SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1995.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No .
Common stock, par value $1.00 per share: 65,094,144 shares
outstanding as of October 31, 1995
- 1 -
Form 10-Q -Part I Southern New England Telecommunications Corporation
PART I - FINANCIAL INFORMATION
Southern New England Telecommunications Corporation
("Corporation") was incorporated under the laws of the State of
Connecticut on January 7, 1986 and has its principal executive
office at 227 Church Street, New Haven, Connecticut 06510
(telephone number (203) 771-5200).
The condensed, consolidated financial statements on the following
pages have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and, in the
opinion of the management, include all adjustments, consisting of
a normal recurring nature necessary for fair presentation for
each period shown. The 1994 financial statements have been
reclassified to conform to the current-year presentation.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the
information presented not misleading. Operating results for any
interim periods, or comparisons between interim periods, are not
necessarily indicative of the results that may be expected for
full fiscal years. It is suggested that these condensed,
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in
the Corporation's 1994 Annual Report on Form 10-K.
- 2 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Statement of Income
(Unaudited)
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
Dollars in Millions, Except 1995 1994 1995 1994
Per Share Amounts
Revenues and Sales
Local service $ 161.8 $ 156.0 $ 479.2 $ 462.3
Network access 91.8 88.7 276.3 263.9
Intrastate toll 66.4 72.8 202.0 227.7
Publishing 45.6 44.6 135.7 135.0
Sales and other 105.9 67.5 274.4 191.7
Total Revenues and Sales 471.5 429.6 1,367.6 1,280.6
Costs and Expenses
Operating and maintenance 279.6 236.0 797.0 708.9
Depreciation and amortization 88.3 81.6 255.3 243.6
Taxes other than income 14.7 13.9 42.5 42.5
Total Costs and Expenses 382.6 331.5 1,094.8 995.0
Operating Income 88.9 98.1 272.8 285.6
Interest 24.3 18.4 61.3 57.2
Income Before Income Taxes 64.6 79.7 211.5 228.4
Income taxes 23.3 32.5 83.4 92.4
Net Income $ 41.3 $ 47.2 $ 128.1 $ 136.0
Weighted Average Common Shares
Outstanding (in thousands) 64,957 64,271 64,800 64,130
Earnings Per Share $ .64 $ .73 $ 1.98 $ 2.12
Dividends Declared Per Share $ .44 $ .44 $ 1.32 $ 1.32
The accompanying notes are an integral part of these financial statements.
- 3 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Balance Sheet
Dollars in Millions, Except September 30, 1995 December 31, 1994
Per Share Amounts (Unaudited)
Assets
Cash and temporary cash investments $ 25.7 $ 6.7
Accounts receivable, net of allowance
for uncollectibles of $32.1 and $29.8, 328.5 294.4
respectively
Materials, supplies and inventories 25.3 26.4
Prepaid publishing 37.4 39.0
Deferred income taxes 62.8 101.8
Prepaid taxes and other assets 35.0 29.4
Total Current Assets 514.7 497.7
Property, plant, and equipment, at cost 4,489.5 4,372.6
Less: Accumulated depreciation 1,808.6 1,660.4
Property, Plant and Equipment, net 2,680.9 2,712.2
Intangible assets, net 420.0 11.1
Deferred charges, leases and other assets 214.6 283.6
Total Assets $3,830.2 $3,504.6
Liabilities and Shareholders' Equity
Debt maturing within one year $ 191.6 $ 39.6
Accounts payable and accrued expenses 206.8 205.1
Restructuring charge - current 51.8 145.5
Advance billings and customer deposits 60.5 56.7
Accrued compensated absences 36.7 36.8
Other current liabilities 90.8 84.6
Total Current Liabilities 638.2 568.3
Long-term debt 1,182.5 952.1
Deferred income taxes 339.6 375.0
Postretirement benefits other than 308.2 308.2
pension
Restructuring charge - long-term 18.6 119.4
Unamortized investment tax credits 37.7 42.9
Other liabilities and deferred credits 285.7 185.8
Total Liabilities 2,810.5 2,551.7
Common stock; $1.00 par value;
300,000,000 shares authorized;
67,705,567 and 67,264,435 issued, 67.7 67.3
respectively
Proceeds in excess of par value 691.9 677.8
Retained earnings 425.3 381.8
Less: Treasury stock; 2,758,512 shares, (104.7) (104.7)
at cost
Unearned compensation related to (60.5) (69.3)
ESOP
Total Shareholders' Equity 1,019.7 952.9
Total Liabilities and Shareholders'Equity $3,830.2 $3,504.6
The accompanying notes are an integral part of these financial statements.
- 4 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Statement of Changes In
Shareholders' Equity
(Unaudited)
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
Dollars in Millions 1995 1994 1995 1994
Common Stock, Par Value
Balance at Beginning of Period $ 67.6 $ 66.9 $ 67.3 $ 66.6
Common shares issued:
Dividend reinvestment plan .1 .2 .3 .4
Savings and incentive plans - - .1 .1
Balance at End of Period $ 67.7 $ 67.1 $ 67.7 $ 67.1
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 687.9 $ 666.2 $ 677.8 $ 656.7
Common shares issued, at market:
Dividend reinvestment plan 4.0 3.7 11.4 11.3
Savings and incentive plans - .9 2.7 2.8
Balance at End of Period $ 691.9 $ 670.8 $ 691.9 $ 670.8
Retained Earnings
Balance at Beginning of Period $ 412.2 $ 348.8 $ 381.8 $ 315.7
Net income 41.3 47.2 128.1 136.0
Dividends declared (28.5) (28.3) (85.5) (84.7)
Tax benefit of dividends declared
on unallocated shares held in ESOP .3 .4 .9 1.1
Balance at End of Period $ 425.3 $ 368.1 $ 425.3 $ 368.1
Treasury Stock
Balance at Beginning and End of $(104.7) $(104.7) $(104.7) $(104.7)
Period
Unearned Compensation Related To
Employee Stock Ownership Plan
Balance at Beginning of Period $ (63.4) $ (73.4) $ (69.3) $ (79.7)
Reduction of ESOP debt 4.0 3.6 11.1 10.2
ESOP earned compensation accrual (1.1) (.9) (2.3) (1.2)
Balance at End of Period $ (60.5) $ (70.7) $ (60.5) $ (70.7)
Total Shareholders' Equity $1,019.7 $ 930.6 $1,019.7 $ 930.6
The accompanying notes are an integral part of these financial statements.
- 5 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Condensed, Consolidated Statement of Cash Flows
(Unaudited)
For the 9 Months Ended
September 30,
Dollars in Millions 1995 1994
Operating Activities
Net income $ 128.1 $ 136.0
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 255.3 243.6
Restructuring payments (62.7) (42.7)
Change in operating assets and liabilities, (5.2) (19.1)
net
Other, net 27.3 4.1
Net Cash Provided by Operating Activities 342.8 321.9
Investing Activities
Purchase of cellular properties (455.6) -
Cash expended for capital additions (248.6) (185.0)
Proceeds from asset sales 65.1 2.7
Repayment of loan made to ESOP .9 .8
Other, net 3.7 18.9
Net Cash Used by Investing Activities (634.5) (162.6)
Financing Activities
Net proceeds from short-term debt 152.3 -
Proceeds from long-term debt 300.0 -
Repayments of long-term debt (65.9) (291.3)
Cash dividends (73.4) (72.8)
Other, net (2.3) (.1)
Net Cash Provided (Used) by Financing 310.7 (364.2)
Activities
Increase (decrease) in cash and cash 19.0 (204.9)
equivalents
Cash and cash equivalents at beginning 6.7 224.8
of period
Cash and Cash Equivalents at End of Period $ 25.7 $ 19.9
Income Taxes Paid $ 63.6 $ 79.5
Interest Paid $ 56.4 $ 59.7
The accompanying notes are an integral part of these financial statements.
- 6 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 1: Financial Data on Subsidiaries
Selected financial data on the Corporation's subsidiaries is summarized as
follows:
For the 3 Months Ended For the 9 Months Ended
September 30, September 30,
Dollars in Millions 1995 1994 1995 1994
Revenues and Sales:
The Southern New England
Telephone Company $384.0 $367.6 $1,132.0 $1,108.1
Cellular operations (1) 45.7 26.1 108.9 70.7
SNET Diversified Group, Inc. (2) 26.2 26.2 80.2 75.5
SNET Real Estate, Inc. 1.7 3.1 11.9 9.6
All others (3) 13.9 6.6 34.6 16.7
Total $471.5 $429.6 $1,367.6 $1,280.6
Operating Earnings (Loss) (4) :
The Southern New England
Telephone Company $177.1 $163.6 $518.1 $491.1
Cellular operations (1) (3.0) 6.6 (3.3) 16.5
SNET Diversified Group, Inc. (2) (3.3) 3.8 (4.7) 8.0
SNET Real Estate, Inc. 1.6 2.4 10.9 7.2
All others (3) 4.8 3.3 7.1 6.4
Total (5) $177.2 $179.7 $528.1 $529.2
(1) Includes the Corporation's wholesale and retail cellular
businesses, SNET Cellular, Inc. ("Cellular") and SNET
Mobility, Inc., net of cellular intercompany amounts.
(2) Includes Business Communications, SNET Premium Services and
SNET Multi-Media Services ("Multi-Media").
(3) Includes SNET America, Inc. ("SNET America"), SNET Paging,
Inc. ("Paging") and Parent Company operations.
(4) Represents earnings (loss) before interest, taxes,
depreciation and amortization. Operating earnings (loss) is
not a generally accepted accounting principle measurement.
Management provides this measurement for informational
purposes only.
(5) Operating earnings (loss), normalized to exclude special
items, is $536.4 million for the 9 month period ended
September 30, 1995. Special items include: an $11.0 million
before-tax charge for litigation matters recorded by The
Southern New England Telephone Company ("Telephone Company");
a $1.4 million before-tax charge for state tax adjustments
recorded by the Parent Company; and a $4.1 million before-tax
gain on the sale of real estate recorded by SNET Real Estate, Inc.
- 7 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 2: Acquisitions and Sale of Certain Assets
In July 1995, Cellular purchased from Bell Atlantic Corporation,
NYNEX Corporation and Richmond Telephone Company, for
approximately $456 million in the aggregate, certain cellular
properties in Rhode Island and New Bedford and Pittsfield,
Massachusetts, and an increased interest in Springwich Cellular
Limited Partnership ("Springwich"). Since the acquisition date,
Cellular and SNET Springwich, Inc. a wholly-owned subsidiary of
Cellular, together hold a 98.6% partnership interest in
Springwich. In total, these acquisitions expanded Cellular's
service area by 70% or approximately 2.3 million POPs (population
equivalents) along the Boston to New York corridor.
The acquisitions were financed with approximately $456 million of
short-term debt issued in June 1995. Short-term debt of $300
million 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 are included
in the consolidated financial statements subsequent to the
acquisition date.
The following unaudited pro forma consolidated results of
operations have been 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 9 Months Ended
September 30,
Dollars in Millions, Except Per 1995 1994
Share Amounts
Revenues and Sales $1,389.0 $1,309.9
Income Before Income Taxes $ 194.1 $ 204.0
Net Income $ 117.9 $ 121.6
Earnings Per Share $ 1.82 $ 1.90
On June 30, 1995, Paging and TNI Associates, Inc. ("TNIA"), a
wholly-owned subsidiary of Paging, completed the sale of
substantially all of the network assets of Paging and TNIA,
including wireless messaging network transmitters, switches, and
operating licenses, as well as all reseller accounts and TNIA's
retail accounts, to Paging Network of New York, Inc. Paging will
retain its retail accounts and will continue, as a reseller, to
market paging services under its Page 2000[R] brand name.
Note 3: Intangible Assets
As of September 30, 1995, intangible assets consisted primarily
of cellular licenses, customer lists and goodwill of approximately
$425 million resulting from the cellular acquisitions completed
in July 1995. The intangible assets 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 on June 30, 1995 [see Note 2].
Accumulated amortization was $5.7 million and $3.7 million as of
September 30, 1995 and December 31, 1994, respectively.
Management periodically reviews the carrying value and lives of
all intangible assets based on expected future operating results.
- 8 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 4: Restructuring Charge
In December 1993, the Corporation recorded a restructuring charge
of $355.0 million before-tax, $204.2 million after-tax, or $3.21
per share, to provide for a comprehensive restructuring program.
The program included costs to be incurred to facilitate employee
separations involving approximately 2,500 employees. The charge
also included: incremental costs of implementing appropriate
reengineering solutions; designing and developing new processes
and tools to continue the Corporation's provision of excellent
service; and retraining of the remaining employees to help them
meet the changing demands of customers.
The original 1993 restructuring charge and costs incurred during
1994 are summarized as follows:
Balance at Costs incurred Balance at
Dollars in Millions Dec. 31, 1993 during 1994 Dec. 31, 1994
Employee separation costs $170.0 $41.8 $128.2
Process and systems re- 145.0 35.0 110.0
engineering
Exit and other costs 40.0 13.3 26.7
Total $355.0 $90.1 $264.9
In April 1995, the Corporation ratified a contract with the
Connecticut Union of Telephone Workers ("CUTW") which included a
voluntary "early-out offer" [see Employee Relations]. The
early-out offer 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
early-out offer 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 a
result of the early-out offer, total employee separations under
the restructuring program are expected to approximate up to 4,000
employees.
The enhanced pension and postretirement benefits under the early-
out offer are expected (from now until June of 1996) to result in
a total non-cash charge of approximately $78 million, net of
settlement gains of approximately $100 million. In the third
quarter of 1995, a non-cash net charge of $135 million was
recorded. The charge included pension enhancements and
curtailment losses of $154 million to reflect the acceptance of
the early-out offer and settlement gains of $19 million to
account for the estimated lump-sum pension payments made for
employee separations during the third quarter. Future
adjustments to the restructuring charge are expected to include a
postretirement curtailment loss of $24 million and a settlement
gain of $58 million in the fourth quarter of 1995 and a
settlement gain of $23 million in the first half of 1996.
A summary of costs incurred in 1995 under the restructuring
program is as follows:
For the 3 Months For the 9 Months
Dollars in Millions Ended September 30, 1995 Ended September 30, 1995
Employee separation costs $137.0 $142.0
Process and systems re- 19.7 53.6
engineering
Exit and other costs 1.6 (1.1)
Total Costs Incurred $158.3 $194.5
- 9 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 4: Restructuring Charge (con't)
Costs incurred for employee separations included payments for
severance, unused compensated absences and health care
continuation, as well as the non-cash net charge discussed
previously. Process and systems reengineering costs included
incremental costs incurred in connection with the execution of
numerous reengineering programs involving network operations,
customer service, repair and support processes. Exit and other
costs included primarily a non-cash adjustment of approximately
$3 million in connection with the completed sale of substantially
all of the assets of Paging and TNIA [see Note 2]. The
adjustment reduced the total non-cash charge recorded in 1994 for
exiting the paging network business to approximately $9 million.
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.
As of September 30, 1995, approximately 1,640 employees (715
management and 925 bargaining-unit employees, or 20.0% and 13.5%
of the respective total work force at the inception of the
restructuring program) left the Corporation under severance plans
and retirement incentives. Of the total, approximately 520
bargaining-unit employees left under the early-out offer.
Approximately 2,160 employees will leave under the early-out
offer during the next three quarters (1,560 employees in the
fourth quarter of 1995 and 600 employees in the first half 1996).
The Corporation staggered separation dates through June 1996 to
ensure that service to customers would not be adversely affected.
The Corporation anticipates savings of approximately $120 million
from total employee separations since the inception of the
restructuring program. These savings are net of costs of
permanent and provisional employees filling core positions and
positions in areas being reengineered. To date, savings of
approximately $40 million have been realized. These anticipated
savings will also be substantially offset by costs related to the
growth in business, the construction of I-SNET (a statewide
information superhighway) and the cost of adding other employees
with different skills.
Cash expenditures for the restructuring program are estimated to
be $100 million and $90 million in 1995 and 1996, respectively.
The early-out offer will be funded primarily by the pension and
postretirement plans. Incremental capital expenditures related
to the restructuring program approximated $20 million for the
first nine months of 1995. 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 $50 million over the remaining life of the program.
The Corporation determined that no additional provision for
employee separations is required as a result of evaluating the
net impact of the early-out offer on the restructuring charge.
The response to the early-out offer also accelerated work force
level objectives, therefore; the utilization of the restructuring
charge is expected to be completed in 1996. It is also expected
that shifts within reserve categories may occur. The Corporation
believes that the restructuring charge balance of $70.4 million
as of September 30, 1995 plus the expected net adjustments of
approximately $57 million, discussed previously, are adequate for
future estimated costs under the 1993 restructuring program.
- 10 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Notes To Condensed, Consolidated Financial Statements
(Unaudited)
Note 5: Income Taxes
In the second quarter of 1995, new state income tax rates were
enacted to accelerate the reduction of current rates. The
current state income tax rate of 11.25% will gradually decrease
to 7.5% in 2000. For the nine month period ended September 30,
1995, income taxes included a provision to adjust deferred tax
balances for the effect of the change in state income tax rates.
Note 6: Litigation
On June 14, 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. A decision assessing the exact amount to be paid to
employees is pending. The Corporation and the Telephone Company
are appealing this decision. The Telephone Company recorded a
liability of $11.0 million as its anticipated cost of total
damages for this and other litigation matters, which was charged
to operating and maintenance expenses in the second quarter of
1995.
- 11 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of quarter ended September 30, 1995 vs. quarter ended
September 30, 1994
Results of Operations
The Corporation's consolidated net income decreased 12.5% to
$41.3 million or $0.64 per share. Net income included a negative
impact of $9.9 million or $0.15 per share related to cellular
acquisitions that were completed in July 1995.
Revenues and Sales
Local service revenues increased $5.8 million, or 3.7%, due
primarily to growth experienced in access lines in service.
Access lines in service grew 2.9% to approximately 2,055,700 at
September 30, 1995 from approximately 1,996,900 at September 30,
1994. Also contributing to the increase in local service
revenues was an increase in subscriptions to premium services,
such as SmartLink[R]. In addition, revenues from maintenance of
inside wiring for residence customers increased due to increased
rates effective January 1995.
Network access revenues, generated primarily from interstate and
intrastate services, increased $3.1 million, or 3.5%. Interstate
access revenues increased $1.1 million due primarily to an
increase in interstate minutes of use of approximately 7% and
growth in access lines in service, discussed above. Partially
offsetting the impact of the increase in minutes of use was a
decrease in interstate access tariff rates implemented on August
1, 1995, in accordance with the Telephone Company's 1995 annual
Federal Communications Commission ("FCC") filing under price cap
regulation. In addition, intrastate access revenues increased
$2.0 million due primarily to an increase in intrastate minutes
of use as a result of growth in competition for intrastate long-
distance services.
Intrastate toll revenues, which include revenues primarily from
toll and WATS services, decreased $6.4 million, or 8.8%. Toll
message revenues decreased $5.4 million due primarily to reduced
intrastate toll rates and decreased volume. The decline in rates
was attributable to the introduction of several discount calling
plans in 1994 that provide competitive options to business and
residence customers. Toll message volume decreased 3.4%
primarily as a result of decreased market share offset partially
by the migration of customers from WATS services. WATS revenues
decreased $1.0 million due primarily to lower message volume
resulting from the shift to lower priced services and the impact
of competition.
Sales and other revenues, which include sales primarily from the
Corporation's non-telephone businesses, increased $38.4 million,
or 56.9%. Sales of cellular operations increased $19.6 million,
or 75.1%, net of cellular intercompany amounts, due mainly to
strong growth of 66.8% in the pre-acquisition customer base and
the impact of the cellular acquisitions completed in July 1995.
Including the new customers from the expanded cellular coverage
area, the customer base increased approximately 120%. In
addition, sales of SNET America, a reseller of interstate and
international long-distance services to Connecticut customers,
increased as a result of continued growth in the customer base.
Operating and Maintenance
Operating and maintenance expenses are comprised primarily of
employee-related costs, including wages and benefits. Cost of
goods sold and general and administrative expenses, including
marketing, represent the remaining portion of these expenses. On
a consolidated basis, operating and maintenance expenses
increased $43.6 million, or 18.5%.
- 12 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of quarter ended September 30, 1995 vs. quarter ended
September 30, 1994
Operating and Maintenance (con't)
The Telephone Company's operating and maintenance expenses
increased $2.1 million or 1.1%. Approximately $2 million of this
increase was due to the net effect of an increase in contracted
services for systems operations (i.e., outsourcing of data center
operations), an increase in advertising and a general decrease in
expenses due to cost-containment efforts. Employee-related costs
for the Telephone Company were flat. A 5.0% wage rate increase
for bargaining-unit employees, effective October 1994 in
accordance with the 1992 CUTW contract, was offset by a 3.5%
decrease in the average work force.
The non-telephone businesses' operating and maintenance expenses
increased $41.5 million or 91.9%. Excluding employee-related
costs, cellular operations experienced increased expenses of
approximately $25 million, which includes approximately $13
million related to the transition and integration of the
operations of the cellular acquisitions. The increase in core
business expenses was due primarily to costs associated with an
expanding customer base, including additional marketing and
distribution expenses. Also contributing to the higher expenses
were increased marketing and operating efforts associated with
SNET America and the multimedia trial of video-on-demand
services. Employee-related costs of the non-telephone businesses
increased approximately $2 million as a result of wage increases
previously mentioned and increases in the average work force,
particularly in Cellular, Multi-Media and SNET America.
Depreciation and Amortization
Depreciation and amortization expense increased $6.7 million, or
8.2%. This increase was due primarily to depreciation and
amortization expense of $6.4 million on assets acquired in the
cellular acquisitions, including primarily cellular licenses.
Interest Expense
Interest expense increased $5.9 million, or 32.1% due primarily
to the issuance of commercial paper and medium-term notes in
connection with the cellular acquisitions [see Note 2]. Interest
on the financing of the cellular acquisitions approximated $7
million. This increase was partially offset by interest savings
realized from repayment of debt related to Paging and SNET Real
Estate, Inc. ("Real Estate") operations.
Income Taxes
The combined federal and state effective tax rate for 1995 was
36.1% compared with 40.8% for 1994. Income taxes in 1995
included an adjustment made to reflect the settlement of tax
matters. In addition, a state income tax credit was recognized
related to personal property taxes paid on certain data
processing equipment.
- 13 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of nine months ended September 30, 1995 vs. nine
months ended September 30, 1994
Results of Operations
The Corporation's consolidated net income decreased 5.8% to
$128.1 million or $1.98 per share. Net income included a
negative impact of $9.9 million or $0.15 per share related to the
cellular acquisitions that were completed in July 1995. Net
income also included the impact of three special items: a $6.3
million after-tax or $0.10 per share charge associated primarily
with a court ruling on the Telephone Company's labor practices
and other litigation matters; a $3.6 million after-tax or $0.06
per share charge for state tax adjustments; and a $2.4 million
after-tax or $0.04 per share gain on the sale of real estate.
Revenues and Sales
Local service revenues increased $16.9 million, or 3.7%, due
primarily to growth experienced in access lines in service.
Access lines in service grew 2.9% to approximately 2,055,700 at
September 30, 1995 from approximately 1,996,900 at September 30,
1994. Also contributing to the increase in local service
revenues was an increase in subscriptions to premium services,
such as SmartLink[R]. In addition, revenues from maintenance of
inside wiring for residence customers increased due to increased
rates effective January 1995.
Network access revenues, generated primarily from interstate and
intrastate services, increased $12.4 million, or 4.7%.
Interstate access revenues increased $5.5 million due primarily
to an increase in interstate minutes of use of approximately 5%
and growth in access lines in service, discussed above. These
increases were partially offset by decreases in interstate access
tariff rates. These decreases, effective July 1, 1994 and August
1, 1995, were in accordance with the Telephone Company's annual
FCC filings under price cap regulation for 1994 and 1995,
respectively. In addition, intrastate access revenues increased
$6.9 million due primarily to an increase in intrastate minutes
of use as a result of growth in competition for intrastate long-
distance services.
Intrastate toll revenues, which include revenues primarily from
toll and WATS services, decreased $25.7 million, or 11.3%. Toll
message revenues decreased $19.7 million due primarily to reduced
intrastate toll rates and decreased volume. The decline in rates
was attributable to the introduction of several discount calling
plans in 1994 that provide competitive options to business and
residence customers. Toll message volume decreased 3.7%
primarily as a result of increased competition offset partially
by the migration of customers from WATS services. WATS revenues
decreased $4.6 million due primarily to lower message volume
resulting from the shift to lower priced services and the impact
of competition.
Sales and other revenues, which include sales primarily from the
Corporation's non-telephone businesses, increased $82.7 million,
or 43.1%. Sales of cellular operation increased $38.2 million,
or 54.0%, net of cellular intercompany amounts, due mainly to
strong growth of 66.8% in the preacquisition customer base and
the impact of the cellular acquisitions. Including the new
customers from the expanded cellular coverage area, the customer
base increased approximately 120%. Sales of SNET America also
increased as a result of continued growth in the customer base.
- 14 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of nine months ended September 30, 1995 vs. nine
months ended September 30, 1994
Operating and Maintenance
Operating and maintenance expenses are comprised primarily of
employee-related costs, including wages and benefits. Cost of
goods sold and general and administrative expenses, including
marketing, represent the remaining portion of these expenses. On
a consolidated basis, operating and maintenance expenses
increased $88.1 million, or 12.4%. Excluding the $11.0 million
before-tax litigation charge, operating and maintenance expenses
increased $77.1 million, or 10.9%.
The Telephone Company's operating and maintenance expenses,
excluding the litigation charge, decreased $14.3 million or 2.5%.
Excluding employee-related costs, operating and maintenance
expenses decreased approximately $17 million due primarily to
cost-containment efforts in areas such as contract services and
publishing. Partially offsetting the decrease was an increase in
employee-related costs of approximately $3 million. This
increase was primarily attributable to a 5.0% wage rate increase
for bargaining-unit employees effective October 1994 in
accordance with the 1992 CUTW contract, and to a lesser extent,
an average 4.0% salary increase for management employees
effective April 1994. Partially offsetting these increases was a
2.2% decrease in the average work force. Employee-related cost
savings associated with the restructuring program are anticipated
to continue as additional employee separations are expected to
occur through June of 1996 [see Note 4].
The non-telephone businesses' operating and maintenance expenses
increased $91.4 million or 69.1%. Excluding employee-related
costs, cellular operations experienced increased expenses of
approximately $52 million, which includes approximately $13
million related to the integration and operation of the cellular
acquisitions. The increase in core business expenses was due
primarily to costs associated with an expanding customer base,
including additional marketing and distribution expenses. Also
contributing to the higher expenses were increased marketing and
operating efforts associated with SNET America and the multimedia
trial. Employee-related costs of the non-telephone businesses
increased approximately $5 million as a result of wage increases
previously mentioned and increases in the average work force,
particularly in Cellular, Multi-Media and SNET America.
Depreciation and Amortization
Depreciation and amortization expense increased $11.7 million, or
4.8%. This increase was due primarily to depreciation and
amortization expense of $6.4 million on assets acquired in the
cellular acquisitions, including primarily cellular licenses. To
a lesser extent, this increase resulted from revised depreciation
rate schedules for the Telephone Company's intrastate plant, as
approved by the DPUC, effective January 1, 1995. Higher levels
of property, plant and equipment, including wireless cell sites,
also contributed to the increase.
Interest Expense
Interest expense increased $4.1 million, or 7.2% due primarily to
the issuance of commercial paper and medium-term notes in
connection with the cellular acquisitions [see Note 2]. Interest
on the financing of the cellular acquisitions approximated $7
million. This increase was partially offset by interest savings
realized from repayment of debt related to Paging and Real Estate
operations.
- 15 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of nine months ended September 30, 1995 vs. nine
months ended September 30, 1994
Income Taxes
The combined federal and state effective tax rate for 1995 was
39.4% compared with 40.5% for 1994. Income taxes in 1995
included an adjustment made to reflect the settlement of tax
matters and a provision to adjust deferred tax balances for the
change in the enacted state income tax rate discussed previously.
In addition, a state income tax credit was recognized related to
personal property taxes paid on certain data processing
equipment.
Comparison of balances as of September 30, 1995 vs. December 31,
1994
Accounts receivable
Accounts receivable increased $34.1 million due primarily to
timing of cash collections of the Telephone Company's accounts
receivable.
Deferred income taxes
Deferred income taxes (current asset) decreased $39.0 million due
primarily to costs incurred during 1995 under the restructuring
program [see Note 4].
Intangible assets
Intangible assets increased $408.9 million due primarily to the
addition of approximately $425 million in cellular licenses,
customer lists and goodwill in connection with the cellular
acquisitions partially offset by the sale of paging operating
licenses [see Note 3].
Deferred charges, leases and other assets
Deferred charges, leases and other assets decreased $69.0
million. In connection with the early-out offer, a net pension
curtailment loss was recognized and charged against the
restructuring reserve in the third quarter of 1995 [see Note 4].
This adjustment resulted in the reclassification of the
bargaining-unit prepaid pension asset to an accrued pension
liability. A decrease in the Telephone Company's regulatory
asset, due primarily to the change in state income tax rates,
also contributed to the decrease.
Debt maturing within one year
Debt maturing within one year increased $152.0 million due
primarily to increased commercial paper outstanding in connection
with the cellular acquisitions [see Note 2].
Other liabilities and deferred credits
Other liabilities and deferred credits increased $99.9 million
due primarily to an increase in the accrued pension liability
caused by the reclassification of the bargaining-unit prepaid
pension asset to a liability discussed previously.
- 16 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $342.8
million during the nine months ended September 30, 1995 as
compared with $321.9 million during the nine months ended
September 30, 1994. The primary use of corporate funds continued
to be capital expenditures.
For the nine months ended September 30, 1995, cash outlays
related to the Corporation's restructuring charge recorded in
December 1993 amounted to $62.7 million. Substantially all of
the expenditures related to incremental costs incurred for
executing numerous reengineering programs during the first three
quarters of 1995. These expenditures were funded from cash flows
from operations. Management anticipates that cash expenditures
for the restructuring program will approximate $100 million and
$90 million in 1995 and 1996, respectively, and will be funded
from operations. The early-out offer will be funded primarily by
the pension and postretirement plans.
The Corporation's ratio of debt to total capitalization increased
to 57.4% at September 30, 1995 compared with 51.0% at December
31, 1994. The increase in the debt ratio was due primarily to
the proceeds from debt issued to acquire the cellular properties
for approximately $456 million [see Note 2]. The repayment of
long-term debt of $65.9 million primarily with proceeds from the
sale of paging and real estate assets partially offset the
increase in debt. For the third quarter of 1995, the
Corporation's Board of Directors declared a dividend of $0.44 per
share.
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 million in lines of credit provided by a syndicate of
banks. As of September 30, 1995, the entire $570.0 million was
available.
In July 1995, the Corporation filed a shelf registration
statement with the SEC to sell up to $470.0 million in medium-
term notes. Pursuant to the shelf registration, the Corporation
sold $300.0 million of these medium-term notes on August 11,
1995. The proceeds were used to replace a portion of the short-
term debt and to establish permanent financing of the
acquisitions discussed in Note 2.
Management believes that the Corporation has adequate internal
and external resources to finance the anticipated requirements of
business development. Capital additions, restructuring costs,
dividends and maturing debt are expected to be funded primarily
with cash from operations during 1995. The Corporation also has
access to external resources including lines of credit and long-
term public financing.
Competition
On May 26, 1994, Public Act 94-83 ("Act") was enacted providing a
new regulatory framework for the Connecticut telecommunications
industry. The Act, which took effect on July 1, 1994, represents
a broad strategic response to the changes facing the
telecommunications industry in Connecticut based on the premise
that broader participation in the Connecticut telecommunications
market will be more beneficial to the public than will broader
regulation. The Act opens Connecticut telecommunications
services to full competition, including local phone service
currently provided primarily by the Telephone Company, and
encourages the DPUC to adopt alternative forms of regulation for
telephone companies, including the Telephone Company's non-
competitive and emerging competitive services.
- 17 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The DPUC has conducted, and is conducting, a number of
proceedings, in two phases, to implement the Act. In the
competitive phase, the DPUC addressed competition in the areas
of: local exchange service; alternative operator services and
customer owned coin operated telephone service; universal service
and lifeline program policy issues; unbundling of local exchange
carriers' ("LECs") local networks; and reclassification of LECs'
products and services into competitive, emerging competitive and
non-competitive categories. During the alternative regulation
phase, currently underway, the Telephone Company submitted to the
DPUC on June 19, 1995 an alternative regulation plan that will
replace rate of return regulation with price regulation for non-
competitive and emerging competitive services. The plan also
indicates that the Telephone Company will not increase the price
of local service before 1998. In addition, the alternative
regulation phase will involve a complete financial review of the
Telephone Company and will address cost of service, capital
recovery and service standards. A final decision from the DPUC
is expected in early 1996.
At this time, four telecommunication providers have been granted
a certificate of public convenience and necessity for local
service and two additional applications are pending before the
DPUC. In addition, on October 26, 1995, AT&T publicly announced
that it will apply with the DPUC to provide local phone service
throughout most of Connecticut. AT&T is expected to be a
formidable provider of local phone service initially to business
customers. The effect of increased competition on the
Corporation's results of operations cannot be predicted at this
time. While some customers will purchase services from
competitors, the Corporation expects that usage of its network
will increase and that increased network revenues will partially
offset loss of revenues from end-user customers. Local service
competition is expected to begin by the end of 1995 under the
framework resulting from the state regulation initiatives
currently underway.
Since the July 1, 1993 effective date of "10XXX" competition,
over 70 telecommunications providers have received approval from
the DPUC to offer "10XXX" or other competitive intrastate long-
distance services. In addition, over 40 companies have filed for
initial certificates of public convenience and necessity and are
awaiting DPUC approval. Increasing competition in intrastate
long-distance service and the Telephone Company's reduction in
intrastate toll rates will continue to place significant downward
pressure on the Telephone Company's intrastate toll revenues as
will the implementation of intrastate equal access, which is
required to be implemented for all dual preferred interexchange
carrier capable switches no later than December 1, 1996. Since
the introduction of "10XXX" competition, major carriers have
increased their marketing efforts in Connecticut to sell
intrastate long-distance services primarily to residential
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. Additionally,
the Telephone Company, working with its affiliate SNET America,
realigned its discount and rate structures to provide Connecticut
customers with SNET All Distance[R], a seamless toll service product
line which includes a discount structure that can be applied to
intrastate, interstate and international calling each month.
- 18 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management expects to see continued movement toward a fully
competitive telecommunications marketplace, both on an
interexchange and intraexchange basis. The Telephone Company's
ability to compete is dependent upon regulatory reform that will
allow pricing flexibility to meet competition and provide a level
playing field with similar regulation for similar services and
with reduced regulation to reflect an emerging competitive
marketplace. The Act and regulatory proceedings that flow from
it should produce a telecommunications marketplace in Connecticut
that, by providing equal opportunity to all competitors, will
work to benefit Connecticut consumers.
Regulatory Matters
Federal Regulation Initiatives
In 1995, the FCC adopted an interim plan for interstate access
rates requiring the LECs to incorporate higher productivity
targets into their rates. The interim plan requires LECs to
choose from among three productivity factors: 4.0%, 4.7% or
5.3%. These factors are subtracted from inflation-based price
increases allowed each year to account for increasing
productivity. If either the 4.0% or 4.7% factor is chosen, LECs
must share 50% of earnings above a 12.25% rate of return. In
addition, all earnings above 13.25% and 16.25%, respectively,
will be returned. If the 5.3% factor is chosen, all earnings can
be retained without sharing. In addition, companies are required
to reinitialize their price cap index ("PCI") on a one-time basis
by reducing the PCI by 0.7% for each prior year in which they
elected the 3.3% factor. The maximum PCI reduction over the four
year price cap period would therefore be 2.8%. The Telephone
Company has elected a 3.3% productivity factor each year since
entering price cap regulation in 1991. Accordingly, the
Telephone Company is required to reinitialize its PCI downward by
2.8%.
In September 1995, the FCC released a Further Notice of Proposed
Rulemaking that sought comment on changes to the established
price cap plan including productivity measurements, sharing,
common line formula and exogenous costs. The FCC is expected to
adopt new price cap rules in 1996.
The Telephone Company's 1995 annual interstate access tariff
filing under 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 before any sharing is required. This filing is expected
to decrease interstate network access revenues by approximately
$10 million for the period August 1, 1995 to June 30, 1996.
Management expects this decrease to be at least partially offset
by increased demand.
On September 1, 1995, the Telephone Company filed a request to
amend its previously approved application to expand its marketing
trial of providing video dialtone service to an additional
150,000 homes in two counties in Connecticut. In the new
application, the Telephone Company focused on key issues related
to providing capacity to video programmers at a time when digital
capacity is not commercially viable or technically available.
- 19 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Effects of Regulatory Accounting
The Telephone Company gives accounting recognition to the actions
of regulatory authorities where appropriate, as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 71
"Accounting for the Effects of Certain Types of Regulation."
Under SFAS No. 71, the Telephone Company records certain assets
and liabilities because of actions of regulatory authorities.
More significantly, amounts charged to operations for
depreciation expense reflect estimated lives and methods
prescribed by regulatory authorities rather than those consisting
of useful and economic lives that might otherwise apply to
unregulated enterprises.
On February 10, 1995, the Telephone Company filed with the DPUC
its depreciation reserve studies indicating its intrastate
deficiency in accumulated depreciation could be as much as $744
million based on telecommunications plant investment as of
January 1, 1995. On November 3, 1995, the DPUC issued a draft
decision on the reasonableness of the intrastate reserve
deficiency. Recognizing that the Telephone Company faces an open
competitive market and its effect on asset lives, the DPUC found
an intrastate reserve deficiency of $587 million to be reasonable
for recovery. The remaining portion of the reserve deficiency of
$157 million should continue to be recovered over the established
remaining life of the related assets. While the draft decision
seeks to quantify the Telephone Company's intrastate reserve
deficiency, the method of recovery will be addressed in
subsequent proceedings on the Telephone Company's financial
condition and alternative, incentive-based regulation. These
proceedings are currently scheduled by the DPUC during the
remainder of 1995 with a decision expected in 1996.
In the event that the Telephone Company no longer meets the
criteria for following SFAS No. 71, the accounting impact to the
Corporation would be an extraordinary non-cash charge to
operations of a material amount. The Telephone Company continues
to review the criteria set forth in SFAS No. 71 and has
determined that the continuing application of the regulatory
accounting standard is appropriate at this time.
Employee Relations
On April 21, 1995, a new labor contract was ratified by members
of the CUTW. As part of the new contract, a voluntary "early-out
offer" was available to bargaining-unit employees during July
1995 and subsequent dates, when considered necessary, during the
life of the contract. The early-out offer provides additional
incentives in the form of enhanced pension benefits. Bargaining-
unit employees leaving under the offer will receive increased
pensions of between 35% and 45%. CUTW members who remain with
the Corporation will receive a 4.0% wage rate increase in January
1996 and a 3.0% wage rate increase in both January 1997 and
January 1998. 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
through downsizing efforts.
- 20 -
Form 10-Q - Part II Southern New England Telecommunications Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the third quarter of 1995.
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibit
(27) Financial Data Schedule
(b) Reports on Form 8-K
On July 5, 1995, the Corporation filed a report on Form
8-K, dated July 1, 1995, announcing the completion of
the acquisitions of cellular properties that include all
of the Rhode Island and the New Bedford, Massachusetts
areas formerly owned by Bell Atlantic as well as the
Pittsfield, Massachusetts market, 80 percent of which
was owned by NYNEX, and the 16.1 percent interest that
NYNEX held in a cellular partnership that serves all of
Connecticut and the Springfield, Massachusetts area. The
registrant also reached an agreement with the Richmond
Telephone Company to purchase the remaining 20 percent
of the Pittsfield market.
On July 25, 1995, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
July 24, 1995 announcing the Corporation's financial
results for the second quarter of 1995.
On August 3, 1995, the Corporation filed a report dated
August 2, 1995, commenting on the estimated impact of
recent developments on operating results including the
acceptance of an early-out offer by 2,660 bargaining-
unit employees and the acquisition of cellular
properties on July 1, 1995. The impact of the early-out
offer will not have a material impact on 1995 operating
earnings and the 1993 restructuring charge may be
adjusted in the fourth quarter of this year when the
costs of the current offer are definitively known. The
impact of the cellular acquisitions will dilute 1995
earnings by approximately 12 percent.
On October 24, 1995, the Corporation and the Telephone
Company filed, separately, reports on Form 8-K, dated
October 23, 1995 announcing the Corporation's financial
results for the third quarter of 1995.
- 21 -
Form 10-Q - Part II Southern New England Telecommunications Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Southern New England Telecommunications Corporation
November 8, 1995
/s/ J. A. Sadek
J. A. Sadek
Vice President and Comptroller
- 22 -
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