.1 "Board" shall mean the Board of Directors of the Company.
2.2 "Committee" shall mean the Committee on Board Affairs and Public
Policy of the Board.
2.3 "Company" shall mean the Southern New England Telecommunications
Corporation.
2.4 "Director" shall mean a member of the Board who is not currently an
employee of the Company or any of its subsidiaries.
2.5 "Effective Date" shall mean June 1, 1996.
2.6 "Payment Date" shall mean the last business day of a calendar quarter.
2.7 "Retainer" shall mean the portion of a Director's total cash
compensation that is fixed and paid without regard to his/her
attendance at meetings. "Retainer" shall not include the Chairperson's
Retainer payable to the Chairperson of a Board committee.
2.8 "Shares" shall mean shares of the Company's common stock, $1.00 par
value.
3. Stock Compensation Determination
3.1 Each Director on the Effective Date and each person who becomes a
Director after the Effective Date shall be paid three hundred (300)
Shares ("Stock Compensation Shares") annually on the date set forth in
Section 4 hereof.
3.2 Each Director may elect to be paid a percent of his/her Retainer in
the form of Shares in lieu of cash ("Elective Stock Retainer");
provided, however, that any such amount so elected shall be in
increments of five percent (5%) of the Retainer, and, provided
further, that the value of any fractional shares thereof shall be paid
in cash. Any such election shall be irrevocable for the calendar year
to which it relates and shall be made in writing prior to the
beginning of the calendar year to which it relates and at least six
months in advance of the first Payment Date of such calendar year.
3.3 The number of Shares of an Elective Stock Retainer shall be determined
by dividing the amount of a Director's Retainer that is to be paid in
Shares by the fair market value of a Share as of the close of trading
on the business day first preceding the Payment Date.
3.4 The number of Shares to be granted under the Plan shall be adjusted
for any stock split, stock dividend, recapitalization, merger,
consolidation, corporate reorganization, combination, exchange of
Shares or other similar events.
4. Stock Compensation Distribution
4.1 Each person who is a Director on the Effective Date shall receive
Stock Compensation Shares on July 1, 1996 and for years thereafter on
the first quarter's Payment Date provided such person is a Director on
such Payment Date. Each person who becomes a Director after the
Effective Date shall receive Stock Compensation Shares on the Payment
Date for the calendar quarter during which he or she became a Director
and for years thereafter on the first quarter's Payment Date provided
such person is a Director on such Payment Date.
4.2 A Director shall receive any Elective Stock Retainer Shares, if the
Elective Stock Retainer represents twenty-five percent (25%) or less
of the Retainer, on
12
SNET Proxy Statement
the Payment Date for the first calendar quarter and for each
additional increment of twenty-five percent (25%) or less, on the
Payment Date for the next succeeding calendar quarter.
4.3 On or before a Payment Date on which Shares are received, a Director
may execute an election pursuant to Section 83(b) of the Internal
Revenue Code of 1986, as amended (the "Code") to include in income the
value of the Shares as of such Payment Date.
4.4 Shares shall be transferred on the books of the Company on the Payment
Date. In the event of the death of a Director, any Shares owned by
such Director shall be delivered to the beneficiary designated by the
Director on a form provided by the Committee, or in the absence of
such designation, to the Director's estate. In the event of the death
of a Director, or the resignation of a Director from the Board, prior
to a Payment Date, such Director shall not be entitled to receive any
Shares with respect to such quarter and instead such Director or the
Director's beneficiary or estate, whichever is applicable, shall
receive cash.
4.5 The Shares transferred pursuant to the Plan shall be either authorized
but unissued shares of common stock of the Company or issued shares
reacquired and held as treasury shares. The total number of Shares
reserved for issuance shall not exceed in the aggregate 200,000 shares
of common stock of the Company.
5. Dividend and Voting Rights
The Director, as owner of the Shares issued hereunder, shall have all the
rights of a shareholder of the Company, including, but not limited to, the
right to vote such shares and the right to receive all dividends declared
or paid on such Shares. Notwithstanding the above, any Shares deferred
pursuant to the SNET Deferred Compensation Plan for Non-Employee Directors
shall accrue an amount equal to any dividends payable on such Shares and
such Shares shall not carry any voting rights until such time as such
Shares are distributed pursuant to such Deferred Compensation Plan.
6. Holding Period
A Director shall not sell, transfer, assign or pledge any Elective Stock
Retainer Shares received on a Payment Date for a period of six months
following such Payment Date. A Director shall not sell, transfer, assign or
pledge any Stock Compensation Shares until such Director terminates his or
her service as a Director.
7. Change in Control
Notwithstanding any provision of the Plan to the contrary, upon a Change in
Control, as defined below, all Shares not deferred shall be immediately and
fully transferable, subject to applicable federal securities laws, by a
Director. In the event of a Change in Control during a calendar quarter in
which a Director would receive Shares pursuant to a Section 3, such Shares
shall be transferred on the last business day prior to the Change in
Control.
For purposes of this Section, Change in Control shall mean:
(a) an acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934) ("Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 thereunder) of 20% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election
of directors (the "Outstanding Company Voting Securities"); excluding,
however, the following: (i) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) participated in
by the Company or any corporation controlled by the Company, or (iv) any
acquisition by any corporation pursuant to a reorganization, merger,
consolidation or similar corporate transaction (in each case, a "Corporate
Transaction"), if, pursuant to such Corporate Transaction, the conditions
described in clauses (i), (ii) and (iii) of Paragraph (c) of this Section 7
are satisfied; or
(b) a change in the composition of the Board such that the individuals
who, as of June 1, 1996,
13
SNET Proxy Statement
constitute the Board (the Board as of the above date shall be hereinafter
referred to as the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, for purposes of this
Section 7, that any individual who becomes a member of the Board subsequent
to the above date whose election, or nomination for election by the
shareholders of the Company, was approved by a vote of at least a majority
of those individuals who are members of the Board also shall be considered
as though such individual were a member of the Incumbent Board; but,
provided further, that any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board shall not be so considered as a
member of the Incumbent Board; or
(c) the approval by the shareholders of the Company of a Corporate
Transaction or, if consummation of such Corporate Transaction is subject,
at the time of such approval by shareholders, to the consent of any
government or governmental agency, the obtaining of such consent (either
explicitly or implicitly by consummation); excluding, however, such a
Corporate Transaction pursuant to which (i) all or substantially all of
the individuals and entities who are the beneficial owners, respectively,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Corporate Transaction will
beneficially own, directly or indirectly, more than 60% of, respectively,
the outstanding shares of common stock of the corporation resulting from
such Corporate Transaction and the combined voting power of the
outstanding voting securities of such corporation entitled to vote
generally in the election of directors, in substantially the same
proportions as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (other than
the Company, any employee benefit plan (or related trust) participated in
by the Company or such corporation resulting from such Corporate
Transaction and any Person beneficially owning, immediately prior to such
Corporate Transaction, directly or indirectly, 20% or more of the
Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) will beneficially own, directly or indirectly, 20% or
more of, respectively, the outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors, and (iii)
individuals who were members of the Incumbent Board will constitute at
least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or
(d) the approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company;
excluding, however, such a sale or other disposition to a corporation, with
respect to which following such sale or other disposition, (1) more than
60% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors will be then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such sale or
other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the case
may be, (2) no Person (other than the Company and any employee benefit plan
(or related trust) participated in by the Company or such corporation and
any Person beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 20% or more of the Outstanding Company
Common Stock or Outstanding Company Voting Securities, as the case may be)
will beneficially own, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors and (3) individuals who were members of the Incumbent
14
SNET Proxy Statement
Board will constitute at least a majority of the members of the board
of directors of such corporation.
8. Administration
The Plan shall be administered by the Committee, which shall have the sole
authority to adopt rules and regulations for carrying out the Plan and
shall interpret and administer the Plan. The Plan shall be administered
such that any Director participating in the Plan shall continue to be
deemed to be a "disinterested person" under, and any transaction hereunder
shall be governed by, Rule 16b-3 of the Securities and Exchange Commission
under the Exchange Act ("Rule") as such Rule is in effect on the Effective
Date and as it may be subsequently amended.
9. Governing Law
The Plan shall be construed in all respects under the laws of the State of
Connecticut and the securities laws of the United States.
10. Amendment and Termination
The Plan may be amended at any time by the Board; provided, however, that
the Board may not, without further approval of the Company's shareholders,
increase the number of Shares issuable under the Plan, materially increase
the benefits accruing to participants under the Plan, or materially modify
the requirements as to eligibility for participation in the Plan; and
provided, further, however, that the provisions of Sections 2.4, 3.1, 3.2,
3.3, 4.1, 4.2, and 4.5 may not be amended more than once every six months,
other than to comport with changes in the Code, the Employee Retirement
Income Security Act, or the rules thereunder. The Senior Vice
President-Organization Development of the Company, with the concurrence of
the Vice President and General Counsel, shall be authorized to make minor
or administrative modifications to the Plan as well as modifications to the
Plan which may be dictated by requirements of federal or state statutes
applicable to the Company. No modification or termination of the Plan
shall, without the participant's consent, alter or impair any of the
participant's rights or obligations under the Plan.
The Plan shall terminate upon the earlier of the following events to occur:
(a) Upon the issuance of all Shares under the Plan; or
(b) Ten (10) years after the Effective Date.
11. Shareholder Approval
This Plan shall become effective on June 1, 1996 subject to the approval of
the Plan by the shareholders of the Company.
15
SNET Proxy Statement
[THIS PAGE INTENTIONALLY LEFT BLANK]
16
SNET Proxy Statement
FINANCIAL INFORMATION
Financial Highlights 18
Business Highlights 19
Letter to Shareowners 20
Financial Commentary 22
Financial Reports
Report on Consolidated Financial Statements 28
Report of Audit Committee 29
Report of Independent Accountants 29
Consolidated Financial Statements
Statements of (Loss) Income 30
Balance Sheets 31
Statements of Changes in Shareholders' Equity 32
Statements of Cash Flows 33
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies 34
Discontinuance of SFAS No. 71 35
Acquisitions and Sale of Assets 36
Employee Benefits 37
Income Taxes 39
Restructuring Charge 40
Short-term Debt 41
Long-term Debt 41
Commitments and Contingencies 42
Discontinued Operations 42
Financial Instruments 43
Common, Preferred and Preference Shares 43
Supplemental Financial Information 43
Stock Option Plans 45
Quarterly Financial Information (Unaudited) 45
Financial and Statistical Data (Unaudited) 46
Investor Information 47
Other Information 48
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.
17
SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL HIGHLIGHTS
Dollars in Millions, Except as Noted 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Operating Results
Revenues and Sales $1,838.5 $1,717.0 $1,653.6
Annual Growth 7.1% 3.8% 2.4%
Costs and Expenses(1) $1,128.2 $1,014.0 $1,358.9(2)
Operating Earnings(3) $ 710.3 $ 703.0 $ 294.7(2)
Net (Loss) Income $ (518.3)(4) $ 177.6 $ (318.1)(2)
- -------------------------------------------------------------------------------------------------------------------------
Per Common Share (dollars)
Income (Loss) from Continuing Operations $ 2.60 $ 2.77 $ (.68)(2)
Net (Loss) Income $ (7.99)(4) $ 2.77 $ (4.99)(2)
Dividends Declared $ 1.76 $ 1.76 $ 1.76
Market Price (year-end) $ 39.750 $ 32.375 $ 36.125
- --------------------------------------------------------------------------------------------------------------------------
At Year-End
Total Assets $2,724.2 $3,504.6 $ 3,761.5
Debt Ratio 80.0%(5) 51.0% 59.9%
Telephone Company Wireline Employees 7,742 8,604 9,087
Total Employees 9,070 9,797 10,476
- --------------------------------------------------------------------------------------------------------------------------
Statistical Data
Network Access Lines in Service (thousands) 2,073 2,009 1,964
Annual Growth 3.2% 2.3% 1.4%
Network Interstate Access Minutes of Use (millions) 7,298 6,917 6,522
Annual Growth 5.5% 6.1% 4.7%
Cellular Subscribers (thousands) 323 166 88
Annual Growth 94.6% 88.6% 29.4%
- --------------------------------------------------------------------------------------------------------------------------
Other Data
Telephone Company Wireline Cost Per Access Line (dollars)(6) $ 320 $ 340 $ 365
Net Cash Provided by Operating Activities $ 439.2 $ 422.6 $ 478.7
Cash Expended for Capital Additions $ 354.0 $ 282.3 $ 267.3
Cash Dividends Paid $ 98.0 $ 97.2 $ 96.7
==========================================================================================================================
(1) Excludes depreciation and amortization.
(2) Includes a charge for restructuring in 1993 that reduced operating
earnings, net income and earnings per share by $355.0, $204.2 and $3.21,
respectively.
(3) Represents earnings before interest, taxes, depreciation and amortization.
Operating earnings is not a generally accepted accounting principle
measurement. Management provides this measurement for informational
purposes only.
(4) Includes a $1,202.6 extraordinary charge for the discontinuance of SFAS No.
71 in 1995 that reduced net income and earnings per share by $687.1 and
$10.59, respectively.
(5) Excluding the effect of the non-cash extraordinary charge related to 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%.
(6) Excludes depreciation and amortization; 1993 also excludes the before-tax
restructuring charge.
18
SNET Annual Report
BUSINESS HIGHLIGHTS
Wireless We completed the largest acquisition in SNET's history when we acquired
cellular properties contiguous to our existing territory. In a single move we
increased by over 70 percent our stake in a business with outstanding growth
potential. Our market area for wireless services now encompasses more than 5.5
million people.
And, following a very successful trial, we just introduced SNET Personal
Phone Service(SM) for busy customers who need to stay in touch while they're on
the go. We're expanding wireless communications from just something to use in
the car to an anywhere, anytime communications tool.
Wireline We achieved an industry first with I-SNET, the broadband network
we are building in Connecticut. On October 30, 1995 for the first time in the
U.S. a customer's telephone call was carried on a hybrid fiber/coax ("HFC")
architecture. By the end of this year, up to 80,000 lines of the HFC network
will be carrying telecommunications service. By 1997, we will have broadband
distribution to 500,000 lines in Connecticut's strongest market areas.
We also developed a uniquely effective way to provide electrical power and
enhanced reliability on the information superhighway by putting power conductors
around our fiber-optic lines. Our technique keeps the network up and running
during electrical power outages. And it doesn't clutter up the landscape with
refrigerator-sized generators. This technique may well become the industry
standard; it's so good we're patenting it.
We've had a terrific response to our bundled "All Distance" product, which
packages in-state, out-of-state and international calling at very competitive
rates. Customers like not only the discounts but the simplicity of having one
provider for all their calling needs and the comfort of dealing with a local
company they trust. Better yet, "All Distance" is just the beginning. We intend
to use this packaged-product marketing approach a lot more to win and keep
customers.
We launched SNET Internet(SM), Connecticut's newest and best route to the
Web. And we stretched ISDN availability to every corner of the state. ISDN
creates two digital channels on a single, standard phone line -- very useful
for Internet users, telecommuters, videoconferencers and for faxing. We also
brought our expertise to the security business, introducing a state-of-the-art
security-systems service for the home and small business market. This is part of
our strategy to reach beyond traditional boundaries to anticipate customers'
information-age needs and bring them the products they want.
And we're building a new education on-ramp to I-SNET, by hooking
Connecticut schools into the information age through an exciting new program
called "SNET Classroom Connections." This unique, integrated wide-ranging
program will bring phone lines into the classroom, give schools Internet access
and offer voice mail.
Information and Entertainment Customers asked for it. They got it --
another choice for cable service. We're entering the cable TV business. Another
first among our peers. We took the first steps in January 1996 to make our
newest subsidiary, SNET Personal Vision, Inc., a statewide cable TV franchisee.
We'll use I-SNET to reach customers with exciting programming and pay-per-view
services. Our excellent record of customer service, good value, superior
technical quality and network reliability, as well as the broadest product
offerings of any communications provider, will give us a clear competitive edge.
And our publishing business continued to leverage its strong customer
relationships and move toward becoming a full-service advertising and media
company. We expect that this $180+ million a year business will grow over 25
percent by the turn of the century.
We also unveiled a new logo for SNET to strengthen our brand name and
signal that we've transformed ourselves from a plain old telco to a dynamic
communications, information and entertainment company. In addition, we helped
support economic growth in the state and promoted our brand name as the proud
sponsor of the Special Olympics World Games and the extremely popular SNET
Classic, which brought professional women's tennis to Connecticut.
Influencing Public Policy We are encouraged that new federal legislation has
become law. It will accelerate the reshaping of this industry. We at SNET look
forward to entering the entertainment business, broadening our product line and
bringing the benefits of greater choice and better services to customers.
Connecticut is ahead of the federal government in encouraging competition in the
information-age marketplace. Also, since SNET was not majority owned by AT&T and
therefore not a party to the Modified Final Judgment that defined the breakup of
the Bell System, we didn't have the restrictions that the Regional Bells have
faced, such as offering long-distance services. In fact, we entered that
lucrative business more than two years ago.
On the state level, the Department of Public Utility Control ("DPUC") is working
on a comprehensive series of proceedings designed to implement landmark state
legislation passed in 1994 that opened the gate to full telecommunications
competition. Our objective is regulation that is streamlined, costs less, allows
us to price competitively and applies equally to all competitive services. The
DPUC issued a draft decision in early 1996, implementing alternative regulation
and making the "rate case" an artifact of the monopoly era.
19
SNET Annual Report
LETTER TO SHAREOWNERS
To Our Shareowners:
Those who watch the information industry have their eyes on Connecticut. The
future of the industry, with competition in every part of our business and the
expected explosion of demand for new services, is happening right here, today,
in Connecticut. That puts SNET on the cutting edge. We are the forerunner -- the
model -- for what the telecommunications industry will become.
We've rebuilt SNET according to our vision of the new information-age. We
looked into the future and began years ago -- well before competitors fired
their first salvos in Connecticut -- to take decisive action that will make us a
successful company in the years ahead. SNET is now a more nimble organization
riveted on profitable growth.
We are accomplishing what we set out to do. We're increasing revenues and
earnings even with more competition. At the same time, we're continuing to
invest heavily for future growth that will make SNET an increasingly attractive
investment.
1995 Earnings From Operations Up 9 Percent,
Capping Eight Consecutive Quarters of Growth
Although we reported a net loss of $518 million or $7.99 per share for 1995, the
loss resulted from an extraordinary accounting change that we and other
telecommunications companies made. It also reflected dilution from our strategic
cellular acquisitions. These unusual factors mask our very strong underlying
performance, with eight consecutive quarters of solid growth. Earnings from
operations, excluding one-time items and the expected dilution, were $3.01 per
share, up 9 percent over the $2.77 per share earned in 1994.
The extraordinary non-cash charge was for discontinuing the use of
Statement of Financial Accounting Standards No. 71, which is covered in detail
elsewhere in this report. The main purpose of the charge was to recognize
depreciation reserve deficiencies.
Consolidated revenues and sales for 1995 were up 7 percent to $1.8 billion.
Wireline revenues were up 4.5 percent. Interstate and international toll
revenues grew more than four-fold from $8 million to $39 million for 1995, and
access lines increased more than 3 percent. Wireless revenues, at $173 million,
were up 45 percent, reflecting a surge of new customers and the cellular
acquisitions we completed in July. Our preacquisition customer-growth rate was
over 50 percent, a phenomenal increase. With the acquisition, we had an overall
95 percent increase in wireless customers for the year.
Consolidated operating expenses were up 12 percent for 1995. Wireline
expenses increased only 2 percent with expenditures for growth in interstate and
international toll service virtually offset by cost-reduction initiatives.
Expenses for our fastest-developing businesses -- Wireless and Information and
Entertainment -- rose 55 percent in support of present and future growth.
Depreciation and amortization expense increased $17 million and interest expense
was up $11 million, due mainly to the cellular acquisitions.
{PHOTO]
EVA Is Our 1996 Internal
Financial-Management Tool
Over the past two years we've been migrating away from traditional
financial-management measures toward economic contribution, also known as
economic value added or EVA(R), because we believe EVA correlates more closely
with shareowner value. Accordingly, in 1996 economic contribution is the
internal financial measurement for managing the business and rewarding
performance.
The adoption of EVA and the recent granting of stock options to all
management employees take us another large step toward more directly aligning
management and shareowner interests.
We Have Realigned SNET to Better
Serve Customers and Get Innovative
Products to Market Fast
Our new retail organization will meet customer needs for customized
packages of communications, information and entertainment services, thus
enhancing our ability to defend and grow our share of the expanding information
industry pie.
Our wholesale organization is deploying new technology, reducing operating
costs and continuously
20
SNET Annual Report
improving service quality to assure that SNET's statewide network remains
preeminent in Connecticut. We're now in a unique position to offer an impressive
array of network and support services to the host of new carriers who can
benefit from our expertise as well as to existing carriers who choose to
outsource certain transport, intelligence or support functions.
Our structure is, to my knowledge, unique in the industry. And I believe it
will serve as a prototype for others in the years to come.
Our Unique Competitive Advantages
Make SNET Stand Out
Competition means choice for consumers. But it has also brought a barrage of
confusing and often misleading "noise" -- ads, telemarketing calls and direct
mail -- to consumers who have more important things to worry about.
SNET stands out from the noise. We are capitalizing on our strengths to
stay ahead of the competition.
O We have by far the broadest product offerings for communications,
information and entertainment services.
O We're the only company competing in Connecticut with a ubiquitous statewide
network.
O As the home team, we know Connecticut customers best.
O We're small enough to turn on a dime, but large enough to invest in new
technology and future growth and ensure totally reliable wireline and
wireless communications for our customers.
O Our employees are committed to winning customers and beating the
competition. Their statewide community presence and involvement are a
powerful force.
We're Taking Bold Initiatives and Capitalizing
on Growth Opportunities
We set high goals and we're achieving them. We're continuing to strengthen our
already broad, powerful product line, and we're pushing to reach ambitious,
best-in-class service objectives. Our efforts to streamline and lower our cost
structure are paying off. So are our efforts to strengthen and leverage our
brand name. When I consider the launch of I-SNET, our growing marketing savvy,
our technological firsts, our strategic expansion in the fast-growing wireless
business -- I'm proud of what we have accomplished so far.
What does the future hold for SNET?
We will be a dynamic, rapidly growing company by fulfilling the tremendous
unmet needs of our customers for information, communications and entertainment
services. Our diverse, highly talented team of people will be proud of our
reputation for world-class service and the ways by which they enhance the
professional and personal lives of our customers.
As we continue to strengthen customer relationships, we are building value
for shareowners. We have taken bold initiatives to prepare for full competition
and capitalize on new growth opportunities. We're eager for the future. We're
more than up to the challenge.
[Signature]
Daniel J. Miglio
Chairman and Chief Executive Officer
February 7, 1996
21
SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL COMMENTARY
(Dollars in Millions, Except Per Share Amounts)
Operating Results
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 information and entertainment includes publishing and multimedia
services. Non-telecommunications services, such as real estate and holding
company operations, are included in other.
Income (loss) from continuing operations was $168.8, $177.6 and $(43.6) in
1995, 1994 and 1993, respectively. The corresponding earnings (loss) per share
for those years were $2.60, $2.77 and $(.68). The financial results are
summarized as follows:
For the Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------
Income (loss) from continuing
operations $ 168.8 $177.6 $ (43.6)
Discontinued operations, net of tax -- -- (10.3)
Extraordinary charges, net of tax (687.1) -- (44.0)
Cumulative effect of
accounting changes -- -- (220.2)
- -----------------------------------------------------------------------------
Net (Loss) Income $(518.3) $177.6 $(318.1)
=============================================================================
(Loss) Earnings Per Share:
Continuing operations $ 2.60 $ 2.77 $ (.68)
Discontinued operations -- -- (.16)
Extraordinary charges (10.59) -- (.69)
Cumulative effect of
accounting changes -- -- (3.46)
- -----------------------------------------------------------------------------
(Loss) Earnings Per Share $ (7.99) $ 2.77 $ (4.99)
=============================================================================
Income (loss) from continuing operations decreased $8.8 in 1995 due
primarily to the impact of the cellular acquisitions completed in July 1995 of
approximately $19, or $.29 per share dilution. Strong operating earnings in the
wireline business offset partially this decrease. Also included in 1995 was a
$11.0 charge, $6.3 or $.10 per share after-tax, associated primarily with a
court ruling on The Southern New England Telephone Company's ("Telephone
Company") labor practices [see Note 9].
In 1994, income (loss) from continuing operations increased $221.2 due
primarily to the absence of a $355.0 restructuring charge, $204.2 or $3.21 per
share after-tax, recorded in 1993 [see Note 6].
In 1995, the Corporation recorded a non-cash extraordinary charge of
$1,202.6, $687.1 or $10.59 per share after-tax, related to the discontinuance of
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation" for financial reporting purposes. This
non-cash extraordinary charge consisted of the elimination of net regulatory
assets and the recognition of depreciation reserve deficiencies for intrastate
and interstate operations [see Note 2]. The Telephone Company determined that
due to emerging competition and the change in its regulatory environment, it
would change from the methodology under SFAS No. 71, which specifies accounting
standards required for public utilities and certain other regulated companies,
to one which is more appropriate for a competitive environment. As a result of
this charge, net loss for 1995 was $518.3, or $7.99 per share.
In 1993, the Corporation recorded an after-tax loss of $10.3, or $.16 per
share, in connection with the discontinuance of certain operations [see Note
10]. In addition, an after-tax extraordinary charge associated with the early
extinguishment of debt of $44.0, or $.69 per share, was recorded in 1993 [see
Note 8]. The adoption of financial accounting standards relating to
postretirement benefits other than pension, post-employment benefits and income
taxes resulted in a charge totaling $220.2, or $3.46 per share, in 1993 [see
Note 1]. As a result of these items, net loss for 1993 was $318.1, or $4.99 per
share.
Revenues and Sales
Revenues and sales increased $121.5, or 7.1%, in 1995 and $63.4, or 3.8%,
in 1994. The components of revenues and sales by product group are summarized as
follows:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
WIRELINE
Local service $ 641.6 $ 618.8 $ 566.7
Network access 369.4 354.5 342.8
Intrastate toll 266.4 295.4 339.8
Interstate and international toll 39.4 8.1 .9
Premium services and
equipment sales 104.9 103.2 115.4
Other revenues 50.2 28.7 15.1
WIRELESS
Cellular 160.9 101.5 70.1
Paging 12.2 17.8 6.8
INFORMATION AND ENTERTAINMENT 180.9 180.5 180.2
OTHER 12.6 8.5 15.8
- --------------------------------------------------------------------------------
Revenues and Sales $1,838.5 $1,717.0 $1,653.6
================================================================================
WIRELINE Local service revenues, derived from providing local exchange, public
telephone and local private line services, increased $22.8, or 3.7%, in 1995 and
$52.1, or 9.2%, in 1994. In 1995, the increase was due primarily to strong
growth of 3.2% in access lines in service, including significant growth in
second residential access lines. The increase of 64,000 access lines was the
second largest annual increase experienced. Local service revenues also
increased due to growth in subscriptions to SmartLink(R) advanced calling
features, including Caller ID, missed call dialing, call blocking and call
tracing. Management expects competition to impact
22
SNET Annual Report
local service revenues beginning in 1996 as other telecommunications providers
offer local service [see Competition].
The increase in 1994 local service revenues was due primarily to new rates
implemented in accordance with the Telephone Company's 1993 general rate award.
Also contributing to the increase was the expansion of the local-calling service
area in several exchanges during September 1993, resulting in a shift of
intrastate toll revenues to local service revenues. In addition, growth in
subscriptions to advanced calling features and access lines in service
contributed to the increase in local service revenues. Totalphone(SM)
subscriptions, including call waiting, call forwarding and three way calling,
increased 16.9% and access lines in service increased 2.3% during 1994.
Network access charges are assessed on interexchange carriers and end users
for access to the local exchange network. In 1995, network access revenues
increased $14.9, or 4.2%, compared with an increase of $11.7, or 3.4%, in 1994.
The increases in 1995 and 1994 were due primarily to consistent growth in
interstate minutes of use of approximately 6% in both years and an increase in
access lines in service, discussed previously. Partially offsetting the impact
of the increase in minutes of use was a decrease in tariff rates implemented on
August 1, 1995 and July 1, 1994, in accordance with the Telephone Company's
annual Federal Communications Commission ("FCC") filing under price cap
regulation for 1995 and 1994, respectively [see Regulatory Matters]. In
addition, intrastate access revenues increased due primarily to an increase in
intrastate minutes of use as a result of growth in competition for intrastate
long-distance service.
In 1995, intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $29.0, or 9.8%, compared with a decrease of
$44.4, or 13.1%, in 1994. Toll message revenues decreased $21.1 in 1995 and
$32.5 in 1994 due primarily to reduced intrastate toll rates. The decline in
rates was attributable to the introduction of several discount calling plans
that provide competitive options to business and residence customers. Also
contributing to the decrease was a reduction in toll message volume of
approximately 2% in both years. Lower toll volume in 1995 was due mainly to the
increasingly competitive toll market. The expansion of the local-calling service
areas in September 1993 caused a reduction in toll volume in 1994. WATS
revenues, which include "800" services, decreased $5.5 and $13.8 in 1995 and
1994, respectively, due primarily to lower WATS message volumes resulting from
the shift to lower priced toll services and the impact of competition. The
offering of competitive discount calling plans and the implementation of
intrastate equal access through December 1996 will continue to place downward
pressure on intrastate toll revenues.
Interstate and international toll services provided to Connecticut based
customers increased $31.3 in 1995 and $7.2 in 1994 as a result of growth in
customers. These services were introduced in the third quarter of 1993.
Premium services and equipment sales leveled off as expected in 1995 as a
result of the increased focus on central office-based solutions, with sales of
certain key products only when they are complementary. In 1994, premium services
and equipment sales decreased $12.2 due primarily to the planned phase-out of
the large PBX system business.
Other revenues include primarily services rendered on behalf of
interexchange carriers, interest income and a provision for uncollectible
wireline accounts receivable. The positive impact of higher service revenues,
increased interest income and lower provision for wireline uncollectibles
contributed to the increases in 1995 and 1994.
WIRELESS Cellular wholesale and retail sales increased $59.4, or 58.5%, in 1995
and $31.4, or 44.8%, in 1994. The increase in 1995 was due mainly to strong
growth of 51.1% in the preacquisition subscriber base in response to competitive
marketing and pricing strategies. Also contributing to the increase in cellular
sales was the impact of the cellular acquisitions [see Note 3]. Including the
new subscribers from the expanded cellular coverage area, the subscriber base
increased 94.6% from approximately 166,000 at year-end 1994 to approximately
323,000 at year-end 1995. Average usage per subscriber continued to decline in
1995, in line with a nationwide trend, as lower volume users made up a larger
portion of the subscriber base. In 1994, cellular sales increased due mainly to
significant growth of 88.6% in the number of subscribers, offset partially by a
decrease in the average usage per subscriber. Activation fees as well as strong
roaming revenues also contributed to the growth in cellular sales.
Paging sales decreased $5.6 in 1995 and increased $11.0 in 1994. The impact
of the sale of paging network assets in June 1995 contributed to the reduction
in sales during 1995 [see Note 3]. Paging retained its retail accounts and will
continue as a reseller to market paging services under its Page 2000(R) brand
name. The increase in 1994 was due primarily to the effect of the purchase and
consolidation, in October 1993, of the remaining 50.5% interest in a paging
partnership.
INFORMATION AND ENTERTAINMENT Publishing revenues remained relatively flat as
expected in 1995 and 1994. Publishing revenues, a significant portion of which
reflect directory contracts entered into in the prior year, continue to remain
sensitive to the Connecticut economy and the competitive marketplace.
23
SNET Annual Report
Costs and Expenses
Total costs and expenses increased $131.6, or 9.8%, in 1995 and decreased
$307.4, or 18.6%, in 1994. Total costs and expenses are summarized as follows:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Operating $ 738.9 $ 632.5 $ 629.8
Maintenance 332.8 325.3 313.5
- --------------------------------------------------------------------------------
Total Operating Costs 1,071.7 957.8 943.3
Restructuring charge -- -- 355.0
Depreciation and amortization 346.0 328.6 291.1
Taxes other than income 56.5 56.2 60.6
- --------------------------------------------------------------------------------
Total Costs and Expenses $1,474.2 $1,342.6 $1,650.0
================================================================================
Total operating costs consist primarily of employee-related expenses,
including wages and benefits. Cost of goods sold and general and administrative
expenses, including marketing, represent the remaining portion of these
expenses. Total operating costs increased $113.9, or 11.9%, in 1995 compared
with an increase of $14.5, or 1.5%, in 1994.
WIRELINE Wireline operating costs increased $17.9, or 2.2%, in 1995 compared
with a decrease of $19.4, or 2.3%, in 1994. Excluding the $11.0 before-tax
litigation charge discussed previously, wireline operating costs increased $6.9,
or .8%, in 1995.
The Telephone Company's wireline operating costs, excluding the litigation
charge, decreased $24.4, or 3.4%, in 1995 compared with a decrease of $20.2, or
2.8%, in 1994. Cost-reduction initiatives over the past two years have been
primary factors in the decrease of operating costs. A major factor was lower
work force levels during 1995 and 1994 due primarily to the early-out offer
("EOO") and severance programs under the 1993 restructuring program [see Note
6]. The Telephone Company's wireline work force decreased to 7,742 employees at
year-end 1995, compared with 8,604 employees at year-end 1994 and 9,087
employees at year-end 1993. Employee-related expense savings are anticipated to
continue from employee separations under the 1993 restructuring program [see
Restructuring Charge].
In 1995, costs of providing interstate and international toll services
increased as a result of an expanding customer base. In addition, a change in
mix of services in 1995 contributed to higher costs of providing premium
services. In 1994, an increase in costs of providing interstate and
international toll services was essentially offset by lower equipment cost of
goods sold as a result of the planned reduction in stand-alone PBX system sales.
WIRELESS Wireless operating costs increased $78.8, or 77.8%, in 1995 compared
with an increase of $38.4, or 61.0%, in 1994. Cellular operations experienced
increased costs of $79.8 in 1995 and $29.5 in 1994. The increases in 1995 and
1994 were due primarily to costs associated with an expanding preacquisition
subscriber base, including additional marketing and distributing expenses. In
addition, the integration and operation of the cellular acquisitions in the
second half of 1995 contributed to higher costs. The increase in 1995 was also
due to roaming fraud, which subsequently decreased in coverage areas upgraded
with preventive control programs. Paging operating costs were relatively flat in
1995 compared with an increase of $8.9 in 1994. The 1994 increase in costs was
due primarily to the impact of the purchase and consolidation of a partnership
discussed previously.
INFORMATION AND ENTERTAINMENT Increased marketing and operating efforts
associated with the multimedia trial were offset partially by cost-reduction
initiatives in publishing during 1995 and 1994.
RESTRUCTURING CHARGE In December 1993, the Corporation recorded a restructuring
charge to provide for a comprehensive restructuring program designed to reduce
costs and improve delivery of service. The restructuring charge of $355.0
before-tax comprised of $170.0 in employee separation costs, $145.0 in process
and systems reengineering costs and $40.0 in exit and other costs. Specifically,
the program included costs to be incurred to facilitate employee separations.
The charge also included incremental costs of: implementing appropriate
reengineering solutions; designing and developing new processes and tools to
continue the Corporation's provision of excellent service; and retraining of the
remaining employees to help them meet the changing demands of customers. Since
the inception of the restructuring program, the Corporation experienced a
cumulative reduction in 1995 employee-related expenses of approximately $50, net
of costs for provisional employees. Most of the reduction in employee-related
expenses, due to the EOO, will be realized in 1996 since the majority of the
employee separations occurred in the fourth quarter of 1995, with the remainder
to occur no later than June 1996. After full implementation of the restructuring
program, the Corporation anticipates annual savings of approximately $120 from
reduced employee-related expenses, net of costs for provisional employees. These
anticipated savings will also be substantially offset by growth in the business
[see Note 6].
DEPRECIATION AND AMORTIZATION In 1995, depreciation and amortization expense
increased $17.4, or 5.3%, compared with an increase of $37.5, or 12.9%, in 1994.
The 1995 increase in depreciation and amortization was due mainly to
amortization expense of approximately $10 on intangible assets acquired in the
cellular acquisitions, primarily cellular licenses. To a lesser extent, this
increase also resulted from revised depreciation rate schedules for the
Telephone Company's intrastate plant, as approved by the Connecticut Department
of Public Utility Control ("DPUC"), effective January 1, 1995. An increase in
the average deprecia-
24
SNET Annual Report
ble telecommunications property, plant and equipment also contributed to the
increase in depreciation and amortization expense.
The $37.5 increase in 1994 depreciation and amortization expense was
attributable primarily to revised depreciation rate schedules for the Telephone
Company's intrastate plant, as approved by the DPUC. Depreciation expense
related to intrastate plant increased approximately $20. An increase in the
average depreciable telecommunications property, plant and equipment also
contributed to the increase in depreciation and amortization expense.
Interest Expense
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Interest $85.9 $74.9 $91.4
================================================================================
Interest expense increased $11.0, or 14.7%, in 1995 and decreased $16.5, or
18.1%, in 1994. The increase in 1995 was due primarily to the issuance of
commercial paper and medium-term notes in connection with the cellular
acquisitions [see Note 3]. Overall, average debt outstanding increased in 1995
by approximately $158. In 1994, interest expense decreased due primarily to
annual interest savings of approximately $8 from debt refinancings and a
decrease in average debt outstanding of approximately $72.
Income Taxes
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Income Taxes $109.6 $121.9 $(44.2)
================================================================================
The combined federal and state effective tax rate in 1995 was 39.4% compared
with 40.7% in 1994 and 39.9% in 1993, excluding the effect of the restructuring
charge. The lower 1995 effective tax rate was due primarily to the recognition
of state tax credits relating to certain personal property taxes. The 1993
effective tax rate was a benefit of 50.3% including the effect of the
restructuring charge coupled with the amortization of investment tax credits and
the rate differentials associated with the reversal of temporary deferred income
taxes. A reconciliation of these effective tax rates to the statutory tax rates
is disclosed in Note 5.
Competition
Connecticut's telecommunications industry continues to move toward a fully
competitive marketplace brought about by legislative and regulatory initiatives
during recent years. As a result of these initiatives, the Corporation is
experiencing increased competition from interexchange carriers and competitive
access providers with respect to the wireline's (Telephone Company's) existing
services. Management supports bringing to customers the benefits of competition
and affording all competitors the opportunity to compete fairly. As demand
increases for telecommunications services in an increasingly competitive
environment, the Corporation continues to seek growth opportunities beyond its
traditional services.
On January 25, 1996, SNET Personal Vision, Inc. ("Personal Vision"), a
newly formed subsidiary, filed an application with the DPUC for a certificate of
public convenience and necessity to offer cable television service throughout
Connecticut. Personal Vision will use I-SNET(SM), a hybrid fiber coaxial
network, to reach customers with programming and pay-per-view services. I-SNET
is currently under construction and will be completed by 2009 [see Investing
Activities]. Service, pending regulatory approval, is expected to reach in
excess of 20% of Connecticut households by the end of 1997.
Since the introduction of "10XXX" competition, in excess of 85 certified
carriers have increased their marketing efforts in Connecticut to sell
intrastate long-distance services to Connecticut customers. In response to major
carriers' and other competitors' efforts, the Telephone Company has undertaken a
number of initiatives. The Telephone Company remains focused on providing
excellent customer service and quality products and has made several changes to
its product lines.
Throughout 1995, the Telephone Company has enhanced several discount
calling plans in its High Volume Discount Toll service offering and realigned
its discount and rate structures to provide Connecticut customers with SNET All
Distance(SM), a seamless toll service product line which includes a discount
structure that combines intrastate, interstate and international calling. One
such product, SNET All Distance Simple Solutions(SM), was made available to
small business and residence customers beginning in September 1995. This
easy-to-understand calling plan provides simple, competitive rates with a
sliding discount based on calling volume.
Concerning competition for local exchange service, seven telecommunications
providers have been granted a certificate of public convenience and necessity
for local service and one additional application is pending before the DPUC. The
effect of increased competition on the Corporation's operating results cannot be
predicted at this time. While some customers may purchase services from
competitors, the Corporation expects that most competitors will utilize the
Telephone Company's network and that increased network access revenues will
offset a portion of local service revenues lost to competition. The
Corporation's ability to compete continues to depend upon regulatory reform that
will allow pricing flexibility to meet competition and provide a level playing
field with similar regulation for similar services and with reduced regulation
to reflect an emerging competitive marketplace.
25
SNET Annual Report
Local service competition began in early 1996 under the current framework of
state regulatory initiatives [see Regulatory Matters].
Regulatory Matters
On February 1, 1996, the U.S. Congress passed legislation that created broad
changes in telecommunications law and regulation nationwide. The primary thrust
of this legislation opens local telecommunications markets to competition and
allows the Regional Bell Operating Companies to provide long-distance services.
In addition, the legislation permits telecommunications companies to enter the
cable television business and eases cable regulation. The FCC is required to
adopt terms and conditions to implement the legislation in the near term.
The majority of the federal legislation is consistent with legislation
enacted by the State of Connecticut in 1994. Public Act 94-83 opened the
Connecticut telecommunications market to competition, and the DPUC is nearing
completion of the implementation proceedings. Certain provisions of the federal
legislation relating to the prices the Telephone Company charges competitors for
services could, however, have the effect of producing below cost prices,
therefore necessitating the development of a significantly larger universal
service fund than previously anticipated. If there are conflicts between state
and federal law for local exchange carriers, including the Telephone Company,
with less than 2% of the nationwide access lines, federal law prevails subject
to a waiver and modification process included in the federal legislation. The
DPUC may grant a waiver or modification of the federal law that is consistent
with the public interest and avoids a significant adverse economic impact on
users or a requirement that is unduly economically burdensome or technically
infeasible.
On January 9, 1996, the DPUC issued a draft decision that replaces
traditional rate of return regulation with alternative (price based) regulation
to be employed during the transition to full competition. The draft decision
contains the following major items: no initial price adjustments; price cap
regulation for non-competitive services; a five year monitoring period on
financial results; and a price cap formula (utilizing an inflation factor, a 5%
productivity offset, a narrowly defined exogenous factor, a potential service
quality adjustment and various pricing bands). In addition, basic local service
rates for residence, business, coin and directory assistance are frozen until
January 1, 1998, at which time the price cap formula becomes effective for these
services. A final decision is anticipated by the end of March 1996. The impact
of these changes on the operating results will depend on the final decision and
the timing of classifying the various products and services into categories
(non-competitive, emerging competitive and competitive) for pricing (banding)
changes.
On December 20, 1995, the DPUC, in a final decision, established interim
rates for unbundled network elements and wholesale local service. The rates will
remain in effect until the Telephone Company files revised cost studies during
the second quarter of 1996.
The Telephone Company's 1995 annual interstate access tariff filing under
FCC price cap regulation took effect August 1, 1995. The Telephone Company
elected a 4.0% productivity factor and will be allowed to earn up to a 12.25%
interstate rate of return annually. This filing is expected to decrease
interstate network access revenues by approximately $10 for the period August 1,
1995 to June 30, 1996. Management expects this decrease to be partially offset
by increased demand.
Employee Relations
On April 12, 1995, a new labor contract was ratified by members of the
Connecticut Union of Telephone Workers, Inc. ("CUTW"). As part of the new
contract, a voluntary EOO, which provided incentives in the form of enhanced
pension benefits, was available to bargaining-unit employees during July 1995.
Approximately 2,700 bargaining-unit employees accepted the offer at that time.
As of December 31, 1995, 2,050 employees had left the Corporation, with the
remainder to leave no later than June 1996. CUTW members who remain with the
Corporation received a combination of basic wage and lump sum increases to their
wages or cash balance plan account totaling 4.0% in January 1996. In both
January 1997 and January 1998, they will receive a combination of basic wage and
lump sum increases totaling 3.0%. In addition, the contract also provides a
sign-on bonus and health benefit and pension enhancements. The new labor
agreement will expire on August 8, 1998. The contract is intended to keep
layoffs to a minimum while enabling the Corporation to position itself to meet
increasing competition.
Liquidity and Capital Resources
OPERATING ACTIVITIES The Corporation generated cash flows from operations of
$439.2 during 1995 compared with $422.6 during 1994 and $478.7 during 1993. Cash
flows from operations increased in 1995 compared with 1994 due primarily to
strong growth in revenues.
Cash outlays relating to the Corporation's restructuring charge recorded in
December 1993 totaled $89.1 and $63.6 in 1995 and 1994, respectively [see Note
6]. Costs incurred for employee separations of $9.0 in 1995 and $27.6 in 1994
included payments for severance, unused compensated absences, health care
continuation and employee retraining. Incremental costs of $74.2 in 1995 and
$35.0 in 1994 were incurred for executing numerous reengineering programs
involving
26
SNET Annual Report
network operations, customer service, repair and support processes. In addition,
exit and other costs were $5.9 in 1995 and $1.0 in 1994 and included expenses
relating to the initial phase of redesigning work areas to reduce overall
corporate space requirements. All cash expenditures were funded with cash flows
from operations. Management anticipates that cash expenditures in connection
with the restructuring program will approximate $80 in 1996 and will be funded
from operations.
The consolidated balance sheet as of December 31, 1995 reflects significant
changes due to the discontinuance of SFAS No. 71. These changes resulted from
the elimination of net regulatory assets and the recognition of depreciation
reserve deficiencies for intrastate and interstate operations [see Note 2]. As a
result of the EOO, net pension curtailment losses were recognized and charged
against the restructuring reserve, resulting in an accrued pension liability for
the bargaining-unit pension plan [see Note 13]. In addition, the current portion
of deferred income taxes decreased due primarily to costs incurred in 1995 under
the restructuring program. The consolidated balance sheet also changed due to
operating activities. Accounts receivable increased due to increased revenues
and timing of cash collections while accounts payable increased due primarily to
timing of cash payments.
INVESTING ACTIVITIES The primary use of corporate funds continued to be capital
expenditures. Cash expended for capital additions was $354.0, $282.3 and $267.3
in 1995, 1994 and 1993, respectively. Capital additions for all years were
funded entirely from cash flows from operations. The majority of these additions
was for construction of the wireline network. Capital additions in 1995 and 1994
also included incremental capital additions under the restructuring program and
improvements to wireless cell sites.
Management anticipates that total capital expenditures for consolidated
telecommunications plant will approximate $395 in 1996 and will be funded from
cash flows from operations. Included in total capital expenditures in 1996 are
estimated additions of $349 to the wireline network, including expenditures
relating to I-SNET, a statewide telephony and information superhighway. Since
1994, the wireline business has been replacing its existing network of twisted
copper wire with low maintenance fiber-optic and coaxial cable. The buildout of
I-SNET, a $4.5 billion investment over 15 years, is expected to be completed by
2009. This advanced network is capable of delivering voice, video and a full
range of information and interactive multimedia services. I-SNET passed
approximately 170,000 households by December 1995 and brought service to its
first customer in October 1995. I-SNET is expected to pass approximately 230,000
households and provide telephony service on up to 80,000 lines by December 1996.
The support of this investment will be primarily through increased productivity
from the new technology deployed, ongoing cost-reduction initiatives and
customer demand for the new services offered.
Incremental capital expenditures relating to the implementation of the
reengineering solutions approximated $29 and $20 in 1995 and 1994, respectively.
The Corporation anticipates incremental capital expenditures of approximately
$30 in 1996 under the restructuring program.
In July 1995, the Corporation completed the acquisitions of certain
cellular properties and an increased interest in an existing partnership for
approximately $456 [see Note 3]. The properties increased the cellular service
area by 2.3 million POPs (population equivalents) along the communication
intensive Boston to New York corridor. The purchase was financed with short-term
debt of approximately $456, of which $300.0 was subsequently replaced with
medium-term notes in August 1995.
During 1995, the Corporation completed the sale of substantially all of the
paging network assets [see Note 3]. In addition, as a part of the Corporation's
reengineering solutions, certain real estate properties were sold during the
year to reduce office space. Proceeds of $74.0 primarily from these transactions
were used to repay debt associated with these assets.
FINANCING ACTIVITIES During 1995, short-term debt increased $192.9 due primarily
to the issuance of commercial paper used to finance the cellular acquisitions
discussed previously.
In July 1995, the Corporation filed a shelf registration statement with
the Securities and Exchange Commission ("SEC") to sell up to $470.0 in
medium-term notes. Pursuant to the registration statement, $300.0 of unsecured
notes were sold in August 1995 with interest rates ranging from 6.50% to 7.00%.
The proceeds of the sale were used to replace a portion of short-term debt and
to establish permanent financing for the cellular acquisitions discussed
previously.
In September 1995, the Corporation's 7.66% medium-term notes of $20.0
matured and were satisfied with the issuance of short-term debt. The Corporation
also repaid long-term debt of $108.3 with proceeds from the issuance of
short-term debt and the sale of paging and real estate assets. A total of $20.0
of medium-term notes will mature in September 1996 and is expected to be
satisfied with the issuance of short-term debt.
In December 1993, the Telephone Company filed a shelf registration
statement with the SEC to sell up to $540.0 in medium-term notes. Pursuant to
the shelf registration, $445.0 of unsecured notes were sold in December 1993
with interest rates ranging from 6.13% to 7.25%. A portion of the proceeds was
used in
27
SNET Annual Report
December 1993 to refinance $220.0 of medium-term notes with interest rates
ranging from 9.60% to 9.63%. The remaining proceeds were used to refinance
$200.0 of 8.63% debentures in January 1994 [see Note 8]. These refinancings
resulted in annual savings of approximately $8.
Dividends paid totaled $98.0, $97.2 and $96.7 in 1995, 1994 and 1993,
respectively. The quarterly dividend rate of $.44 per share has remained
unchanged for the past six years. Dividends will be paid out of proceeds in
excess of par value as long as a deficit exists in retained earnings.
ESOP In connection with the establishment of the Employee Stock Ownership Plan
("ESOP") in 1990, the Corporation loaned the ESOP $10.0 and guaranteed a $110.0
loan to the ESOP by a third party. The Corporation has committed to make cash
contributions to the ESOP that, together with dividends received on shares held
by the ESOP, will enable the ESOP to make its principal and interest payments on
both loans. Both loans mature in the year 2000. In 1995, the Corporation made
cash payments to the ESOP for debt service of $13.3 and anticipates making
equivalent cash payments during 1996.
DEBT RATIO The Corporation's ratio of debt to total capitalization at year-end
1995 was 80.0% compared with 51.0% at year-end 1994 and 59.9% at year-end 1993.
Excluding the combined effect of the non-cash extraordinary charge related to
SFAS No. 71 and the debt issued to acquire the cellular properties, the 1995
debt ratio would have been 48.0%. The ESOP represented 2.6% of the debt ratio at
December 31, 1995 compared with 3.8% and 3.9% at December 31, 1994 and 1993,
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 a contractual commitment to $570.0 in lines of
credit provided by a syndicate of banks. The annual commitment fee is currently
.05% of the total lines of credit. As of December 31, 1995, the entire $570.0
was available.
As of December 31, 1995, the Corporation and the Telephone Company had
$225.0 and $95.0, respectively, of unissued, unsecured debt securities
registered with the SEC since 1991. 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, restructuring costs and dividends are expected
to be funded primarily with cash from operations during 1996. The Corporation
also has access to external resources including lines of credit and long-term
shelf registration commitments.
- --------------------------------------------------------------------------------
Report on Consolidated Financial Statements
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.
These consolidated financial statements have been audited by Coopers &
Lybrand L.L.P., Independent Accountants. Their report, which appears on the
following page, expresses an informed judgment that the Corporation's
consolidated financial statements, considered in their entirety, present fairly,
in conformity with the applicable generally accepted accounting principles, the
Corporation's consolidated financial position, operating results and cash flows.
[Signature]
Donald R. Shassian
Senior Vice President and Chief Financial Officer
January 22, 1996
28
SNET Annual Report
Report of Audit Committee
The Audit Committee of the Board of Directors reviews and reports to the full
Board on the appropriateness of the Corporation's accounting policies, the
adequacy of its internal controls and the reliability of the financial
information reported to the public. The Committee, which consists of five
non-employee directors, met five times during 1995 with the Corporation's
financial management, internal auditors and external auditors (Coopers & Lybrand
L.L.P., Independent Accountants) to review their work and the relationships
between them in whatever depth considered necessary to fulfill the Committee's
responsibilities.
The Committee assesses the Corporation's relationship with the external
auditors and recommends the appointment of the external auditors to the Board
for ratification by the shareholders at the Annual Meeting. The internal
auditors report directly to the Committee and, along with the external auditors,
meet privately with and have unrestricted access to the Committee to discuss any
matter that they believe should be brought to their attention.
During the year, the Committee met with the Senior Vice President and Chief
Financial Officer, the Vice President and Controller, the Vice President and
General Counsel, the Vice President Audit Services and partners of Coopers &
Lybrand to review and discuss the following: the Corporation's consolidated
financial statements; the Coopers & Lybrand Management Letter and Management's
Response; the scope and results of audits performed by Coopers & Lybrand and by
Audit Services; the adequacy of the Corporation's system of internal controls;
the status of pending litigation against the Corporation; the Corporation's
process to promote and monitor employee compliance with Standards of Conduct;
and developments within the auditing, accounting and financial reporting fields,
as well as the impact of these developments on the Corporation's accounting
policies, practices and financial reporting.
On the basis of these reviews, the Committee reported with confidence to
the full Board that in its opinion, the Corporation's accounting policies,
reported financial information and system of internal controls are appropriate
to provide the assurance as to the integrity and reliability of financial
reporting required by the Board.
[Signature]
Barry M. Bloom
Chairman, Audit Committee
January 22, 1996
- --------------------------------------------------------------------------------
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, 1995 and 1994, and the related
consolidated statements of (loss) income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
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, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 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. Also, as discussed in Note 1 to the consolidated financial
statements, in 1993 the Corporation changed its method of accounting for
postretirement benefits other than pensions, postemployment benefits and income
taxes.
[Signature]
Coopers & Lybrand L.L.P.
Hartford, Connecticut
January 22, 1996
29
SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Statements of (Loss) Income
Dollars in Millions, Except Per Share Amounts, For the Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
REVENUES AND SALES $1,838.5 $1,717.0 $1,653.6
- -----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating 738.9 632.5 629.8
Maintenance 332.8 325.3 313.5
Provision for business restructuring -- -- 355.0
Depreciation and amortization 346.0 328.6 291.1
Taxes other than income 56.5 56.2 60.6
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 1,474.2 1,342.6 1,650.0
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 364.3 374.4 3.6
Interest 85.9 74.9 91.4
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 278.4 299.5 (87.8)
Income taxes 109.6 121.9 (44.2)
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 168.8 177.6 (43.6)
Discontinued operations, net of tax -- -- (10.3)
Extraordinary charges, net of tax (687.1) -- (44.0)
Cumulative effect of accounting changes -- -- (220.2)
- -----------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (518.3) $ 177.6 $ (318.1)
==============================================================================================================================
Weighted Average Common Shares Outstanding (thousands) 64,888 64,209 63,692
==============================================================================================================================
(LOSS) EARNINGS PER SHARE
Income (loss) from continuing operations $ 2.60 $ 2.77 $ (.68)
Discontinued operations -- -- (.16)
Extraordinary charges (10.59) -- (.69)
Cumulative effect of accounting changes -- -- (3.46)
- -----------------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS PER SHARE $ (7.99) $ 2.77 $ (4.99)
==============================================================================================================================
The accompanying notes are an integral part of these financial statements.
30
SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Balance Sheets
Dollars in Millions, At December 31, 1995 1994
- --------------------------------------------------------------------------------
ASSETS
Cash and temporary cash investments $ 11.1 $ 6.7
Accounts receivable, net of allowance for
uncollectibles of $34.2 and $29.8, respectively 347.3 294.4
Materials, supplies and inventories 26.1 26.4
Prepaid publishing 37.3 39.0
Deferred income taxes 66.8 101.8
Prepaid and other 46.3 29.4
- --------------------------------------------------------------------------------
Total Current Assets 534.9 497.7
Property, plant and equipment, net 1,565.2 2,712.2
Intangible assets, net 414.9 11.1
Deferred income taxes 92.0 --
Deferred charges, leases and other assets 117.2 283.6
- --------------------------------------------------------------------------------
Total Assets $2,724.2 $3,504.6
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 232.2 $ 39.6
Accounts payable and accrued expenses 261.9 205.1
Restructuring charge -- current 59.0 145.5
Advance billings and customer deposits 58.0 56.7
Accrued compensated absences 36.6 36.8
Other current liabilities 87.9 84.6
- --------------------------------------------------------------------------------
Total Current Liabilities 735.6 568.3
Long-term debt 1,182.4 952.1
Deferred income taxes -- 375.0
Accrued postretirement benefit obligation 310.8 308.2
Restructuring charge -- long-term 18.0 119.4
Unamortized investment tax credits 17.6 42.9
Other liabilities and deferred credits 106.9 185.8
- --------------------------------------------------------------------------------
Total Liabilities 2,371.3 2,551.7
- --------------------------------------------------------------------------------
Common stock; $1.00 par value; 300,000,000
shares authorized; 67,881,159 and
67,264,435 issued, respectively 67.9 67.3
Proceeds in excess of par value 697.9 677.8
Retained (deficit) earnings (249.5) 381.8
Less: Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (58.7) (69.3)
- --------------------------------------------------------------------------------
Total Shareholders' Equity 352.9 952.9
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,724.2 $3,504.6
================================================================================
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 31
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, 1993 66,117,339 $66.1 $639.6 $ 744.2 $(104.7) $(91.4) $1,253.8
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (318.1) (318.1)
Common stock issued, at market:
Dividend reinvestment plan 419,803 .4 14.8 15.2
Savings and incentive plans 71,218 .1 2.3 2.4
Dividends declared ($1.76 per share) (112.1) (112.1)
Reduction of ESOP debt 9.2 9.2
Tax benefit of dividends declared
on unallocated shares held in ESOP 1.7 1.7
ESOP earned compensation accrual 2.5 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 66,608,360 66.6 656.7 315.7 (104.7) (79.7) 854.6
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 177.6 177.6
Common stock issued, at market:
Dividend reinvestment plan 474,441 .5 15.2 15.7
Savings and incentive plans 181,634 .2 5.9 6.1
Dividends declared ($1.76 per share) (113.0) (113.0)
Reduction of ESOP debt 10.1 10.1
Tax benefit of dividends declared
on unallocated shares held in ESOP 1.5 1.5
ESOP earned compensation accrual .3 .3
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 67,264,435 67.3 677.8 381.8 (104.7) (69.3) 952.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (518.3) (518.3)
Common stock issued, at market:
Dividend reinvestment plan 466,498 .5 15.4 15.9
Savings and incentive plans 150,226 .1 4.7 4.8
Dividends declared ($1.76 per share) (114.2) (114.2)
Reduction of ESOP debt 11.0 11.0
Tax benefit of dividends declared
on unallocated shares held in ESOP 1.2 1.2
ESOP earned compensation accrual (.4) (.4)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 67,881,159 $67.9 $697.9 $(249.5) $(104.7) $(58.7) $ 352.9
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
32 SNET Annual Report
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows
Dollars in Millions, For the Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $(518.3) $ 177.6 $ (318.1)
Tax benefit of dividends on shares held in ESOP 1.2 1.5 1.7
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Depreciation and amortization 346.0 328.6 291.1
Extraordinary charges, net of tax 687.1 -- 44.0
Provision for business restructuring, before-tax -- -- 355.0
Cumulative effect of accounting changes, net of tax -- -- 220.2
Loss on disposal of discontinued operations, before-tax -- -- 17.0
Provision for uncollectible accounts 24.5 22.4 32.1
Restructuring payments (89.1) (63.6) --
Increase (decrease) in deferred income taxes 30.7 30.0 (100.0)
Decrease in investment tax credits (6.9) (7.9) (10.5)
Change in operating assets and liabilities, net (53.3) (84.0) (45.3)
Other, net 17.3 18.0 (8.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 439.2 422.6 478.7
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash expended for capital additions (354.0) (282.3) (267.3)
Purchase of cellular properties (455.6) -- --
Proceeds from owned and leased asset sales 74.0 -- 80.7
Disposal of assets and investments (8.2) (2.9) (5.6)
Repayment of loan made to ESOP .9 .8 .8
Increase in investments -- -- (10.4)
Other, net 23.8 29.4 8.4
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (719.1) (255.0) (193.4)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt 300.0 -- 420.1
Repayments of long-term debt (108.3) (294.7) (270.3)
Cash dividends paid (98.0) (97.2) (96.7)
Net proceeds (payments) of commercial paper 192.9 6.3 (58.5)
Amounts placed in trust for debt refinancing -- -- (62.1)
Other, net (2.3) (.1) (.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 284.3 (385.7) (67.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Temporary Cash Investments 4.4 (218.1) 217.6
Cash and temporary cash investments at beginning of year 6.7 224.8 7.2
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Year $ 11.1 $ 6.7 $ 224.8
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 33
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
NOTE 1: Summary of Significant
Accounting Policies
BASIS OF PRESENTATION The consolidated financial statements of Southern New
England Telecommunications Corporation ("Corporation") are in conformity with
generally accepted accounting principles ("GAAP"). In the fourth quarter of
1995, 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" effective January 1, 1996 [see Note 2].
The consolidated financial statements include the accounts of the
Corporation, all wholly-owned subsidiaries and partnerships in which the
Corporation effectively has control. Material investments in which the
Corporation holds a 50% or less interest and in which the Corporation can
exercise influence are reported on an equity basis. All other investments are
reported at cost. All significant intercompany transactions and accounts have
been eliminated.
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.
The Corporation derives substantially all of its revenues from the
telecommunications service industry by providing network and
information-management services and communications systems; in-state, national
and international long-distance communications services; directory publishing
and advertising services; and cellular mobile phone and paging services.
Substantially all of the Corporation's operations and customer base are located
in Connecticut.
The 1994 and 1993 consolidated financial statements have been reclassified
to conform to the current year presentation.
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, 1995 and 1994, accounts payable included drafts outstanding of $45.9 and
$22.3, 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 ("ELG") straight-line depreciation method or the composite vintage group
method. ELG was approved for Federal Communications Commission ("FCC") purposes
on interstate assets placed in service beginning in 1982 and for Department of
Public Utility Control ("DPUC") purposes on intrastate assets placed in service
beginning in 1993. Composite vintage group method is used for assets in service
prior to the adoption of ELG. Property and equipment other than telephone plant
is depreciated primarily using the straight-line method.
The cost of depreciable telephone plant retired, net of removal costs and
salvage, 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. 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 As of December 31, 1995, intangible assets consisted
primarily of cellular licenses, customer lists and goodwill resulting from the
cellular acquisitions completed in July 1995. The intangible assets are stated
at cost and are being amortized using the straight-line method, over periods
ranging from 5 to 40 years. As of December 31, 1994, intangible assets consisted
primarily of paging operating licenses which were sold in June 1995 [see Note
3]. Accumulated amortization was $10.9 and $3.7 as of December 31, 1995 and
1994, respectively.
LEASE NOTES RECEIVABLE Direct-financing and leveraged lease
contracts, defined by SFAS No. 13, "Accounting for Leases," as amended, 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 pay-
34 SNET Annual Report
ments, plus estimated residual value expected to be realized, over the cost of
the related equipment. For leveraged leases, the unearned income reflects the
net positive cash flow to be generated from the lease.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation accounts for its Employee
Stock Ownership Plan ("ESOP") in accordance with Statement of Position 76-3, as
amended. Accordingly, compensation expense is measured as the cost of shares
allocated from the trust, plus the amount required to purchase any additional
shares allocated to employee accounts, less a percentage of dividends received
by the plan. Dividends on stock held by the ESOP are recorded as a reduction of
retained earnings, and all ESOP shares are treated as outstanding for earnings
per share calculations. Debt of the ESOP that has been guaranteed by the
Corporation is recorded as long-term debt and as a reduction of shareholders'
equity. As the ESOP repays the debt, a corresponding reduction in long-term debt
and an increase in shareholders' equity is recorded.
REVENUE RECOGNITION Revenues are recognized when earned regardless of the
period in which billed. Revenues for directory advertising are recognized over
the life of the related directory, normally one year.
CAPITALIZED INTEREST COST 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. Upon
the discontinuance of SFAS No. 71, effective January 1, 1996, the Telephone
Company will begin reporting capitalized interest as a cost of telephone plant
and a reduction in interest expense, in accordance with SFAS No. 34,
"Capitalization of Interest Cost." The Corporation's other subsidiaries account
for capitalized interest in accordance with SFAS No. 34.
ADVERTISING COSTS Costs for advertising products and services or corporate
image are expensed as incurred.
INCOME TAXES The Corporation files a consolidated federal income tax return
and, where allowable, combined state income tax returns. Effective January 1,
1993, the Corporation changed the method of computing income taxes to the
liability method with the adoption of SFAS No. 109, "Accounting for Income
Taxes." Under the liability method, 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, under SFAS No. 109, the Corporation may recognize deferred tax
assets if it is more likely than not that the related benefit will be realized.
Investment tax credits realized in prior years by the Telephone Company are
being amortized as a reduction to the provision for income taxes over the life
of the related plant.
EARNINGS PER SHARE Earnings per common share are computed by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding during the period.
ACCOUNTING CHANGES Effective January 1, 1993, the Corporation implemented
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," SFAS No. 112, "Employers' Accounting for Postemployment Benefits" and
SFAS No. 109. The cumulative effect of these accounting changes resulted in a
non-cash charge that reduced 1993 net income and earnings per share by $220.2
and $3.46, respectively.
NEW ACCOUNTING PRONOUNCEMENTS The Corporation will adopt SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" in fiscal year 1996. SFAS No. 121 requires that all long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
there is an indication that the carrying amount of the asset may not be
recoverable. Such review will compare the carrying value of all applicable
assets to the expected future undiscounted operating cash flows derived from
such assets. Management expects the adoption of SFAS No. 121 to have an
immaterial impact on the consolidated financial statements.
The Corporation will also adopt SFAS No. 123, "Accounting for Stock-Based
Compensation" in fiscal year 1996. SFAS No. 123 requires either the recognition
or the pro forma disclosure of compensation expense for stock options and other
equity instruments determined by a fair value based method of accounting.
Management intends to disclose pro forma net income and earnings per share,
which will have no effect on the consolidated financial statements.
NOTE 2: Discontinuance of SFAS No. 71
In the fourth quarter 1995, the Telephone Company determined it was no longer
eligible for application of SFAS No. 71, which specifies accounting standards
required for public utilities and certain other regulated companies. Effective
January 1, 1996, the Telephone Company will follow 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, extraordi-
SNET Annual Report 35
nary charge of $687.1, or $10.59 per share, net of applicable tax benefits of
$515.5, in the fourth quarter of 1995.
The following table is a summary of the extraordinary charge:
Before-tax After-tax
- --------------------------------------------------------------------------------
Adjustment to net telephone plant $ (1,178.0) $ (703.9)
Elimination of net regulatory assets (24.6) (14.3)
Tax-related net regulatory liabilities . -- 20.1
Accelerated amortization of
investment tax credits -- 11.0
- --------------------------------------------------------------------------------
Total Non-cash, Extraordinary Charge $ (1,202.6) $ (687.1)
================================================================================
The adjustment of $1,178.0 to net telephone plant was necessary since
estimated useful lives and depreciation methods historically prescribed by
regulators did not reflect the rapid pace of technology and differed
significantly from those used by unregulated companies. Plant balances were
adjusted by increasing the accumulated depreciation reserve. The increase to the
accumulated depreciation reserve was determined by a discounted cash flow
analysis which considered technological replacement and the estimated impact of
future competition. To support this analysis, a depreciation reserve study was
also performed that identified, by asset categories, inadequate accumulated
depreciation levels (i.e., deficiencies) that had developed over time. A
comparison of average asset lives before and after the discontinuance of SFAS
No. 71, for the most significantly affected categories of telephone plant, is as
follows:
Asset Category Before After
- --------------------------------------------------------------------------------
Digital Switch 17 10.5
Digital Circuit 11.5 8.2
Conduit 55 55
Copper 22-26 10.5-16
Fiber 32-40 30
================================================================================
The discontinuance of SFAS No. 71 also required the Corporation to
eliminate from its consolidated balance sheet, prepared for financial reporting
purposes, the effects of any actions of regulators that had been recognized as
assets and liabilities pursuant to SFAS No. 71, but would not have been
recognized as assets and liabilities by unregulated companies. The elimination
of net regulatory assets relates principally to vacation pay costs and gross
earnings tax which were being amortized as they were recognized in the
ratemaking process.
Upon adoption of SFAS No. 109, the effects of required adjustments to the
Telephone Company's deferred tax balances were recorded as regulatory assets and
liabilities. Both the tax-related regulatory assets and liabilities were grossed
up for the tax effect anticipated when collected in future rates and amortized
as the related deferred taxes were recognized in the ratemaking process. As of
December 31, 1995, prior to the extraordinary charge, the Telephone Company had
tax-related regulatory assets and liabilities of $49.8 and $84.4, respectively.
These balances were eliminated and the related deferred tax balances were
adjusted to reflect application of SFAS No. 109 consistent with other
unregulated companies.
The Telephone Company uses the deferral method of accounting for investment
tax credits and amortizes the credits as a reduction to income tax expense over
the life of the asset that gave rise to the investment tax credit. As asset
lives were shortened, the 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 3: Acquisitions and Sale of Assets
In July 1995, the Corporation purchased from Bell Atlantic Corporation, NYNEX
Corporation and Richmond Telephone Company, for approximately $456 in the
aggregate, certain cellular properties in Rhode Island and New Bedford and
Pittsfield, Massachusetts, and an increased interest in Springwich Cellular
Limited Partnership. In total, these acquisitions expanded the cellular service
area by 2.3 million POPs (population equivalents) along the Boston to New York
corridor.
The acquisitions were financed with approximately $456 of short-term debt
issued in June 1995. Short-term debt of $300.0 was replaced with medium-term
debt in the third quarter of 1995. The acquisitions were accounted for under the
purchase method. Accordingly, the operating results of the cellular properties
and the increased interest in Springwich were included in the consolidated
financial statements subsequent to the acquisition date. The excess of the
purchase price over the estimated fair value of the net assets acquired of
approximately $24 was assigned to goodwill with an amortization period of 15
years.
The following unaudited pro forma consolidated operating results were
prepared assuming that the acquisitions were completed as of the beginning of
the periods presented. It is based on historical information and does not
necessarily reflect the actual results that would have occurred or the results
which may occur in the future.
For the Years Ended December 31, 1995 1994
- --------------------------------------------------------------------------------
Revenues and Sales $1,859.9 $1,757.3
Income from Continuing
Operations Before Income Taxes $ 264.5 $ 263.2
Income from Continuing
Operations $ 160.8 $ 156.1
Earnings Per Share from
Continuing Operations $ 2.48 $ 2.43
================================================================================
In October 1993, the Corporation purchased the remaining 50.5% partnership
interest in TNI Associates for approximately $22. The acquisition was accounted
for under the purchase method. Accordingly, the partnership's operating results
were included in the consolidated financial statements subsequent to the
36 SNET Annual Report
acquisition date. The excess of the purchase price over the estimated fair
value of the net assets acquired was assigned to goodwill with an amortization
period of 15 years. Prior to the purchase, the Corporation's share of the
partnership income was accounted for under the equity method.
On June 30, 1995, the Corporation completed the sale, for approximately
$25, of substantially all of the paging network assets, including wireless
messaging network transmitters, switches and operating licenses, as well as all
reseller accounts and the partnership's retail accounts, to Paging Network of
New York, Inc. The paging operations will retain its retail accounts and will
continue, as a reseller, to market paging services under its Page 2000(R) brand
name. The net loss from the sale represented costs incurred as a direct result
of exiting the paging network business and was charged against the restructuring
reserve [see Note 6].
NOTE 4: Employee Benefits
SEPARATION OFFERS In April 1995, the Corporation ratified a contract with
the Connecticut Union of Telephone Workers, Inc. which included a voluntary
early-out offer ("EOO"). The EOO provided enhanced pension benefits by adding
six years to the age and to the length of service of employees for purposes of
determining pension and postretirement health care benefits eligibility. The
employees also had the option to select a pension distribution method (e.g.,
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. As of December 31, 1995, approximately 2,050 employees had
left the Corporation, with the remainder to leave no later than June 1996. Net
losses related to the EOO were recorded against the restructuring reserve [see
Note 6].
As part of the bargaining-unit contract negotiated in August 1992,
employees electing to retire or terminate their employment between December 15,
1992 and February 16, 1993 were offered an early retirement incentive, Special
Pension Option ("SPO"). Approximately 570 employees accepted the early
retirement offer. The Corporation recorded a $6.5 net gain in 1993 as a result
of this SPO.
PENSION PLANS The Corporation sponsors several non-contributory, defined benefit
pension plans: one for management employees and one for bargaining-unit
employees; and two supplementary non-qualified, unfunded plans, one for
non-employee directors and one for all employees. The supplementary
non-qualified plans provide a benefit to include any pension amount above that
would otherwise be payable under the defined benefit pension plans due to
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. Benefits for the non-employee
directors are based on final annual retainer.
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 1995 and declines to 7.5% in 1998.
Pension cost (income) for all plans, computed using the projected unit
credit actuarial method, includes the following components:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Service cost $ 22.1 $ 30.9 $ 28.5
Interest cost on projected
benefit obligation 113.5 107.0 103.0
Amortizations and deferrals, net 249.6 (136.4) 131.4
Actual return on plan assets (393.3) 1.0 (262.5)
Settlement gain (76.0) -- (20.0)
Costs relating to special
termination benefits 137.5 -- 13.5
Curtailment loss 16.8 13.4 --
- --------------------------------------------------------------------------------
Net Pension Cost (Income) $ 70.2 $ 15.9 $ (6.1)
================================================================================
The increase in pension cost for 1995 was due primarily to the charges for
special termination benefits associated with the EOO, a curtailment loss for
employee separations and a settlement gain, that combined, resulted in a net
loss of $78.3 in 1995. The increase in pension cost for 1994 was due primarily
to the net effect of a lower discount rate, a 1994 curtailment loss for employee
separations and the absence of the 1993 $6.5 net gain. The 1995 net loss of
$78.3 and the 1994 curtailment loss were charged against the restructuring
reserve in the respective years [see Note 6].
SNET Annual Report 37
The following table sets forth the plans' funded status:
At December 31, 1995 1994
- --------------------------------------------------------------------------------
Actuarial Present Value of Accumulated
Benefit Obligation, including vested
benefits of $1,405.8 and $1,216.4,
respectively $ 1,475.6 $ 1,319.0
================================================================================
Plan assets at fair value $ 1,847.8 $ 1,805.2
Actuarial present value of projected
benefit obligation (1,565.2) (1,455.3)
- --------------------------------------------------------------------------------
Assets in Excess of Projected
Benefit Obligation 282.6 349.9
Unrecognized prior service costs 151.7 146.4
Unrecognized transition asset (130.5) (173.7)
Unrecognized net gain (383.4) (333.4)
Adjustment required to recognize
minimum liability (2.7) (2.1)
- --------------------------------------------------------------------------------
Accrued Pension Cost $ (82.3) $ (12.9)
================================================================================
Assumptions used to calculate the plans' funded status:
At December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Discount rate for projected
benefit obligation 7.0% 8.0% 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.
Effective January 1, 1993, the Corporation adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS
No. 106 requires that employers accrue, during the years an employee renders
service, the expected cost, based on actuarial valuations, of health care and
other non-pension benefits provided to retirees and their eligible dependents.
With the adoption of SFAS No. 106, the Corporation elected to record immediately
the accumulated postretirement benefit obligation in excess of the fair value of
plan assets (i.e., transition obligation) as a change in accounting principle.
The cumulative effect of this accounting change reduced 1993 net income and
earnings per share by $215.9 and $3.39, respectively. The adoption of SFAS No.
106 had no material effect on 1993 income from continuing operations.
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, 1995 1994 1993
- --------------------------------------------------------------------------------
Service cost $ 4.4 $ 5.4 $ 5.3
Interest cost of accumulated
benefit obligation 33.4 32.2 32.0
Actual return on plan assets (31.5) (2.6) (13.1)
Amortizations and deferrals, net 21.0 (5.4) 6.5
Costs relating to special
termination benefits 11.0 -- --
Curtailment loss 12.9 .8 --
- --------------------------------------------------------------------------------
Net Postretirement Benefit Cost $ 51.2 $ 30.4 $ 30.7
================================================================================
Postretirement benefit cost increased in 1995 as a result of special
termination benefits associated with the EOO, a curtailment loss for employee
separations offset, in part, by favorable claims experience and assumption
changes, primarily an increase in the discount rate for benefit costs from 7.0%
to 8.0%. The 1995 combined cost of special termination benefits and curtailment
loss of $23.9 and the 1994 curtailment loss were charged against the
restructuring reserve in the respective years [see Note 6].
The following table sets forth the plans' funded status:
At December 31, 1995 1994
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 447.5 $ 313.2
Fully eligible active plan participants 21.1 24.2
Other active plan participants 74.2 90.8
- --------------------------------------------------------------------------------
Total Accumulated Postretirement
Benefit Obligation 542.8 428.2
Plan assets at fair value (178.6) (126.2)
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets 364.2 302.0
Unrecognized net (loss) gain (16.7) 26.6
Unrecognized prior service cost (16.3) --
- --------------------------------------------------------------------------------
Accrued Postretirement
Benefit Obligation $ 331.2 $ 328.6
================================================================================
Assumptions used to calculate the plans' funded status:
At December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Discount rate for projected
benefit obligation 7.0% 8.0% 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% 7.5%
Bargaining-unit health trust 7.5% 7.5% 8.0%
Retiree life insurance trust 7.5% 7.5% 8.0%
================================================================================
38 SNET Annual Report
The assumed health care cost trend rate used to measure the expected cost
of these benefits for 1996 was 7.0% and declines to 3.8% by 2001. A one
percentage point increase in the assumed health care cost trend rate would have
increased the estimated aggregate service and interest cost components of the
1995 net postretirement benefit cost by approximately $1 and the accrued
postretirement benefit obligation as of December 31, 1995 by approximately $20.
POSTEMPLOYMENT BENEFITS Effective January 1, 1993, the Corporation adopted SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." This statement
requires employers to accrue benefits provided to former or inactive employees
after employment but before retirement. These benefits include workers'
compensation, disability benefits and health care continuation coverage for a
limited period of time after employment. The standard requires that these
benefits be accrued as earned where the right to the benefits accumulates or
vests. The cumulative effect of this accounting change reduced 1993 net income
and earnings per share by $7.1 and $.11, respectively. The adoption of SFAS No.
112 had no material effect on 1993 income from continuing operations. Health
care continuation costs, which do not vest, continue to be paid from company
funds and are expensed when paid.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation has established a leveraged ESOP
for substantially all employees as part of its existing savings plans. Under the
ESOP, the Corporation's matching contributions are invested entirely in common
stock of the Corporation and are held by the ESOP.
In January 1990, the Corporation loaned the ESOP $10.0 and in February
1990, the ESOP borrowed an additional $110.0, which the Corporation guaranteed,
through a third party. The proceeds of the $10.0 loan were used to acquire
shares of the Corporation's common stock through open market purchases. The
proceeds of the $110.0 loan were used to purchase shares of both unissued common
stock and treasury stock from the Corporation. All shares purchased by the ESOP
were originally pledged as collateral for its debt. The Corporation periodically
makes cash payments to the ESOP that, together with dividends received on shares
held by the ESOP, are used to make interest and principal payments on both
loans. As these payments are made, shares are released from collateral and made
available for distribution to employees' accounts, based on the proportion of
debt service paid in the year.
ESOP expense and ESOP trust activity are as follows:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Compensation expense(1) $14.7 $14.3 $13.4
Interest expense incurred(1) 5.1 5.9 6.7
Interest income earned (.6) (.7) (.8)
- --------------------------------------------------------------------------------
Total Expense $19.2 $19.5 $19.3
================================================================================
Dividends Used for Debt Service $ 5.3 $ 5.3 $ 5.4
================================================================================
Cash Contributions Used for Debt Service $13.3 $13.2 $13.2
================================================================================
(1) Net of applicable dividends used for debt service.
ESOP shares outstanding are as follows:
In Thousands, At December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Allocated shares 1,508.0 1,164.4 917.2
Unreleased shares 1,301.5 1,809.6 2,111.2
- --------------------------------------------------------------------------------
Total ESOP Shares 2,809.5 2,974.0 3,028.4
================================================================================
NOTE 5: Income Taxes
Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting for
Income Taxes." The adoption of SFAS No. 109 resulted in recording tax benefits,
primarily associated with the effects of lower federal and state tax rates,
applicable to the Corporation's non-telephone businesses. The cumulative effect
of this accounting change increased 1993 net income and earnings per share by
$2.8 and $.04, respectively. The adoption of SFAS No. 109 had no material effect
on 1993 income from continuing operations.
Income tax expense (benefit) includes the following components:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Federal
Current $ 62.4 $ 74.7 $ 57.1
Deferred 27.4 19.5 (87.7)
Investment tax credits, net (6.9) (7.9) (10.5)
- --------------------------------------------------------------------------------
Total Federal 82.9 86.3 (41.1)
- --------------------------------------------------------------------------------
State
Current 17.3 31.1 27.0
Deferred 9.4 4.5 (30.1)
- --------------------------------------------------------------------------------
Total State 26.7 35.6 (3.1)
- --------------------------------------------------------------------------------
Total Income Taxes $109.6 $121.9 $(44.2)
================================================================================
Deferred income tax expense (benefit) resulted primarily from restructuring
program costs incurred in 1995 and 1994, which were recorded in the consolidated
financial statements in 1993 as a part of the restructuring charge. In April
1995, new Connecticut state income tax rates were enacted to accelerate the
reduction of current rates. The 1995 Connecticut state income tax rate of 11.25%
will gradually decrease to 7.5% in 2000. Income taxes in 1995 included a
provision to adjust deferred tax balances for the effect of the change in state
income tax rates.
SNET Annual Report 39
A reconciliation between income taxes and taxes computed by applying the
statutory federal income tax rate to income (loss) from continuing operations
before income taxes is as follows:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Statutory Federal Income Tax Rate 35.0% 35.0% (35.0)%
================================================================================
Federal income taxes at
statutory rate $ 97.4 $104.8 $(30.7)
State income taxes, net of federal
income tax effect 17.4 23.1 (2.0)
Depreciation of telephone plant
construction cost previously
deducted for tax purposes(1) 5.1 5.1 6.3
Rate differentials applied to
reversing temporary differences (3.5) (4.9) (11.2)
Amortization of investment
tax credits(1) (6.9) (7.9) (10.5)
Prior years' tax adjustments (1.4) 1.7 1.9
Other differences, net 1.5 -- 2.0
- --------------------------------------------------------------------------------
Income Taxes $109.6 $121.9 $(44.2)
================================================================================
Effective Tax Rate 39.4% 40.7% (50.3)%
================================================================================
(1) Telephone Company only.
Consolidated deferred income tax assets (liabilities) are comprised of the
following:
At December 31, 1995 1994
- --------------------------------------------------------------------------------
Depreciation $(34.8) $(546.6)
Leveraged leases (30.4) (30.7)
Deferred gross earnings tax -- (15.9)
Postretirement benefits other than pensions 124.1 136.9
Restructuring charge 32.1 112.1
Unamortized investment tax credits 7.2 31.1
Pension 31.3 5.1
Software 15.1 11.7
Other 17.5 25.0
Valuation allowance (3.3) (1.9)
- --------------------------------------------------------------------------------
Deferred Income Taxes $158.8 $(273.2)
================================================================================
The 1995 increase in the valuation allowance was due primarily to an
increase in federal capital loss carryforwards that may expire before
utilization. The valuation allowance in 1994 related to state and local net
operating loss carryforwards that may expire before utilization. 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 or $3.21 per share after-tax, to provide for a comprehensive
restructuring program. Specifically, the program included costs to be incurred
to facilitate employee separations. The charge also included incremental costs
of: implementing appropriate reengineering solutions; designing and developing
new processes and tools to continue the Corporation's provision of excellent
service; and retraining of the remaining employees to help them meet the
changing demands of customers.
The 1993 restructuring charge was originally estimated as follows:
At December 31, 1993
- --------------------------------------------------------------------------------
Employee separation costs $170.0
Process and systems reengineering 145.0
Exit and other costs 40.0
- --------------------------------------------------------------------------------
Total Restructuring Charge $355.0
================================================================================
A summary of costs incurred under the restructuring program is as follows:
For the Years Ended December 31, 1995 1994
- --------------------------------------------------------------------------------
Employee separation costs $111.2 $41.8
Process and systems reengineering 74.2 35.0
Exit and other costs 2.5 13.3
- --------------------------------------------------------------------------------
Total Costs Incurred $187.9 $90.1
================================================================================
Costs incurred for employee separations included payments for severance,
unused compensated absences and health care continuation, as well as non-cash
net pension and postretirement curtailment losses of $102.2 and $14.2 in 1995
and 1994, respectively. Process and systems reengineering costs included
incremental costs incurred in connection with the execution of numerous
reengineering programs involving network operations, customer service, repair
and support processes. In 1995, exit and other costs included primarily a
non-cash adjustment of approximately $3 in connection with the completed sale of
substantially all of the paging network assets. The adjustment reduced the total
non-cash charge recorded in 1994 for exiting the paging network business to
approximately $9 [see Note 3].
As previously discussed in Note 4, 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. As of
December 31, 1995, approximately 2,050 employees had left the Corporation, with
the remaining 650 employees to leave no later than June 1996. The enhanced
pension and postretirement benefits under the EOO are expected (through June of
1996) to result in a total non-cash charge of approximately $78, net of
settlement gains of approximately $100. In 1995, a non-cash net charge of $102.2
was recorded. The charge included pension and postretirement enhancements and
curtailment losses of $178.2 to reflect the acceptance of the EOO, net of
settlement gains of $76.0 to account for the estimated lump-sum pension payments
made for employee separations during 1995. Future adjustments to the
restructuring charge are expected to include settlement gains of approximately
$24 in the first half of 1996.
Total employee separations under the restructuring program are expected to
approximate up to 4,000 employees. Through the end of 1995, approximately 3,165
employees left the Corporation under the restructuring program: 970 employees
left under severance plans through the end of 1994 and 2,195 employees left
primarily under the EOO in 1995. The
40 SNET Annual Report
remaining employee separations are expected to occur primarily in 1996.
Total employee separations through the end of 1995 were offset partially by an
increase in provisional employees and growth in the business resulting in a net
reduction in the Corporation's work force of 1,406 employees.
To date, the Telephone Company has implemented network operations, customer
service, repair and support programs and developed new processes to
substantially reduce the costs of business while significantly improving quality
and customer service. The initial installation and ongoing development of these
new integrated processes have enabled the Telephone Company to increase its
responsiveness to customer specific needs and to eliminate certain current
labor-intensive interfaces between the existing systems.
Since the inception of the restructuring program, the Corporation
experienced a cumulative reduction in 1995 employee-related expenses of
approximately $50, net of costs for provisional employees. Most of the reduction
in employee-related expenses, due to the EOO, will be realized in 1996 since the
majority of the employee separations occurred in the fourth quarter of 1995,
with the remainder to occur no later than June 1996. After full implementation
of the restructuring program, the Corporation anticipates annual savings of
approximately $120 from reduced employee-related expenses, net of costs for
provisional employees. These anticipated savings will also be substantially
offset by growth in the business.
Cash expenditures for the restructuring program are estimated to be $80 in
1996. The EOO will be funded primarily by the pension and postretirement plans.
Incremental capital expenditures related to the restructuring program
approximated $29 and $20 in 1995 and 1994, respectively. These items were
recorded in property, plant and equipment and will result in increased
depreciation expense in future years. The Corporation currently anticipates
total incremental capital expenditures of approximately $30 in 1996 under the
restructuring program.
The Corporation determined that no additional provision for employee
separations is required as a result of evaluating the net impact of the EOO on
the restructuring reserve. Specific process and systems reengineering projects
under the restructuring program are expected to be completed in 1996. Management
expects to maintain an estimated reserve of $18 at the end of 1996, primarily
for employee separations. Also, shifts within reserve categories are expected to
occur in 1996. The Corporation believes that the total restructuring reserve
balance of $77.0 as of December 31, 1995 plus the expected net adjustments of
approximately $24, discussed previously, are adequate for future estimated costs
under the 1993 restructuring program.
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, 1995 1994
- --------------------------------------------------------------------------------
Commercial paper $199.9 $ 7.0
Current maturities of long-term debt 32.3 32.6
- --------------------------------------------------------------------------------
Total Short-term Debt $232.2 $39.6
- --------------------------------------------------------------------------------
Weighted Average Interest Rate at Year-End 5.8% 6.2%
- --------------------------------------------------------------------------------
The Corporation maintained bank lines of credit to facilitate the issuance
of commercial paper. As part of these credit facilities, the Corporation has
obtained a contractual commitment to $570.0 in lines of credit provided by a
syndicate of banks. At December 31, 1995, the entire $570.0 remained available.
The annual commitment fee is currently .05% of the total lines of credit.
NOTE 8: Long-term Debt
The components of long-term debt are as follows:
At December 31, Interest Rates 1995 1994
- --------------------------------------------------------------------------------
Unsecured notes 6.13% to 8.70% $1,065.0 $785.0
Guaranteed debt of ESOP 9.35% 67.5 77.6
Debentures 4.38% 45.0 45.0
Mortgage notes 9.14% to 9.90% 17.9 43.4
Bank notes 8.50% to 10.94% 24.9 37.4
- --------------------------------------------------------------------------------
Total Long-term Debt 1,220.3 988.4
Unamortized discount
and premium, net (5.7) (3.8)
Capital lease obligations .1 .1
Current maturities (32.3) (32.6)
- --------------------------------------------------------------------------------
Long-term Debt $1,182.4 $952.1
- --------------------------------------------------------------------------------
Scheduled maturities of total long-term debt include $32.3 in 1996, $13.4
in 1997, $41.8 in 1998, $16.9 in 1999, $125.1 in 2000, $665.8 from 2001 to 2009
and $325.0 from 2031 to 2033.
In July 1995, the Corporation filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") to sell up to $470.0 in medium-term
notes with maturities ranging from 3 to 30 years. Pursuant to the registration
statement, the Corporation sold, in August 1995, $300.0 of unsecured notes with
interest rates ranging from 6.50% to 7.00%. The proceeds of the sale were used
to replace a portion of short-term debt and to establish permanent financing for
the cellular acquisitions [see Note 3]. As of December 31, 1995, the issued
notes were outstanding. Additional notes may be sold in one or more issues from
time to time as market conditions warrant.
In December 1993, the Telephone Company filed a shelf registration
statement with the SEC to sell up to $540.0 in medium-term notes with maturities
ranging from 10 to 40 years. In December 1993, the Telephone Company announced
that it would repurchase up to
SNET Annual Report 41
$220.0 of medium-term notes with interest rates ranging from 9.60% to
9.63%. The Telephone Company also irrevocably called $200.0 of 8.63% debentures
by providing a 30 day legal notice of redemption to the holders. Pursuant to the
registration statement, the Telephone Company sold, in December 1993, with DPUC
approval, $445.0 of unsecured notes with interest rates ranging from 6.13% to
7.25%. Of the total medium-term notes refinanced in December 1993, $166.5 in
notes were purchased. The Telephone Company also executed an "in-substance
defeasance" for the remainder of the notes not repurchased. Sufficient U.S.
Government securities were deposited in an irrevocable trust to cover the
outstanding principal, interest and call premium payable February 15, 1995. The
proceeds were also used to redeem the debentures in January 1994. The costs
associated with the refinancing were recorded as an extraordinary charge
totaling $44.0, net of applicable tax benefits of $38.0, or $.69 per share. As
of December 31, 1995, the issued notes were outstanding. Additional notes may be
sold in one or more issues from time to time as market conditions warrant.
In 1991, the Corporation filed a shelf registration statement with the SEC
to sell up to $165.0 in medium-term notes with maturities ranging from 3 to 15
years. In 1991, the Corporation sold, for refinancing purposes, $110.0 of
unsecured notes with interest rates ranging from 7.20% to 8.00%. As of December
31, 1995, the issued notes were outstanding. Additional notes may be sold in one
or more issues from time to time as market conditions warrant.
NOTE 9: Commitments and
Contingencies
The Corporation entered into both operating and capital leases for
facilities and equipment used in its operations. Rental expense under operating
leases was $29.1, $33.1 and $35.2 for 1995, 1994 and 1993, respectively. Future
minimum rental commitments under third-party, noncancelable operating leases
include $13.6 in 1996, $12.2 in 1997, $10.9 in 1998, $9.7 in 1999, $8.4 in 2000
and $18.0 thereafter. Capital leases were not significant.
The Corporation expects total capital expenditures of approximately $395
for additions to property, plant and equipment during 1996. In connection with
the capital program, the Corporation has made certain commitments for the
purchase of material and equipment.
In June 1995, a U.S. District Court decision was issued in favor of the
Department of Labor against the Corporation and the Telephone Company. The
decision held that the Corporation and the Telephone Company violated certain
sections of the Fair Labor Standards Act and was liable for back wages and
liquidating damages. The Corporation and the Telephone Company are appealing
this decision. The Telephone Company recorded a liability of $11.0 as its
anticipated cost of total damages for this and other litigation matters, which
was charged to operating and maintenance expenses in 1995.
NOTE 10: Discontinued Operations
In September 1992, the Corporation's Board of Directors approved a plan to
withdraw from the finance business by phasing out the activities of SNET Credit,
Inc. ("Credit"). In connection with this plan, the Corporation recorded an
estimate of the loss on the disposal of $4.0, net of applicable tax benefits of
$1.4, in 1992.
During 1993, Credit sold portions of its direct-financing lease portfolio
for a total of approximately $81 in cash. The proceeds from the sales were used
to pay all of its third-party debt outstanding. Due primarily to the net loss on
the sales and a reevaluation of the additional direct-financing leases that were
retained, the Corporation increased the estimated loss on the disposal by $10.3,
net of applicable tax benefits of $6.7, during the fourth quarter of 1993.
The Corporation retained, on an investment basis, the portfolio of
leveraged leases and a group of direct-financing leases. The gross investment in
these leases has been recorded on the consolidated balance sheet in deferred
charges, leases and other assets. The investment in direct-financing leases are
in a commercial aircraft and other equipment. Investments in leveraged leases
are in a coal-fired, electric generating facility and other equipment.
The components of the lease notes receivable retained are as follows:
At December 31, 1995 1994
- --------------------------------------------------------------------------------
Direct- Direct-
Financing Leveraged Financing Leveraged
Leases Leases Leases Leases
- --------------------------------------------------------------------------------
Minimum rentals receivable $ 70.1 $ 25.3 $ 77.5 $ 26.1
Unearned income (30.2) (15.7) (33.9) (16.1)
Estimated, unguaranteed
residual value of leased assets 10.3 31.5 10.4 34.1
Initial direct costs .3 -- .3 --
Allowance for losses (9.7) -- (8.4) --
- --------------------------------------------------------------------------------
Lease Notes
Receivable $ 40.8 41.1 $ 45.9 44.1
Deferred taxes arising
from leveraged leases (30.4) (30.7)
- --------------------------------------------------------------------------------
Net Investment in
Leveraged Leases $ 10.7 $ 13.4
- --------------------------------------------------------------------------------
Future minimum receipts under third-party direct-financing leases include
$6.9 in 1996, $5.6 in 1997, $4.0 in 1998, $4.9 in 1999, $3.1 in 2000 and $45.6
thereafter.
42 SNET Annual Report
NOTE 11: 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.
Short-term Debt The carrying amount of short-term debt approximates fair value
because of the short maturity of those instruments.
Long-term Debt The fair value of the Corporation's 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, 1995 1994
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Cash and temporary
cash investments $ 11.1 $ 11.1 $ 6.7 $ 6.7
Long-term investments $ 4.1 $ 9.6 $ 4.4 $ 10.1
Short-term debt $ (232.2) $ (232.2) $ (39.6) $ (39.6)
Long-term debt $(1,182.3) $(1,242.2) $(952.0) $(864.0)
- --------------------------------------------------------------------------------
CONCENTRATION 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 with high-quality financial institutions. 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 12: 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.
Under a 1987 shareholders' rights plan ("Rights Plan"), as amended in 1990,
each share of Common Stock has a purchase right that entitles the holder to
purchase one additional share of Common Stock at an exercise price of $80.00.
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 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, 1997.
NOTE 13: Supplemental Financial
Information
OPERATING EARNINGS(1) The following unaudited financial data on the
Corporation's product groups is voluntary and provided for informational
purposes only:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Wireline(2) $580.7 $533.0 $151.9
Wireless(3) (8.3) 16.7 9.4
Information and Entertainment(4) 101.9 114.7 117.2
Other(5) 36.0 38.6 16.2
- --------------------------------------------------------------------------------
Total Operating Earnings $710.3 $703.0 $294.7
- --------------------------------------------------------------------------------
(1) Represents earnings before interest, taxes, depreciation and amortization.
1993 also includes the before-tax restructuring charge of $355.0. Operating
earnings is not a generally accepted accounting principle measurement.
(2) Includes Telephone Company's telecommunications operations, SNET
Diversified Group, Inc. and SNET America, Inc.
(3) Includes the wholesale and retail cellular operations, SNET Cellular, Inc.
and SNET Mobility, Inc., net of cellular intercompany amounts, and SNET
Paging, Inc. ("Paging"). Paging's operating earnings (loss) were $(6.5),
$(2.2) and $(7.9) in 1995, 1994 and 1993, respectively. Paging's operations
have been redefined from a network-based service to a resale service in
1995.
(4) Includes publishing and multimedia operations.
(5) Includes SNET Real Estate, Inc. and holding company operations.
SNET Annual Report 43
NOTE 13: Supplemental Financial Information (continued)
SUPPLEMENTAL BALANCE SHEET INFORMATION
At December 31, 1995 1994
- --------------------------------------------------------------------------------
Materials, supplies and inventories:
Materials and supplies $ 10.6 $ 6.2
Inventories 15.5 20.2
- --------------------------------------------------------------------------------
Total Materials, Supplies and Inventories $ 26.1 $ 26.4
- --------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Telephone plant:
Land $ 17.5 $ 16.7
Buildings 396.2 384.3
Central office equipment 1,657.2 1,618.8
Outside plant facilities and equipment 1,640.3 1,613.0
Furniture and office equipment 310.6 355.1
Station equipment and connections 22.7 23.9
Plant under construction 122.4 68.3
Other property and equipment 365.2 292.5
- --------------------------------------------------------------------------------
Total Property, Plant and Equipment, at cost $ 4,532.1 $ 4,372.6
- --------------------------------------------------------------------------------
Accumulated depreciation, beginning of period $(1,660.4) $(1,528.2)
Depreciation (328.1) (320.6)
Retirements 206.3 191.5
Adjustment [see Note 2] (1,178.0) --
Other changes (6.7) (3.1)
- --------------------------------------------------------------------------------
Accumulated Depreciation, end of period $(2,966.9) $(1,660.4)
- --------------------------------------------------------------------------------
Total Property, Plant and Equipment, net $ 1,565.2 $ 2,712.2
- --------------------------------------------------------------------------------
Deferred charges, leases and other assets:
Lease notes receivable $ 81.9 $ 90.0
Deferred charges [see Note 2] .8 49.9
Regulatory tax asset [see Note 2] -- 62.2
Prepaid pension cost -- 38.7
Other assets 34.5 42.8
- --------------------------------------------------------------------------------
Total Deferred Charges, Leases and Other Assets $ 117.2 $ 283.6
- --------------------------------------------------------------------------------
Other current liabilities:
Dividends payable $ 28.7 $ 28.4
Accrued postretirement benefit obligation 20.4 20.4
Accrued interest 19.8 13.5
Other current liabilities 19.0 22.3
- --------------------------------------------------------------------------------
Total Other Current Liabilities $ 87.9 $ 84.6
- --------------------------------------------------------------------------------
Other liabilities and deferred credits:
Accrued pension cost $ 82.3 $ 51.6
Regulatory tax liability [see Note 2] -- 84.2
Other 24.6 50.0
- --------------------------------------------------------------------------------
Total Other Liabilities and Deferred Credits $ 106.9 $ 185.8
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Interest Paid, net of
amounts capitalized $ 79.7 $ 81.2 $ 97.0
- --------------------------------------------------------------------------------
Income Taxes Paid $ 87.8 $109.5 $ 73.9
- --------------------------------------------------------------------------------
Change in operating assets and
liabilities, net:
Increase in accounts receivable $(76.9) $(48.3) $(15.9)
(Increase) decrease in materials,
supplies and inventories (.1) (4.8) .5
Increase in accounts payable,
accrued expenses and
compensated absences 55.7 7.0 2.7
Change in other assets and
liabilities, net (32.0) (37.9) (32.6)
- --------------------------------------------------------------------------------
Change in Operating Assets and
Liabilities, net $(53.3) $(84.0) $(45.3)
- --------------------------------------------------------------------------------
SUPPLEMENTAL INCOME STATEMENT INFORMATION
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Advertising Expense $ 38.8 $ 32.4 $ 17.0
- --------------------------------------------------------------------------------
Depreciation and amortization:
Depreciation $ 328.1 $320.6 $288.0
Amortization 17.9 8.0 3.1
- --------------------------------------------------------------------------------
Total Depreciation and Amortization $ 346.0 $328.6 $291.1
- --------------------------------------------------------------------------------
Taxes other than income:
Property $ 43.7 $ 45.5 $ 47.6
Other 12.8 10.7 13.0
- --------------------------------------------------------------------------------
Total Taxes Other Than Income $ 56.5 $ 56.2 $ 60.6
- --------------------------------------------------------------------------------
Interest expense:
Long-term debt $ 74.7 $ 70.3 $ 85.9
Short-term debt 8.5 2.2 1.6
Other 2.7 2.4 3.9
- --------------------------------------------------------------------------------
Total Interest Expense $ 85.9 $ 74.9 $ 91.4
- --------------------------------------------------------------------------------
During 1995, 1994 and 1993, revenues earned from providing services to AT&T
Corp. accounted for 9.2%, 10.2% and 10.8%, respectively, of total revenues and
sales.
44 SNET Annual Report
NOTE 14: Stock Option Plans
The Corporation is permitted to issue stock options to all employees. The
SNET 1986 Stock Option Plan, which expires on June 30, 1996, provides stock
options to certain key employees at the discretion of a committee of the Board
of Directors ("Committee"). The SNET 1995 Stock Incentive Plan, approved on May
10, 1995, is a stock based compensation plan which enables the awarding of
incentive compensation, including stock options, to all employees at the
discretion of the Board of Directors or the Committee. Under both plans, the
exercise price of each option may not be less than 100% of the fair market value
of the shares on the date of grant. All options are exercisable no earlier than
one year after the date of grant and have a maximum life of ten years. Both
plans allow stock appreciation rights ("SARs") to be granted in tandem with the
related stock option. No SARs have been granted since 1992 and the Corporation
presently does not intend to grant additional SARs in the future.
In the fourth quarter of 1995, the Corporation granted options to
management employees in order to align employee interests with shareholder
interests.
Information with respect to activity of the plans is as follows:
Options Shares
Available Under Average
for Grant Option SARs Price
- --------------------------------------------------------------------------------
Balance at 1/1/93 1,410,950 261,550 191,700 $31.27
Granted (312,000) 312,000 -- $36.24
SARs exercised -- (11,275) (11,275) $26.58
Options exercised -- (5,000) -- $29.24
Canceled 13,250 (13,250) (7,825) $32.58
- --------------------------------------------------------------------------------
Balance at 12/31/93 1,112,200 544,025 172,600 $34.20
- --------------------------------------------------------------------------------
Granted (360,500) 360,500 -- $31.86
SARs exercised -- (8,100) (8,100) $29.82
Options exercised -- (1,100) -- $24.69
Canceled 33,600 (33,600) (1,800) $34.78
- --------------------------------------------------------------------------------
Balance at 12/31/94 785,300 861,725 162,700 $33.25
- --------------------------------------------------------------------------------
Approved for grant 4,600,000 -- -- --
Granted (2,535,950) 2,535,950 -- $37.59
SARs exercised -- (41,475) (41,475) $28.44
Options exercised -- (15,775) -- $30.86
Canceled 34,500 (34,500) -- $33.15
- --------------------------------------------------------------------------------
Balance at 12/31/95 2,883,850 3,305,925 121,225 $36.65
- --------------------------------------------------------------------------------
At December 31, 1995, 121,225 SARs and 282,625 shares under option were
exercisable.
NOTE 15: Quarterly Financial Information (Unaudited)
1st QTR 2nd QTR 3rd QTR 4th QTR Full Year
- --------------------------------------------------------------------------------------------------------------------------------
1995
- ----
Revenues and Sales $443.1 $453.0 $471.5 $ 470.9 $1,838.5
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 94.6 $ 89.3 $ 88.9 $ 91.5 $ 364.3
- --------------------------------------------------------------------------------------------------------------------------------
Net (Loss) Income:
Income from Continuing Operations $ 46.7 $ 40.1 $ 41.3 $ 40.7 $ 168.8
Extraordinary Charge [see Note 2] -- -- -- (687.1) (687.1)
- --------------------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ 46.7 $ 40.1 $ 41.3 $(646.4) $ (518.3)
- --------------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings Per Share:
Income from Continuing Operations $ .72 $ .62 $ .64 $ .62 $ 2.60
Extraordinary Charge (1) -- -- -- (10.54) (10.59)
- --------------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings Per Share $ .72 $ .62 $ .64 $ (9.92) $ (7.99)
- --------------------------------------------------------------------------------------------------------------------------------
1994
- ----
Revenues and Sales $423.2 $427.8 $429.6 $ 436.4 $1,717.0
Operating Income $ 92.9 $ 94.6 $ 98.1 $ 88.8 $374.4
Net Income $ 43.5 $ 45.3 $ 47.2 $ 41.6 $177.6
Earnings Per Share $ .68 $ .71 $ .73 $ .65 $2.77
- --------------------------------------------------------------------------------------------------------------------------------
(1) (Loss) earnings per share is computed independently for the quarter based on
weighted average common shares outstanding for the quarter. The calculations
resulted in a difference of $.05 between loss per share for the quarter and
for the year.
SNET Annual Report 45
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL AND STATISTICAL DATA (UNAUDITED)
Dollars in Millions, Except as Noted 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Data
Revenues and sales $ 1,839 $ 1,717 $ 1,654 $ 1,614 $ 1,608
Costs and expenses(1) $ 1,128 $ 1,014 $ 1,359 $ 997 $ 1,044
Interest expense $ 86 $ 75 $ 91 $ 97 $ 102
Income taxes $ 110 $ 122 $ (44) $ 110 $ 86
Net (loss) income(2):
From continuing operations $ 169 $ 178 $ (44) $ 159 $ 123
Net (loss) income $ (518) $ 178 $ (318) $ 151 $ 124
(Loss) earnings per share (dollars)(2):
From continuing operations $ 2.60 $ 2.77 $ (.68) $ 2.56 $ 2.01
Net (loss) income $ (7.99) $ 2.77 $ (4.99) $ 2.44 $ 2.02
Dividends declared per share (dollars) $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76
Net cash provided by operating activities $ 439 $ 423 $ 479 $ 504 $ 427
Cash expended for capital additions $ 354 $ 282 $ 267 $ 290 $ 321
Depreciation and amortization $ 346 $ 329 $ 291 $ 250 $ 253
Property, plant and equipment, net $ 1,565 $ 2,712 $ 2,770 $ 2,767 $ 2,712
Total assets $ 2,724 $ 3,505 $ 3,762 $ 3,485 $ 3,451
Shareholders' equity $ 353 $ 953 $ 855 $ 1,254 $ 1,176
Long-term debt $ 1,182 $ 952 $ 984 $ 1,048 $ 1,072
- -----------------------------------------------------------------------------------------------------------------------------------
Statistical Data
Network access lines in service (thousands) 2,073 2,009 1,964 1,937 1,922
Annual growth 3.2% 2.3% 1.4% .8% .9%
Network interstate access minutes
of use (millions) 7,298 6,917 6,522 6,230 5,988
Annual growth 5.5% 6.1% 4.7% 4.0% 2.8%
Cellular subscribers (thousands) 323 166 88 68 57
Annual growth 94.6% 88.6% 29.4% 19.3% 26.7%
Operating earnings(3) $ 710 $ 703 $ 295 $ 617 $ 564
Telephone Company wireline cost per
access line (dollars)(4) $ 320 $ 340 $ 365 $ 359 $ 377
Return of average total capital --(5) 12.8% --(6) 10.3% 9.6%
Return on average equity --(5) 19.4% --(6) 12.5% 10.8%
Debt ratio(7) 80.0% 51.0% 59.9% 47.4% 51.2%
Pre-tax interest coverage (times) 4.2 5.0 .1 3.8 3.0
Average total debt cost 6.9% 6.8% 7.7% 7.8% 8.1%
Current ratio (times) .73 .88 .82 .84 .81
Average dividend yield 5.1% 5.4% 4.9% 5.4% 5.5%
Payout ratio --(5) 63.5% --(6) 72.1% 87.1%
Market price per share (dollars):
High $ 40.250 $ 36.250 $ 38.375 $ 38.000 $ 35.875
Low $ 31.750 $ 28.250 $ 33.625 $ 28.250 $ 29.000
Book value per share (dollars) $ 5.42 $ 14.77 $ 13.38 $ 19.79 $ 18.78
Average market price per share (dollars) $ 34.47 $ 32.63 $ 35.70 $ 32.70 $ 32.23
Average book value per share (dollars) $ 15.14 $ 14.26 $ 17.69 $ 19.49 $ 18.68
Average price/earnings ratio (times) --(5) 12 --(6) 13 16
Average trading volume 91,797 59,437 79,086 60,360 53,287
Number of shareholders 53,332 55,693 57,352 59,089 60,619
Telephone Company wireline employees 7,742 8,604 9,087 9,532 9,557
Total employees 9,070 9,797 10,476 11,216 11,224
- -----------------------------------------------------------------------------------------------------------------------------------
Certain amounts have been restated to reflect the discontinuance of Credit.
(1) Excludes depreciation and amortization. 1993 includes a charge of $355.0,
$204.2 or $3.21 per share after-tax, for restructuring. 1991 includes a
charge of $38.0, $21.6 or $.35 per share after-tax, for the cost of
employee separation plans.
(2) 1995 includes an extraordinary charge of $687.1, or $10.59 per share,
related to the discontinuance of SFAS No. 71. 1993 includes the
restructuring charge, discontinued operations of $10.3, or $.16 per share,
an extraordinary charge of $44.0, or $.69 per share and the cumulative
effect of accounting changes of $220.2, or $3.46 per share. 1991 includes
the cost of employee separation plans.
(3) Represents earnings before interest, taxes, depreciation and amortization.
Operating earnings 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 earnings would have been $650 in 1993.
(4) Excludes depreciation and amortization; 1993 also excludes the before-tax
restructuring charge.
(5) Not presented for 1995 based upon a loss per share. A return of 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 of 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 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%.
46 SNET Annual Report
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, Connecticut 06510 Symbol: SNG 100 Pearl Street
(203) 771-5200 Hartford, Connecticut 06103
Shareholder Information
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Meeting of Shareholders: Transfer Agent and Registrar: The Form 10-K may be obtained
May 8, 1996, 10:00 a.m. State Street Bank and Trust Company by contacting the Transfer Agent
SNET's General Office Building P.O. Box 8200 and Registrar.
300 George Street Boston, Massachusetts 02266
New Haven, Connecticut 06511 From anywhere in the continental U.S.: For Shareholder Information
1-800-243-1110 including latest recorded news
and information, call
1-800-SNG-6220
Security Analysts and Dividend Reinvestment
Portfolio Managers and Stock Purchase Plan
- -----------------------------------------------------------------------------------------------------------------------------------
Direct inquiries to: All owners of common stock are Shareholders do not pay any
Mr. James A. Magrone eligible for the plan, which allows brokerage or administrative fees
Director-Investor Relations participants to apply dividends and/or when purchasing additional shares
227 Church Street optional cash payments toward through the plan. You can obtain a
New Haven, Connecticut 06510 increased investment in the prospectus and enrollment forms by
(203) 771-4662 Corporation. contacting State Street Bank and
Trust Company, Plan Administrator.
Market and Dividend Data
- -----------------------------------------------------------------------------------------------------------------------------------
Market information was
obtained from the composite
tape, which encompasses
trading on the principal U.S.
stock exchanges as well as
offboard trading. Cash
dividends of $.44 a share were
declared for each quarter in
1995 and 1994. The number of
holders of SNET stock at
February 29, 1996 was 52,962.
Market Price
-----------------------------------------------------------------------------------
1995 1994
Quarter High Low Close Quarter High Low Close
-----------------------------------------------------------------------------------
First $34.500 $31.750 $33.375 First $36.250 $28.625 $29.000
Second $35.500 $32.375 $35.250 Second $33.750 $28.250 $30.500
Third $36.125 $32.625 $35.375 Third $34.750 $30.500 $33.625
Fourth $40.250 $35.125 $39.750 Fourth $35.750 $32.125 $32.375
SNET Annual Report 47
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
OTHER INFORMATION
Executive Officers of the Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
Daniel J. Miglio Chairman and Chief Executive Officer
Jean M. LaVecchia Senior Vice President--Organization Development
Fred T. Page Senior Vice President--Network Services
Ronald M. Serrano Senior Vice President--Communication, Information and Entertainment Group
Donald R. Shassian Senior Vice President and Chief Financial Officer
Representative Servicemarks and Trademarks
- -----------------------------------------------------------------------------------------------------------------------------------
SNET(R), We Go Beyond The Call(R), SmartLink(R), Totalphone, All Distance EVA(R) is a registered trademark of
SNET Personal Phone Service, and Simple Solutions are trademarks Stearn Stewart & Co.
I-SNET and SNET Internet are or servicemarks of The Southern New
trademarks or servicemarks of England Telephone Company. Page
Southern New England 2000(R) is a registered trademark of
Telecommunications Corporation. SNET Paging, Inc.
48 SNET Annual Report
[LOGO]
We go beyond the call
APPENDIX
(Pursuant to Rule 304 of Regulation S-T)
1. Page 11 contains a description in tabular form of a graph entitled
"Performance Graph" which represents the comparison of the cumulative total
shareholder return on the Company's Common Stock against the cumulative total
return of the Standard & Poor's 500 Stock Index and the Standard and Poor's
Telephone Index for the period of five years commencing December 31, 1990 and
ending December 31, 1995, which graph is contained in the paper format of this
Proxy Statement being sent to Shareholders.
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING TO BE HELD ON MAY 8, 1996 AT 10 A.M. IN THE
CORPORATION'S GENERAL OFFICE BUILDING, 300 GEORGE STREET,
NEW HAVEN, CONNECTICUT.
The undersigned hereby appoints Barry M. Bloom, James R. Greenfield, and Daniel
J. Miglio, and each or any of them an attorney, with full power to vote all
common stock of the undersigned in Southern New England Telecommunications
Corporation at the annual meeting of its shareholders on May 8, 1996, and at any
adjournment thereof, upon all matters that may properly come before the meeting,
including the matters described in the proxy statement furnished herewith. At
their discretion, the attorneys are authorized to vote upon such other business
as may properly come before the meeting. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR PROPOSALS 1, 2 AND 3 AND AGAINST PROPOSAL 4.
PLEASE SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY WHETHER OR NOT YOU EXPECT
TO ATTEND THE MEETING. YOU MAY NEVERTHELESS VOTE IN PERSON IF YOU ATTEND.
DO YOU HAVE ANY COMMENTS?
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
See reverse side.
PLEASE MARK VOTES AS IN THIS EXAMPLE [x]
1. Election of Directors
[ ] FOR [ ] WITHHOLD [ ] FOR ALL EXCEPT
W. ANDREWS, B. BLOOM, W. FENOGLIO, C. GAUDIANI AND D. MIGLIO
NOTE: If you do not wish your shares voted "FOR" a particular nominee(s), mark
the "For All Except" box and strike a line through the name of the nominee(s).
Your shares shall be voted for the remaining nominees.
RECORD DATE SHARES:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
2. RATIFICATION OF AUDITORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval of SNET 1996 Non-Employee Director Stock Plan
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL 4.
4. Shareholder proposal to eliminate classified Board
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Mark box at right if comments have been noted on the
reverse side of this card. [ ]
Please be sure to sign and date this Proxy.
Date
Shareholder sign here
Co-owner sign here
DETACH CARD AT THIS PERFORATION AND RETURN IN ENCLOSED ENVELOPE.