UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock-par value $1 New York and Pacific Stock Exchanges
per share
Rights to purchase common stock New York and Pacific Stock Exchanges
(Currently traded with
common stock)
Securities registered pursuant to Section 12(g) of the Act: None
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
At February 28, 1997, 65,793,847 common shares were outstanding.
At February 28, 1997, the aggregate market value of the voting stock
held by non-affiliates was $2,383,418,614.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's combined 1996 Annual Report to Shareholders
and Proxy Statement dated March 20, 1997 issued in connection with the
1997 Annual Meeting of Shareholders [Part II and Part III]
1
TABLE OF CONTENTS
Item Page
PART I
1. Business.......................................................... 3
2. Properties........................................................ 11
3. Legal Proceedings................................................. 12
4. Submission of Matters to a Vote of Security Holders............... 12
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................ 14
6. Selected Financial Data.......................................... 14
7. Management's Discussion and Analysis of Financial Condition
and Operating Results........................................... 14
8. Financial Statements and Supplementary Data...................... 14
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 14
PART III
10. Directors and Executive Officers of the Registrant............... 14
11. Executive Compensation........................................... 14
12. Security Ownership of Certain Beneficial Owners and Management... 14
13. Certain Relationships and Related Transactions................... 14
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.. 15
See page 13 for "Executive Officers of the Registrant"
2
PART I
Item 1. Business
GENERAL
Southern New England Telecommunications Corporation
("Corporation") was incorporated in 1986 under the laws of the
State of Connecticut and has its principal executive offices at
227 Church Street, New Haven, Connecticut 06510 (telephone number
(203) 771-5200). The Corporation is a holding company engaged
through its subsidiaries in operations principally in Connecticut
with expanded cellular services in Rhode Island and certain areas
in Massachusetts. The Corporation has business units in the
following telecommunications product groups: wireline; wireless;
and information and entertainment. Wireline includes The
Southern New England Telephone Company's telecommunications
services; SNET America, Inc. (providing national and
international long-distance services to Connecticut customers);
and SNET Diversified Group, Inc. (providing premium
telecommunications services and the selling and leasing of
communications equipment to residential and business customers).
Wireless includes SNET Cellular, Inc., SNET Mobility, Inc. and,
prior to 1996, SNET Paging, Inc. (providing cellular (wholesale
and retail), personal communications, equipment sales and paging
resale services). Information and entertainment includes
publishing, internet and SNET Personal Vision, Inc. (providing
cable television service starting in 1997). Other activities
include SNET Real Estate, Inc. (engaging in leasing commercial
real estate) and the holding company (engaging in financial and
strategic planning).
WIRELINE
The Southern New England Telephone Company's Telecommunications
Services
The Southern New England Telephone Company ("Telephone Company"),
a local exchange carrier ("LEC"), was incorporated in 1882 under
the laws of the State of Connecticut and is engaged in providing
telecommunications services in Connecticut, subject to various
forms of regulation. These telecommunications services include:
local and intrastate toll services; network access service, which
links customers' premises to the facilities of other carriers;
and other services such as digital transmission of data and
transmission of radio and television programs, packet switched
data network and private line services.
In 1996, approximately 68% of the Corporation's consolidated
revenues and sales were derived from the Telephone Company's
telecommunications services and approximately 11% were derived
from wireless sales. The remainder was derived principally from
directory publishing operations, national and international long-
distance services, the Corporation's other subsidiaries, and
activities associated with the provision of facilities and non-
access services to interexchange carriers. About 70% of the
operating revenues from the Telephone Company's
telecommunications services were attributable to intrastate
operations, with the remainder attributable to interstate access
services.
The Telephone Company's access lines in service grew to 2,163,000
at December 31, 1996 from 2,073,000 at December 31, 1995, an
increase of 4.3%. The increase resulted primarily from growth in
Centrex business lines and second residential lines. The network
access lines provided by the Telephone Company to customers'
premises can be interconnected with the access lines of other
telephone
3
companies in the United States and with telephone systems in most
other countries. The following table sets forth, for the
Telephone Company, the number of network access lines in service
at the end of each year:
Network Access Lines in
Service (thousands): 1996 1995 1994 1993 1992
Residence 1,444 1,415 1,379 1,355 1,340
Business 719 658 630 609 597
Total 2,163 2,073 2,009 1,964 1,937
The Telephone Company is subject to the jurisdiction of the
Federal Communications Commission ("FCC") with respect to
interstate rates, services, access charges and other matters,
including the prescription of a uniform system of accounts. The
FCC also prescribes the principles and procedures (referred to as
"separations procedures") used to separate investments, revenues,
expenses, taxes and reserves between the interstate and
intrastate jurisdictions. In addition, the FCC has adopted
accounting and cost allocation rules for the separation of costs
of regulated from non-regulated telecommunications services for
interstate ratemaking purposes. The Telephone Company's
interstate access services have been subject to price cap
regulation since January 1991. Price caps are a form of
incentive regulation to limit prices and improve productivity.
The price cap plan sets maximum limits on prices and requires
LECs to share with customers earnings in excess of authorized
levels.
The Telephone Company, in providing telecommunications services
in Connecticut, is subject to regulation by the Connecticut
Department of Public Utility Control ("DPUC"), which has
jurisdiction with respect to intrastate rates and services and
other matters such as the approval of accounting procedures and
the issuance of securities. The DPUC has adopted accounting and
cost allocation rules for intrastate ratemaking purposes, similar
to those adopted by the FCC, for the separation of costs of
regulated from non-regulated activities. The Telephone Company's
intrastate services have been subject to the traditional rate of
return regulation. Effective April 1, 1996, the DPUC replaced
traditional rate of return regulation with alternative (price
based) regulation to be employed during the transition to full
competition [see State Regulatory Initiatives].
Competition
As a result of legislative and regulatory reform, the
Corporation continues to experience an increasingly competitive
environment with respect to telecommunications services in
Connecticut. Competitors include interexchange carriers and
competitive access providers with respect to the wireline's
(Telephone Company's) existing services. In 1996, major carriers
intensified their marketing efforts to sell intrastate long-
distance services with full implementation of intrastate equal
access. In addition, providers began offering local exchange
service to businesses in certain areas of the state. Management
supports bringing to customers the benefit of competition and
affording all competitors the opportunity to compete fairly under
reduced regulation. The competitive environment also provides
opportunities for the Corporation to continue to grow its
interstate and international long-distance service and to launch
its cable television service in 1997.
The Telephone Company's currently regulated services are subject
to competition from companies and carriers, including competitive
access providers, that construct and operate their own
communications systems and networks, as well as from companies
that resell the telecommunications systems and networks of
underlying carriers. Since the introduction of intrastate long-
distance toll competition, in excess of 170 telecommunications
providers have received approval from the DPUC to offer
intrastate
4
long-distance services. In addition, over 50 companies
have filed for initial certificates of public convenience
and necessity in order to offer intrastate long-distance
services and are awaiting DPUC approval. The reduction
in intrastate toll rates, and the increasingly competitive
intrastate toll market continue to place significant downward
pressure on intrastate toll revenues.
To provide competitive toll products, wireline led the industry
in 1996 by introducing the option of one-second rating for all
toll calls so customers only pay for the time they talk.
Wireline also successfully promoted the one bill feature of SNET
All Distance[R], a seamless toll service product line which
provides discount calling plans that include intrastate,
interstate and international calling. The migration of
Connecticut customers to wireline's bundled calling plans
resulted in significant growth for interstate and international
long-distance services.
Concerning competition for local exchange service, seventeen
telecommunications providers have been granted certificates of
public convenience and necessity for local service and one
additional application is pending before the DPUC. With only a
few smaller companies offering local service in 1996, including a
cable television company, competition did not have the impact on
local service revenues as originally anticipated. Local service
competition is expected to grow significantly in 1997; however,
the financial impact cannot be predicted at this time. Based on
existing state and federal regulations, the Telephone Company
expects that many competitors will resell the Telephone Company's
network and that increased network access revenues will offset a
significant portion of local service revenues lost to
competition.
The Corporation's ability to compete is dependent upon regulatory
reform that will allow pricing flexibility to meet competition
and provide a level playing field with similar regulation for
similar services and with reduced regulation to reflect an
emerging competitive marketplace.
Regulatory Matters
Federal Regulatory Initiatives
On February 8, 1996, Congress passed the Telecommunications Act
of 1996 ("Act"). The Act was designed to overhaul U.S.
Telecommunication policy by removing barriers to local
competition. The Federal Communications Commission's ("FCC")
First and Second Report and Order ("Order"), adopted August 1,
1996, implements the Act and contains numerous provisions
regarding the interconnection of the Telephone Company's network
with those of its competitors. Significant changes to network
and data systems will be required for the Telephone Company to
comply with the Order. In addition, the Order would require
fundamental changes in the development of the prices that the
Telephone Company would charge competitors for purchasing
regulated network products and services. These decisions are the
first of three major rule makings to carry out the Act. Future
decisions will include universal service and access charge
reform, discussed below. The Order, as well as universal service
and access charge reform, could have a material negative impact
on the Telephone Company.
The Order was appealed and a stay was requested by various local
telephone companies, including the Telephone Company, the
National Association of Regulatory Utility Commissioners and
individual state regulatory commissions. On October 15, 1996,
the Eighth Circuit Court of Appeals ("Eighth Circuit") issued a
partial stay of the Order, delaying the effectiveness of the
pricing provisions and the rule allowing competitors to "pick and
choose" isolated terms out of negotiated interconnection
agreements. The FCC appealed the Eighth Circuit's decision to
stay these rules to the Supreme Court. The Supreme Court,
however, subsequently declined to hear the appeal. Oral
arguments on the Order were heard by the Eighth Circuit on
January 17, 1997. A decision is expected in the first half of
1997. In the
5
meantime, the Telephone Company has proceeded to negotiate several
interconnection agreements with other carriers in accordance with
the FCC's directives not affected by the Eighth Circuit's stay.
In accordance with the Act, the Federal-State Joint Board adopted
a Recommended Decision on Universal Service on November 7, 1996.
The recommendation addresses the universal service provisions of
the Act and proposes that one federal fund be established to
provide support for universal service. The proposal calls for
interstate telecommunications service providers to contribute to
the fund based on their telecommunications revenue, net of
payments to other carriers. The revenue to be assessed may
either be total interstate and intrastate revenue, or interstate
revenue only. By May 1997, the FCC is required to issue an order
implementing the universal service section of the Act.
On December 24, 1996, the FCC also released a Notice For Proposed
Rule Making, seeking comments on proposed changes to the way the
Telephone Company recovers interstate access charges from
interstate toll providers, including SNET America, Inc.
Implications of the FCC's proposal indicate that the industry
could experience reduced access revenues. The Telephone Company
provided comments to the FCC proposal on January 27, 1997. A
decision from the FCC regarding this matter is expected in April
or May 1997.
The Telephone Company's 1996 annual interstate access tariff
filing included a 4.0% productivity factor and allowed a 12.25%
interstate rate of return. The filing is anticipated to decrease
interstate network access rates by $2.3 million for the period
July 1, 1996 to June 30, 1997. Management expects this decrease
to be offset by increased demand. As of December 31, 1996, the
Telephone Company's interstate rate of return was below the
12.25% threshold.
The Telephone Company's 1995 annual interstate access tariff
filing under price cap regulation incorporated rate reductions of
approximately $10 million in decreased interstate network access
revenues for the period August 1, 1995 to June 30, 1996. The
decrease was offset by increased demand. The calendar year 1995
interstate rate of return of 11.58%, which was below the 12.25%
threshold, was reported to the FCC.
The Telephone Company will file its 1997 annual interstate access
tariff in April 1997 to become effective July 1, 1997. The
filing will adjust interstate access rates for an experienced
rate of inflation, the FCC's productivity target and exogenous
cost changes, if any. The Telephone Company does not anticipate
changing its 4.0% productivity factor election.
Since January 1, 1988, the Telephone Company has utilized an FCC
approved, company-specific Cost Allocation Manual ("CAM"), which
apportions costs between regulated and non-regulated activities,
and describes the nature of the transactions between the
Telephone Company and its affiliates. In addition, the FCC
requires larger LECs, including the Telephone Company, to undergo
an annual independent audit to determine whether the LEC is in
compliance with its approved CAM. The Telephone Company has
received audit reports for 1988 through 1995 indicating it is in
compliance with its CAM, and is currently undergoing an audit for
the year 1996.
State Regulatory Initiatives
In compliance with the Act, the Telephone Company has filed with
the DPUC numerous cost studies supporting its proposed wholesale
(i.e., resale) and unbundled rates for interconnection services.
In light of the Order, on March 4, 1997, the DPUC issued a
second draft decision setting a 17.8% discount rate for local
residence service. A final decision is expected in late March
1997.
6
The DPUC's review of the Telephone Company's cost studies related
to unbundled elements is still pending. Hearings were held the
first week in February 1997, with a final decision expected in
April 1997. This decision is expected to address the Telephone
Company's offerings of unbundled elements of its facilities and
associated interconnection arrangements.
In March 1996, the DPUC replaced traditional rate of return
regulation with alternative (price based) regulation, effective
April 1, 1996, during the transition to full competition. The
decision contains the following major items: price cap
regulation for non-competitive services; a five year monitoring
period on financial results; and a price cap formula on services
categorized as non-competitive (utilizing an inflation factor, a
5% productivity offset, a narrowly defined exogenous factor, a
potential service quality adjustment and various pricing bands).
In addition, basic local service rates for residence, business
and coin may not be raised above current levels until January 1,
1998, at which time the price cap formula becomes effective for
these services, unless they have been reclassified into the
emerging competitive or competitive categories. The decision
also authorized a rate of return on the Telephone Company's
common equity of 11.90% during the monitoring period. The impact
of these changes on the Telephone Company's operating results
will depend on the timing of classifying the various products and
services into categories (non-competitive, emerging competitive
and competitive) for pricing (banding) changes. As of December
31, 1996, the Telephone Company's rate of return was 7.95%.
On November 27, 1996, the DPUC granted the Telephone Company's
request to reclassify message toll and calling card services from
the non-competitive category to competitive in its entire service
territory. Reclassification provides the Telephone Company with
the opportunity to gain additional promotional and pricing
flexibility for its products and services, and to operate under
regulatory guidelines similar to its competitors.
On January 24, 1997, the Corporation filed a proposal with the
DPUC outlining steps to structure its wireline business,
including the Telephone Company, into separate retail and
wholesale subsidiaries. Under the proposal, the new retail
organization, a competitive local exchange carrier, will compete
under the same regulations as all other retail telecommunications
providers in the state and will bring innovative packages of
products and services to the consumer. The LEC, primarily the
Telephone Company's wholesale business, will provide network
services and functionality to retail providers, including the
Corporation's new retail business, on neutral terms. The
directory publishing operations will also be structured as a
separate subsidiary of the Corporation. A decision is expected
in late June 1997.
SNET America, Inc.
SNET America, Inc. ("SNET America") was incorporated in 1993
under the laws of the State of Connecticut. SNET America resells
a complete range of interstate and international long-distance
services to Connecticut customers, including calling card and
"800" service, along with volume discount plans such as SNET All
Distance Simple Solutions, a calling plan for small business and
residence customers.
SNET America and the Telephone Company jointly sell toll
services. This enables the Corporation to satisfy its
customers' long-distance calling needs with a single point of
contact through SNET All Distance, a seamless toll service
product line which provides discount calling plans that include
intrastate, interstate and international calling. The joint
marketing as SNET All Distance has produced such features as one-
second rating and one bill for all toll calls. [See Competition].
7
SNET Diversified Group, Inc.
SNET Diversified Group, Inc. ("Diversified") was incorporated in
1986 under the laws of the State of Connecticut in order to
identify and develop new, non-regulated business opportunities.
The majority of Diversified's activities is the offering of
premium services, such as information and enhanced network-
related services. Another activity is leasing and selling
customer premises equipment ("CPE") to residential and small
business customers. Key telephone systems and related products
are offered and maintained which are complementary to the
Telephone Company's central office-based solutions.
Diversified faces significant competition from numerous
department store, discount store and business equipment retailers
that carry CPE. Diversified has differentiated its product line
from its competitors by offering a wide array of quality products
including leasing options.
WIRELESS
The Corporation provides cellular (wholesale and retail),
personal communications, equipment sales and paging resale
services in Connecticut, Rhode Island and certain areas in
Massachusetts, through its subsidiaries SNET Cellular, Inc.
("Cellular"), SNET Mobility, Inc. ("Mobility") and, prior to
1996, SNET Paging, Inc. ("Paging").
SNET Cellular, Inc.
Cellular was incorporated in 1985 under the laws of the State of
Connecticut. In 1990, Cellular formed the Springwich Cellular
Limited Partnership ("Springwich") with four other partners.
Springwich is authorized to provide wholesale cellular radio
telecommunications services in the Hartford, New Haven, New
London, and Fairfield, Connecticut New England County
Metropolitan Areas ("NECMAs") and in the Springfield,
Massachusetts NECMA. Springwich also is licensed to provide
cellular wholesale service in three Rural Service Areas, Windham
and Litchfield Counties in Connecticut and Franklin County in
Massachusetts.
In July 1995, Cellular purchased from Bell Atlantic Corporation
("Bell Atlantic"), NYNEX Corporation ("NYNEX") and Richmond
Telephone Company, for approximately $456 million in aggregate,
certain cellular properties in Rhode Island and New Bedford and
Pittsfield, Massachusetts, and an increased interest in
Springwich. In total, these acquisitions expanded Cellular's
service area by approximately 2.3 million POPs (population
equivalents) to approximately 5.5 million POPs along the Boston
to New York corridor. Under the new partnership structure,
Cellular holds a 98.6% partnership interest in Springwich.
Cellular has "roamer agreements" with other carriers which allow
the carriers' subscribers access to Cellular's network and allow
Cellular's subscribers access to other networks throughout the
United States and Canada.
Cellular is currently subject to FCC jurisdiction. In November
1996, the DPUC opened an investigation to determine whether
wireless service was a replacement for landline telephone
service. The DPUC will review number administration, Connecticut
market conditions, intrastate land line local and toll usage, and
cellular intrastate usage. If wireless service is determined to
be a replacement for land line service, the DPUC plans to
petition the FCC for rate regulation authority.
During 1994, the FCC issued a spectrum plan allocating radio
spectrum to be licensed for the provision of new personal
communications services ("PCS"). As a result of the plan,
licenses for separate blocks of spectrum were auctioned to
potential PCS providers in geographic areas of the United States
through
8
1996. Various telecommunications groups, including primarily
all the nation's largest telephone companies, competed for licenses
to offer PCS in markets including Cellular's coverage area.
These blocks of spectrum could be used to provide a range of
wireless services including advanced paging, wireless data services
and two-way voice communications. The Corporation did not participate
in these auctions since it had adequate spectrum to provide
competitive services.
In July 1995, Bell Atlantic and NYNEX completed the merger of
their cellular service properties. This combination created the
largest wireless service provider on the East Coast and the
second largest provider in the United States.
Cellular expects increasing competition from new alliances and
the impact from auctions of PCS licenses. A purchaser of PCS
spectrum is expected to launch the first digital service in
Connecticut during 1997, creating a third major wireless provider
in the state. Cellular has made and will continue to make
investments in network expansion and enhancements.
SNET Mobility, Inc.
Mobility was incorporated in 1985 under the laws of the State of
Connecticut under its predecessor's name SNET MobileCom, Inc.
Mobility purchases wholesale cellular communications service from
Springwich and resells cellular communications service to the
retail market under the registered trademark LINX[R] in Springwich's
service area.
During 1996, Mobility launched SNET Personal Phone Service[SM], a
Local Service Area concept where subscribers may choose their
county of service at a favorable rate in contrast to traditional
cellular service, which is made available at peak and offpeak
rates for entire cellular markets. Mobility is the first
provider of this service in its franchise area.
Mobility markets its services through its internal sales force
and through agreements with third-party distributors and dealers.
Mobility anticipates continuing competition from local, regional
and national resellers. Over the past few years, intense
competition for new subscribers has led to increases in the
market and increases in selling and promotional costs. In
response to this competition, Mobility continues to evaluate the
quality of its distribution channels, price aggressively, bundle
with other telecommunications services and introduce both
creative customer acquisition programs and differentiated value-
added services.
SNET Paging, Inc.
Paging was incorporated in February 1990 under the laws of the
State of Connecticut and launched service on April 1, 1991. On
June 30, 1995, Paging and a subsidiary completed the sale of
substantially all of its paging network assets and the
subsidiary's reseller accounts, to Paging Network of New York,
Inc. Paging was merged into Mobility on May 30, 1996, with
Mobility retaining the Paging retail accounts and continuing, as
a reseller, to market paging services under the Page 2000[R] brand
name.
INFORMATION AND ENTERTAINMENT
Publishing Operations
The Telephone Company's publishing operations produces and
distributes traditional paper products including White and Yellow
Pages directories throughout Connecticut and adjacent
communities. To strategically widen its business focus and
position itself for the future, the publishing operations
9
introduced electronic publishing services, such as SNET Access[SM],
Consumer Tips and Electronic Yellow Pages.
The Connecticut advertising marketplace is undergoing major
structural changes and is becoming increasingly more fragmented
and competitive. The publishing division faces increased
competition from traditional directory publishers and non-
traditional services such as on-line services, desktop
publishing, electronic shopping services, CD-ROM and the
expansion of cable television. Furthermore, additional
competition may arise from the Regional Bell Operating Companies'
ability to offer information services.
SNET Personal Vision, Inc.
On September 6, 1996, SNET Personal Vision, Inc. ("Personal
Vision") received an 11 year license from the DPUC to operate a
community antenna television system that will serve the entire
state of Connecticut. Personal Vision also became a partner in
the americast joint venture with The Walt Disney Company,
Ameritech Corporation, BellSouth Corporation, SBC Communications
Inc. and GTE Corporation. The partnership will provide a full
range of americast[TM] programming and marketing services and access
to the joint venture's innovative technology. Personal Vision
will launch its cable service, SNET americast, in the spring of
1997.
Internet Service
On January 31, 1996, the Corporation launched SNET Internet[SM]
access service, which allows all subscribers in the state of
Connecticut to access the Internet with a local phone call.
OTHER SERVICES
SNET Real Estate, Inc.
SNET Real Estate, Inc. ("Real Estate") was incorporated in 1983
under the laws of the State of Connecticut. Real Estate is the
owner of commercial property which it leases under operating
leases and is a 99% partner in a limited liability company that
also leases commercial property. Currently, Real Estate is
managing its existing portfolio and is not actively pursuing
additional real estate investments.
Real Estate faces a risk that real estate markets in which its
properties are located, primarily Connecticut, may deteriorate
from their current value. This risk is minimized by the
conservative nature of Real Estate's portfolio, a majority of
which is leased to affiliates.
Holding Company
On February 15, 1995, the DPUC provided the Corporation greater
flexibility to diversify into new markets by lifting to 40% a
nine-year-old restriction that prevented the Corporation from
investing more than 25% of its total assets in unregulated
diversified activities without approval of the DPUC. In January
1997, the Corporation requested the DPUC to completely lift the
restriction. A decision is expected in late June 1997.
EMPLOYEE RELATIONS
The Corporation and its subsidiaries employed approximately 9,350
persons at February 28, 1997, of whom approximately 65% are
represented by the Connecticut Union of Telephone Workers, Inc.
("CUTW"), an unaffiliated union.
10
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 Early Out Offer, which
provided incentives in the form of enhanced pension benefits, was
available to bargaining-unit employees during July 1995.
Approximately 2,700 bargaining-unit employees accepted the offer
at that time and left the Corporation by June 1996. CUTW members
who remained with the Corporation received a combination of basic
wage and lump sum increases to their wages or cash balance
pension plan account totaling 4.0% in January 1996 and 3.0% in
January 1997. In January 1998, they will receive a combination
of basic wage and lump sum increases totaling 3.0%. In addition,
the contract also provided a sign-on bonus and health benefit and
pension enhancements. The new labor agreement will expire on
August 8, 1998. The contract is intended to keep layoffs to a
minimum while enabling the Corporation to position itself to meet
increasing competition.
Item 2. Properties
The principal properties of the Corporation do not lend
themselves to a detailed description by character and location.
The majority of telecommunications property, plant and equipment
of the Corporation is owned by the Telephone Company. Of the
Corporation's investment in telecommunications property, plant
and equipment at December 31, 1996, central office equipment
represented 41%; connecting lines not on customers' premises, the
majority of which are over or under public roads, highways or
streets and the remainder over or under private property,
represented 35%; land and buildings (occupied principally by
central offices) represented 12%; telephone instruments and
related wiring and equipment, including private branch exchanges,
substantially all of which are on the premises of customers,
represented 1%; and other, principally vehicles and general
office equipment, represented 11%.
Substantially all of the central office equipment installations
and administrative offices are located in Connecticut in
buildings owned by the Telephone Company situated on land which
it owns in fee. Many garages, service centers and some
administrative offices are located in rented quarters.
The Corporation has a significant investment in the properties,
facilities and equipment necessary to conduct its business with
the overwhelming majority of this investment relating to
telephone operations. Management believes that the Corporation's
facilities and equipment are suitable and adequate for the
business.
Capital Expenditures
The Corporation has been making, and expects to continue to make,
significant capital expenditures to meet the demand for
telecommunications services and to further improve such services.
The total gross investment in property, plant and equipment
increased from approximately $4.0 billion at December 31, 1991 to
approximately $4.7 billion at December 31, 1996, after giving
effect to retirements, but before deducting accumulated
depreciation at either date. Since 1992, cash expended for
capital additions was as follows:
Dollars in Millions, 1996 1995 1994 1993 1992
For the Years Ended
Cash Expended for
Capital Additions $367 $354 $282 $267 $290
In 1996, the Corporation funded its cash expenditures for capital
additions entirely through cash flows from operations. In 1997,
capital additions are expected to be approximately $435 million,
including
11
estimated additions of $262 to the wireline network. The Corporation
expects to fund substantially all of its 1997 capital additions through
cash flows from operations.
The buildout of I-SNET, a $4.5 billion investment, is expected to
be completed by 2007. I-SNET, a statewide telephony and
information superhighway, is an advanced network capable of
delivering voice, video and a full range of information and
interactive multimedia services. I-SNET passed approximately
234,000 households by December 1996 and is expected to pass
approximately 334,000 households by December 1997. The Telephone
Company plans to support this investment primarily through
increased productivity from the new technology deployed, ongoing
cost-reduction initiatives and customer demand for the new
services offered, including SNET americast.
Item 3. Legal Proceedings
The Corporation and certain of its subsidiaries are involved in
various claims and lawsuits that arise in the normal conduct of
their business. In the opinion of management, upon advice of
counsel, these claims will not have a material adverse effect on
the financial position, operating results or cash flows of the
Corporation or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the
fourth quarter of the fiscal year covered by this report.
12
Executive Officers of the Registrant (1)
(as of February 28, 1997)
Executive
Officer
Name Age(2) Position Since
Daniel J. Miglio 56 Chairman, President and
Chief Executive Officer 1/86
Jean M. LaVecchia 44 Senior Vice President-
Organization Development 8/94
Fred T. Page 50 Senior Vice President-
Network Services 2/96
Ronald M. Serrano 41 Senior Vice President-
Communication, Information
and Entertainment Group 1/93
Donald R. Shassian 41 Senior Vice President and
Chief Financial Officer 12/93
(1) Executive officers subject to Section 16 of the Securities
Exchange Act of 1934.
(2) As of December 31, 1996.
Mr. Miglio, Ms. LaVecchia and Mr. Page have held high level
managerial positions with the Corporation or its subsidiaries for
more than the past five years. Mr. Serrano was a Vice President
of Mercer Management Consulting, Inc., (formerly Strategic
Planning Associates) for more than five years prior to joining
the Corporation. Mr. Shassian was a partner with Arthur Andersen
& Co., independent accountants, for more than five years prior to
joining the Corporation.
13
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
The common stock of the Corporation is listed on the New York and
Pacific stock exchanges and the number of holders of record,
computed on the basis of registered accounts, was 50,458 as of
February 28, 1997. Information with respect to the quarterly
high, low and closing sales price for the Corporation's common
stock and quarterly cash dividends declared is included in the
registrant's Annual Report to Shareholders on page 30 under the
caption "Market and Dividend Data" and is incorporated herein by
reference pursuant to General Instruction G(2).
Items 6 through 8.
Information required under Items 6 through 8 is included in the
registrant's combined 1996 Annual Report to Shareholders and
Proxy Statement dated March 20, 1997 on pages 6 through 29 in
their entirety and is incorporated herein by reference pursuant
to General Instruction G(2).
The Corporation will adopt Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," in fiscal year
1998. SFAS No. 128 establishes standards for computing and
presenting earnings per share. Management does not expect the
adoption of SFAS No. 128 to have a material impact on the
earnings per share calculation.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
No changes in or disagreements with accountants on any accounting
or financial disclosure occurred during the period covered by
this report.
PART III
Items 10 through 13.
Information required under Items 10 through 13 is included in the
registrant's combined 1996 Annual Report to Shareholders and
1997 Proxy Statement dated March 20, 1997 on pages 35 through 44.
Such information is incorporated herein by reference pursuant
to General Instruction G(3).
Information regarding executive officers of the registrant
required by Item 401(b) and (e) of Regulation S-K is included in
Part I of this Annual Report on Form 10-K, following Item 4.
14
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Documents filed as part of the report: Page
(1) Report of Management *
Report of Independent Accountants *
Consolidated Financial Statements:
Consolidated Statements of Income (Loss) - for the
years ended December 31, 1996, 1995 and 1994 *
Consolidated Balance Sheets - as of
December 31, 1996 and 1995 *
Consolidated Statements of Changes in Shareholders'
Equity - for the years ended December 31, 1996,
1995 and 1994 *
Consolidated Statements of Cash Flows - for the
years ended December 31, 1996, 1995 and 1994 *
Notes to Consolidated Financial Statements *
(2) Consolidated Financial Statement Schedule for the year
ended December 31, 1996
Report of Independent Accountants 20
II - Valuation and Qualifying Accounts 21
Schedules other than those listed above have been omitted
because the required information is contained in the
financial statements and notes thereto, or because such
schedules are not applicable.
* Incorporated herein by reference to the appropriate portions
of the registrant's combined 1996 Annual Report to Shareholders
and 1997 Proxy Statement dated March 20, 1997 [see Part II].
15
(3) Exhibits:
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibits numbered 10(iii)(A)1 through 10(iii)(A)16 are management
contracts or compensatory plans required to be filed as exhibits
pursuant to Item14(c) of Form 10-K.
Exhibit
Number
3a Amended and Restated Certificate of Incorporation
of the registrant as filed June 14, 1990 (Exhibit
3-A to Form SE dated 3/15/91, File No. 1-9157).
3b By-Laws of the registrant as amended and restated
through October 10, 1990 (Exhibit 3 to Form 8-K
dated 10/10/90, File No. 1-9157).
4a Rights Agreement dated December 11, 1996 between
Southern New England Telecommunications
Corporation and State Street Bank and Trust
Company, as Rights Agent (Exhibit 4 to Form 8-K
dated 12/11/96, File No. 1-9157).
4b Indenture dated December 13, 1993 between The
Southern New England Telephone Company and Fleet
National Bank of Connecticut, Trustee, issued in
connection with the sale of $200,000,000 of 6 1/8%
Medium-Term Notes, Series C, due December 15, 2003
and $245,000,000 of 7 1/4% Medium-Term Notes,
Series C, due December 15, 2033 (Exhibit 4b to
1994 Form 10-K dated 3/10/95, File No. 1-9157).
4c Indenture dated July 10, 1991 between the
registrant and Fleet National Bank of Connecticut,
Trustee, issued in connection with the sale of
$100,000,000 of 6 1/2% Medium-Term Notes, Series
2, due August 15, 2000 and $200,000,000 of 7%
Medium-Term Notes, Series 2, due August 15,
2005 (Exhibit 4c to 1995 Form 10-K dated 3/20/96,
File No. 1-9157).
10(iii)(A)1 SNET Short Term Incentive Plan as amended February
8, 1995 (Exhibit 10(iii)(A)1 to 1994 Form 10-K
dated 3/10/95, File No. 1-9157).
10(iii)(A)2 SNET Long Term Incentive Plan as amended March 1,
1993 (Exhibit 10(iii)(A)2 to 1992 Form 10-K dated
3/23/93, File No. 1-9157).
10(iii)(A)3 SNET Financial Counseling Program as amended
January 1987 (Exhibit 10-D to Form SE dated
3/23/87-1, File No. 1-9157).
10(iii)(A)4 Group Life Insurance Plan and Accidental Death and
Dismemberment Benefits Plan for Outside Directors
of SNET as amended July 1, 1986 (Exhibit 10-E to
Form SE dated 3/23/87-1, File No. 1-9157).
16
(3) Exhibits (continued):
Exhibit
Number
10(iii)(A)5 SNET Pension Benefit Plan as amended November 1,
1991 (Exhibit 10-A to Form SE dated 3/20/92, File
No. 1-9157). Amendment dated December 8, 1993
(Exhibit 10(iii)(A)5 to 1993 Form 10-K dated
3/23/94, File No. 1-9157). Amendment dated
February 8, 1995 (Exhibit 10(iii)(A)5 to 1994 Form
10-K dated 3/10/95, File No. 1-9157). Amendments
effective December 13, 1995 and January 1, 1996
(Exhibit 10(iii)(A)5 to 1995 Form 10-K dated
3/20/96, File No. 1-9157).
10(iii)(A)6 SNET Management Pension Plan as amended March 31,
1995. Amendments effective December 20, 1995
through April 1, 1996 (Exhibit 10(iii)(A)6 to 1995
Form 10-K dated 3/20/96, File No. 1-9157). Amendments
effective April 1, 1996 through December 18, 1996.
10(iii)(A)7 SNET Incentive Award Deferral Plan as amended
March 1, 1993 (Exhibit 10(iii)(A)7 to 1992 Form 10-K
dated 3/23/93, File No. 1-9157).
10(iii)(A)8 SNET Mid-Career Pension Plan as amended November
1, 1991 (Exhibit 10-D to Form SE dated 3/20/92,
File No. 1-9157). Amendment dated December 8,
1993 (Exhibit 10 (iii)(A)8 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)9 SNET Deferred Compensation Plan for Non-Employee
Directors as amended January 1, 1993 (Exhibit
10(iii)(A)9 to 1992 Form 10-K dated 3/23/93, File
No. 1-9157).
10(iii)(A)10 Change-in-Control Agreements (Exhibit 10-F to Form
SE dated 3/15/91, File No. 1-9157).
10(iii)(A)11 SNET 1986 Stock Option Plan as amended March 1,
1993 (Exhibit 10(iii)(A)11 to 1992 Form 10-K dated
3/23/93, File No. 1-9157).
10(iii)(A)12 SNET Retirement and Disability Plan for Non-
Employee Directors as amended April 14, 1993
(Exhibit 10(iii)(A)12 to 1993 Form 10-K dated
3/23/94, File No. 1-9157). Amendment dated
February 14, 1996.
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration No.
33-51055 on Form S-8, File No. 1-9157).
10(iii)(A)14 Description of SNET Executive Retirement Savings
Plan (Exhibit 10(iii)(A)14 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to
Registration No. 33-64975, File No. 1-9157).
10(iii)(A)16 SNET Non-Employee Director Stock Plan effective
June 1, 1996 (Exhibit 4.2 to Registration No. 333-
05757 on Form S-8, File No. 1-9157).
17
(3) Exhibits (continued):
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
13 Pages 6 through 30 of the registrant's 1996 Annual
Report to Shareholders for the fiscal year ended
December 31, 1996.
21 Subsidiaries of the Corporation.
23 Consent of Independent Accountants.
24a Powers of Attorney.
24b Board of Directors' Resolution.
27 Financial Data Schedule.
99a Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
The Corporation will furnish, without charge, to a shareholder
upon request a copy of the combined 1996 Annual Report to
Shareholders and Proxy Statement, portions of which are
incorporated by reference, and will furnish any other exhibit at
cost.
(b) Reports on Form 8-K:
On October 22, 1996, the Corporation and the Telephone Company
filed, separately, reports on Form 8-K, dated October 22, 1996
announcing the Corporation's financial results for the third
quarter of 1996. The Corporation's Form 8-K also announced
the acquisition of Woodbury Telephone Company [see Note 2].
On December 13, 1996, the Corporation filed a report on Form 8-K,
dated December 11, 1996 announcing the renewal of the
existing shareholder rights plan and declaring a dividend of
one preference share purchase right for each outstanding share
of the Corporation's common stock [see Note 12].
On January 21, 1997, the Corporation and the Telephone Company
filed, separately, reports on Form 8-K, dated January 21,
1997, announcing the Corporation's 1996 financial results.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Donald R. Shassian
Donald R. Shassian, Senior Vice President
and Chief Financial Officer March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
PRINCIPAL EXECUTIVE OFFICER:
Daniel J. Miglio*
Chairman, President, Chief Executive Officer and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
Donald R. Shassian By /s/ Donald R. Shassian
Senior Vice President (Donald R. Shassian, as attorney-
and Chief Financial Officer in fact and on his own behalf)
DIRECTORS:
William F. Andrews*
Richard H. Ayers*
Zoe Baird*
Robert L. Bennett*
Barry M. Bloom* March 20, 1997
Frank J. Connor*
William R. Fenoglio*
Claire L. Gaudiani*
James R. Greenfield*
Ira D. Hall*
Burton G. Malkiel*
Frank R. O'Keefe, Jr.* * by power of attorney
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Southern New England Telecommunications Corporation:
Our report on the consolidated financial statements of Southern
New England Telecommunications Corporation has been incorporated
by reference in this Form 10-K from the combined Proxy Statement
and 1996 Annual Report to Shareholders of Southern New England
Telecommunications Corporation on page 13 therein. In connection
with our audits of such financial statements, we have also audited
the related financial statement schedule for each of the three
years in the period ended December 31, 1996 listed in Item 14 (a) (2)
of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included
therein.
Hartford, Connecticut COOPERS & LYBRAND L.L.P.
January 21, 1997
20
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Balance at Balance
beginning of Charged to Charged to at end
Description period expense other accounts Deductions of period
Allowance for Uncollectible
Accounts Receivable:
Year 1996 $34.2 $42.6 $5.1 (a) $54.5 (b) $27.4
Year 1995 29.8 23.1 3.6 (a) 22.3 (b) 34.2
Year 1994 27.9 20.7 7.5 (a) 26.3 (b) 29.8
Allowance for Uncollectible
Direct-Financing Lease Notes Receivable:
Year 1996 $ 9.7 $ 1.8 $ - $ 0.5 (b) $11.0
Year 1995 8.4 1.4 - 0.1 (b) 9.7
Year 1994 11.7 1.7 - 5.0 (b) 8.4
Restructuring Charge:
Year 1996 $ 77.0 $ - $ - $ 45.5 (c) $ 31.5
Year 1995 264.9 - - 187.9 (c) 77.0
Year 1994 355.0 - - 90.1 (c) 264.9
(a) Includes amounts previously written off that were credited directly to
this account when recovered and miscellaneous amounts.
(b) Includes amounts written off as uncollectible. 1996 also includes fully
reserved amounts written off of $17.8 as a result of a revised procedure
to write off uncollectible accounts receivable within a shorter time
frame.
(c) Includes non-cash net pension and postretirement settlement gain charged
against the restructuring reserve of $65.1 in 1996 and curtailment
losses of $102.2 and $14.2 in 1995 and 1994, respectively.
21
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
3a Amended and Restated Certificate of Incorporation
of the registrant as filed June 14, 1990 (Exhibit
3-A to Form SE dated 3/15/91, File No. 1-9157).
3b By-Laws of the registrant as amended and restated
through October 10, 1990 (Exhibit 3 to Form 8-K
dated 10/10/90, File No. 1-9157).
4a Rights Agreement dated December 11, 1996 between
Southern New England Telecommunications
Corporation and State Street Bank and Trust
Company, as Rights Agent (Exhibit 4 to Form 8-K
dated 12/11/96, File No. 1-9157).
4b Indenture dated December 13, 1993 between The
Southern New England Telephone Company and Fleet
National Bank of Connecticut, Trustee, issued in
connection with the sale of $200,000,000 of 6 1/8%
Medium-Term Notes, Series C, due December 15, 2003
and $245,000,000 of 7 1/4% Medium-Term Notes,
Series C, due December 15, 2033 (Exhibit 4b to
1994 Form 10-K dated 3/10/95, File No. 1-9157).
4c Indenture dated July 10, 1991 between the
registrant and Fleet National Bank of Connecticut,
Trustee, issued in connection with the sale of
$100,000,000 of 6 1/2% Medium-Term Notes, Series
2, due August 15, 2000 and $200,000,000 of 7%
Medium-Term Notes, Series 2, due August 15,
2005 (Exhibit 4c to 1995 Form 10-K dated 3/20/96,
File No. 1-9157).
10(iii)(A)1 SNET Short Term Incentive Plan as amended February
8, 1995 (Exhibit 10(iii)(A)1 to 1994 Form 10-K
dated 3/10/95, File No. 1-9157).
10(iii)(A)2 SNET Long Term Incentive Plan as amended March 1,
1993 (Exhibit 10(iii)(A)2 to 1992 Form 10-K dated
3/23/93, File No. 1-9157).
10(iii)(A)3 SNET Financial Counseling Program as amended
January 1987 (Exhibit 10-D to Form SE dated
3/23/87-1, File No. 1-9157).
10(iii)(A)4 Group Life Insurance Plan and Accidental Death and
Dismemberment Benefits Plan for Outside Directors
of SNET as amended July 1, 1986 (Exhibit 10-E to
Form SE dated 3/23/87-1, File No. 1-9157).
10(iii)(A)5 SNET Pension Benefit Plan as amended November 1,
1991 (Exhibit 10-A to Form SE dated 3/20/92, File
No. 1-9157). Amendment dated December 8, 1993
(Exhibit 10(iii)(A)5 to 1993 Form 10-K dated
3/23/94, File No. 1-9157). Amendment dated
February 8, 1995 (Exhibit 10(iii)(A)5 to 1994 Form
10-K dated 3/10/95, File No. 1-9157). Amendments
effective December 13, 1995 and January 1, 1996
(Exhibit 10(iii)(A)5 to 1995 Form 10-K dated
3/20/96, File No. 1-9157).
10(iii)(A)6 SNET Management Pension Plan as amended March 31,
1995. Amendments effective December 20, 1995
through April 1, 1996 (Exhibit 10(iii)(A)6 to 1995
Form 10-K dated 3/20/96, File No. 1-9157). Amendments
effective April 1, 1996 through December 18, 1996.
10(iii)(A)7 SNET Incentive Award Deferral Plan as amended
March 1, 1993 (Exhibit 10(iii)(A)7 to 1992 Form 10-K
dated 3/23/93, File No. 1-9157).
10(iii)(A)8 SNET Mid-Career Pension Plan as amended November
1, 1991 (Exhibit 10-D to Form SE dated 3/20/92,
File No. 1-9157). Amendment dated December 8,
1993 (Exhibit 10 (iii)(A)8 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)9 SNET Deferred Compensation Plan for Non-Employee
Directors as amended January 1, 1993 (Exhibit
10(iii)(A)9 to 1992 Form 10-K dated 3/23/93, File
No. 1-9157).
10(iii)(A)10 Change-in-Control Agreements (Exhibit 10-F to Form
SE dated 3/15/91, File No. 1-9157).
10(iii)(A)11 SNET 1986 Stock Option Plan as amended March 1,
1993 (Exhibit 10(iii)(A)11 to 1992 Form 10-K dated
3/23/93, File No. 1-9157).
10(iii)(A)12 SNET Retirement and Disability Plan for Non-
Employee Directors as amended April 14, 1993
(Exhibit 10(iii)(A)12 to 1993 Form 10-K dated
3/23/94, File No. 1-9157). Amendment dated
February 14, 1996.
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration No.
33-51055 on Form S-8, File No. 1-9157).
10(iii)(A)14 Description of SNET Executive Retirement Savings
Plan (Exhibit 10(iii)(A)14 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to
Registration No. 33-64975, File No. 1-9157).
10(iii)(A)16 SNET Non-Employee Director Stock Plan effective
June 1, 1996 (Exhibit 4.2 to Registration No. 333-
05757 on Form S-8, File No. 1-9157).
12 Computation of Ratio of Earnings to Fixed Charges.
13 Pages 6 through 30 of the registrant's 1996 Annual
Report to Shareholders for the fiscal year ended
December 31, 1996.
21 Subsidiaries of the Corporation.
23 Consent of Independent Accountants.
24a Powers of Attorney.
24b Board of Directors' Resolution.
27 Financial Data Schedule.
99a Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1996 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1997.
SNET MANAGEMENT PENSION PLAN
A summary of amendments to the SNET Management Pension Plan ("Plan")
is as follows:
Effective April 1, 1996:
An annuitant of any former employee who received a disability
pension on or after January 1, 1976 and is receiving an annuitant
pension as of April 1, 1996 shall be eligible to receive this
pension payable from the trust fund instead of SNET operating funds.
Effective June 1, 1996:
The termination of employees who received benefits under the SNET
Management Severance Pay Plan shall not be considered as a temporary
layoff for purposes of this Pension Plan. If such an employee is
rehired, except as provided in Sec. 6, Paragraph 4, the continuity
of service shall be deemed to have been broken for all purposes and
such employee shall not receive service credit under the Sec. 6,
Paragraph 6 of the Pension Plan. However, this amendment shall have
no effect to any employee who was offered the Severance Pay Plan
prior to June 1, 1996 and left SNET with Severance Plan benefits on
or after June 1, 1996 and prior to January 1, 1997.
Effective September 15, 1996:
Employees can no longer submit written direction that any death
benefit be payable to a qualified beneficiary in monthly
installments.
Surviving spouses of terminated employees may elect to defer
receipt of their pension benefits until a later date, up to when
the employee would have reached age 65.
Effective October, 1996 and later:
For purposes of determining the maximum pension benefit payable
and distributed under this Plan under the IRC Section
415(b)(2)(E), the interest and mortality provisions of the
Uruguary Round Agreement Act (GATT) which provided for the use of
the 30-Year Treasury rate and the table prescribed by the
Secretary of the Treasury under Code Section 417(e)(3) are
repealed and the interest and mortality rate assumptions
previously in effect prior to the adoption of GATT have been
reinstated.
Effective December 18, 1996:
The "Consent to Receive Distributions" provisions of the Plan are
amended to provide that if the employee notifies SNET in writing
of his election to begin receiving his pension payments after the
90-day election period, the monthly pension payments shall be
payable beginning the day SNET receives the election form, unless
the Secretary is made aware in writing during the 90-day election
period of a pending divorce action which may assign pension
benefits to the Alternate Payee, or is made aware by the employee
in writing after the 90-day election period that such employee did
not receive such written explanation of election and consent as
provided in Paragraph (4)(B) of this Article VII, or the Secretary
is made aware by the Employee in writing during the 90-day
election period that such employee has notified the Company that
he or she is contesting his or her termination of employment from
SNET or a Participating Company through a grievance, arbitration,
lawsuit or complaint with an administrative agency with
appropriate jurisdiction and the secretary approves, in his or her
discretion, monthly pension payments when elected within the 90
day election period begin the day following the Employee's
termination of employment date or such other pension distribution
options, including the lump sum distribution option, otherwise
available only upon termination of employment.
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Amendment of Retirement and Disability Plan for Non-Employee
Directors.
On February 14, 1996, the Retirement and Disability Plan for
Non-Employee Directors of Southern New England Telecommunications
Corporation (the "Plan") was amended to provide that eligibility
for benefits under the Plan shall be limited to those participants
as of February 14, 1996, that the amount of accrued pension benefits
for participants shall be frozen as of May 31, 1996 and that
benefits payable to participants shall continue to be paid under
the terms of the Plan until such benefit obligations are
satisfied whereupon the Plan shall terminate.
EXHIBIT 12
1996 Form 10-K
Southern New England Telecommunications Corporation
Computation of
Ratio of Earnings to Fixed Charges
Dollars in Millions, For the Year Ended December 31, 1996
Income before income taxes $300.4
Add:
Interest on indebtedness 88.2
Portion of rents representative of
the interest factor 7.0
Earnings before fixed charges and income taxes (1) $395.6
Fixed charges
Interest charges $ 95.4
Portion of rents representative of
the interest factor 7.0
Fixed charges (2) $102.4
Ratio of earnings to fixed charges [(1) divided by (2)] 3.86
<PAGE>
SNET LOGO
Southern New England
Telecommunications Corporation
227 Church Street
New Haven, Connecticut 06510
- -------------------------------------------------------------------------------
1996 ANNUAL REPORT & 1997 PROXY STATEMENT
- -------------------------------------------------------------------------------
WIRELINE
WIRELESS
INFORMATION AND
ENTERTAINMENT
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Highlights 1
Year in Review 2
Letter to Shareowners 3
Financial Commentary 6
Report of Management 13
Report of Independent Accountants 13
Statements of Income (Loss) 14
Balance Sheets 15
Statements of Changes in Shareholders' Equity 16
Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Financial and Statistical Data (Unaudited) 29
Investor Information 30
Other Information 31
NOTICE OF ANNUAL MEETING 33
PROXY STATEMENT
Proxy Information 35
Beneficial Ownership of Common Stock 35
Election of Directors (Proposal 1) 36
Nominees for Election as Directors 36
Directors Continuing in Office 36
Compensation and Other Information Regarding Directors 38
Committees of the Board 38
Ratification of Appointment of Auditors (Proposal 2) 39
Submission of Shareholder Proposals 39
Other Matters to Come Before the Meeting 39
Report of Personnel Resources Committee of the Board of
Directors on Executive Compensation 39
1996 Executive Compensation 39
CEO Compensation 40
Summary Compensation Table 41
Option/SAR Grants in the Last Fiscal Year 42
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year End Option/SAR Values 43
Pension Plan 43
Change-in-Control Agreements 44
Certain Transactions 44
Performance Graph 44
Financial Statements 44
WHO WE ARE
SNET is a Connecticut-based company reaching beyond its traditional borders to
offer wireline, wireless and information and entertainment services, including
local, national and international calling; mobile communications; and
publishing, information and advertising. The company is building I-SNET(SM), a
statewide, information superhighway that brings to customers a full array of
information, communications and entertainment services.
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Dollars in Millions, Except as Noted 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Operating Results
<S> <C> <C> <C>
Revenues and Sales $1,941.9 $1,816.4 $1,717.8
Annual Growth 6.9% 5.7% 3.6%
Costs and Expenses(1) $1,203.6 $1,121.6 $1,014.9
Operating Cash Flow(2) $ 738.3 $ 694.8 $ 702.9
Net Income (Loss)(3) $ 192.8 $ (518.3) $ 177.6
- ---------------------------------------------------------------------------------------------------------------
Per Common Share (dollars)
Income Before Extraordinary Charge $ 2.94 $ 2.60 $ 2.77
Net Income (Loss)(3) $ 2.94 $ (7.99) $ 2.77
Dividends Declared $ 1.76 $ 1.76 $ 1.76
Market Price (year-end) $ 38.875 $ 39.750 $ 32.375
- ---------------------------------------------------------------------------------------------------------------
At Year-End
Total Assets $2,671.0 $2,724.2 $3,504.6
Debt Ratio(4) 74.9% 80.0% 51.0%
Telephone Company Wireline Employees 8,167 7,742 8,604
Total Employees 9,441 9,070 9,797
- ---------------------------------------------------------------------------------------------------------------
Statistical Data
Network Access Lines in Service (thousands) 2,163 2,073 2,009
Annual Growth 4.3% 3.2% 2.3%
Second Residential Network Access Lines in Service (thousands) 97 75 60
Annual Growth 29.3% 25.0% 27.7%
Network Interstate Access Minutes of Use (millions) 7,906 7,298 6,917
Annual Growth 8.3% 5.5% 6.1%
Cellular Subscribers (thousands)(5) 392 323 166
Annual Growth(5) 21.4% 94.6% 88.6%
- ---------------------------------------------------------------------------------------------------------------
Other Data
Telephone Company Wireline Cost Per Access Line (dollars)(6) $ 332 $ 320 $ 340
Net Cash Provided by Operating Activities $ 470.2 $ 439.2 $ 422.6
Cash Expended for Capital Additions $ 366.6 $ 354.0 $ 282.3
Cash Dividends Paid $ 100.2 $ 98.0 $ 97.2
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes depreciation and amortization.
(2) Represents operating income before depreciation and amortization.
Operating cash flow is not a generally accepted accounting principle
measurement. Management provides this measurement for informational
purposes only.
(3) 1995 includes a $1,202.6 before-tax extraordinary charge for the
discontinuance of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," that reduced net income and earnings per share by
$687.1 and $10.59, respectively.
(4) Excluding the effect of the non-cash extraordinary charge related to the
discontinuance of SFAS No. 71, the 1995 debt ratio would have been 57.6%.
Excluding the combined effect of the charge related to SFAS No. 71 and the
debt issued to acquire the cellular properties, the 1995 debt ratio would
have been 48.0%.
(5) Excluding the subscribers from the acquired cellular properties, cellular
subscribers would have increased 51.1% to 251,000 subscribers in 1995.
(6) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses.
SNET Annual Report 1
<PAGE>
YEAR IN REVIEW
o We earned a record $2.94 per share for 1996, up 8%.
o Our wireline business reported record growth in access lines, and Connecticut
added an area code to accommodate burgeoning demand for telephone numbers.
o Our wireless business continued robust growth -- revenues up 27% -- with
improved margins.
o We became the number two long-distance provider in Connecticut, as
interstate/international revenues more than doubled.
o We continued to build I-SNET(sm), our broadband, full-service network.
Successful tests of telephony applications expanded to 2,000 customers.
o We obtained the first ever, statewide cable-TV franchise and joined the
americast partnership to gain world-class programming and technology.
o We entered the Internet access business and leaped to the number two position
in Connecticut.
o We led the industry in offering billing to the nearest second so customers
pay only for the time they talk on long-distance calls.
o We challenged the FCC's interconnection order and gained a court stay of
onerous provisions.
o We signed a definitive agreement to acquire Woodbury Telephone, the only
other independent telephone company in Connecticut.
2 SNET Annual Report<PAGE>
LETTER TO SHAREOWNERS
To Our Shareowners:
Trailblazing is an SNET tradition. Our drive to take customers beyond the call
is the reason behind our industry "firsts" and our finest accomplishments. SNET
is now an information, communications and entertainment company well positioned
for the 21st century.
In this transitional era of converging technologies and markets, we are
broadening and integrating our product lines, pursuing new growth opportunities
and proving to be a very scrappy competitor. We are pioneering new broadband
technology through a hybrid fiber/coaxial cable design that is less expensive
than an all-fiber network and just as effective. This is creating a platform for
further growth as we introduce and package an array of desirable information,
communications and entertainment products. Our proven ability to compete in
wireless and long distance prepares us for local telephone competition, which
will heat up in 1997, and for expansion into the cable-TV market.
In all of the following ways we have significant competitive strengths on
which to build:
o a strong brand name
o a superior local presence and knowledge of customers
o the broadest product line in the industry
o an experienced, diverse and battle-tested management team
o an employee team dedicated to quality and service
o a versatile landline network throughout Connecticut
o a wireless network covering Connecticut, Rhode Island and portions of
Massachusetts
o nimbleness of size: the ability to act and react quickly.
Stock Price Disappointing
Through the middle of 1996, our stock was doing relatively well, up about 4
percent. Beginning in July, the price declined with increasing investor
uncertainty about the effects of local competition. Investor confidence
plummeted further when the Federal Communications Commission (FCC) issued its
Interconnection Order in August, a topic to which
[Picture of Chairman]
DANIEL J. MIGLIO
Chairman and Chief Executive Officer
I'll return. On top of those industry-wide developments, our margins were
squeezed in the fourth quarter as costs rose to maintain service quality in the
face of skyrocketing demand.
We're taking aggressive steps to regain investor interest. We've challenged
the FCC's decision and are committed to improving margins in 1997. Others in the
industry will soon face the competition that we are succeeding against and our
record will compare favorably. I believe investors will view our performance
positively in the future and that our strong competitive position and growth
prospects will be reflected in our stock price.
Earnings Growth Continues
Net income for 1996 was $193 million or $2.94 per share. This represents an 8
percent gain over the prior year's operating earnings before one-time items,
including an extraordinary non-cash charge for a change in accounting method.
Our strong revenues -- up 7 percent to $1,942 million -- reflect our
ability to capitalize on growth opportunities in long distance and wireless. Our
wireline business grew 6 percent as interstate/international long-distance
revenues more than doubled. We led the industry in introducing billing to the
nearest second and initiated a very effective campaign promoting the advantages
of our single bill, which enabled us to capture a substantial
SNET Annual Report 3
<PAGE>
share of the long-distance market. In addition, access lines grew at a healthy
clip -- a record 90,000 new lines, up 4.3 percent, fueled by booming demand for
business and second residential lines. Additional strong growth came from
vertical services like SNET SmartLink(R).
We also continued double-digit growth in our wireless business while
improving operating margins. Revenues climbed 27 percent to $219 million, due
partly to the cellular acquisitions we made in July, 1995. Wireless margins were
significantly better than a year ago and will be improving further in 1997 as we
push to achieve industry norms. Information and Entertainment revenues were up 2
percent to $184 million.
Consolidated operating expenses for the year were up 8 percent. Wireline
expenses increased 12 percent to support growth in interstate/international
toll, for aggressive marketing and for bad debts. In addition, weather
conditions, unparalleled demand for new lines and workforce inexperience caused
cost per access line to increase in 1996, counter to our long-term downward
trend. This year, we will be back on track with overall cost per line decreasing
once again. Wireless expenses, even including the cellular acquisitions, were
flat for the year. Information and Entertainment expenses were down 6 percent
for 1996 compared with 1995 when we trialed cable-TV and video-on-demand
services to gain valuable marketing and operational experience. Depreciation and
amortization expenses were up 3 percent for the year as was interest expense.
Finally, certain true-ups and credits resulted in lower state taxes.
This past year was clearly one of marketing successes and positioning for
the future. We incurred significant costs not only to meet unprecedented demand
and competition, but also to prepare for integrated marketing and product
packaging. This year, we will continue to position SNET as we prepare for our
exciting entry into cable TV, implement requirements of the Federal
Telecommunications Act and reprogram computers for the year 2000.
That reprogramming comes after a detailed examination of the implications
of the year 2000 for our computer systems and business processes. We estimate
that related expenses will be in the $15 million to $20 million range for 1997
as we revise and test over 30 million lines of computer code. In our business,
revenues derive from a very high volume of date-sensitive transactions. So, we
are pursuing this proactively, well in advance, to assure that there will be no
glitches at the turn of the century.
We're Pursuing New Growth Opportunities
As we continue to advance through turbulent, uncharted waters made murkier
by regulatory uncertainties, we are poised to take full advantage of growth
opportunities that change offers. For instance, we just proposed to the
Department of Public Utility Control (DPUC) that we separate our business into
wholesale and retail subsidiaries, formalizing the internal separation that
already exists between our wholesale and retail units. This new operating model
will unleash the growth potential of each arm of our business, and provide the
singularity of focus each needs to compete most effectively. Importantly, the
retail subsidiary will compete under the same rules as other providers of
telecommunications services in Connecticut to bring consumers an ever increasing
array of innovative products and services.
Our wholesale strategy is to remain the preeminent network by marketing our
transport, switching and processing capabilities to retail-service providers in
Connecticut and beyond. We offer sophisticated, feature-rich capabilities
unparalleled in quality. For instance, our network is so reliable that customers
experienced less than one minute on average of downtime in 1996.
We are constantly improving and replacing our network, aiming for the year
2007 when every inch of it will be an information superhighway that reaches all
households and businesses in Connecticut.
On the retail side, our aim is to be the hometown team of choice. We will
grow and retain our customer base by building lasting, multiple-product
relationships across a broad range of information, communications and
entertainment services.
You can see how we're executing that strategy through the exciting
initiatives we have under way or are about to launch. Our new statewide cable-TV
franchise will put us in a strong marketing position that we intend to use to
its fullest potential. One of our competitors attempted to slow the launch of
our new cable venture by alleging that the back-up network powering design isn't
safe. This contention is unfounded. We would never put our employees or anyone
else at risk. However, rather than engage in a prolonged appeal process dealing
with a minor technicality we are modifying our power-cable design to conform
with the current national code. This will not delay our entry into the cable-TV
business. We will launch SNET americast on schedule.
4 SNET Annual Report
<PAGE>
In the long-distance business, we've set our sights on becoming the
market-share leader in Connecticut. Likewise, for Internet services, which
continue to grow geometrically.
We are honing our competitive edge by continuing to develop employee
capabilities and by reshaping a monopoly culture to one that is riveted on
customers and encourages an adaptive, creative work atmosphere and mentality.
And we're forging alliances that will leverage our strengths, improve margins
and add value. An example is our partnership with Disney through americast. This
gives us access to high-quality programming at competitive prices and
capitalizes on pooled resources to develop the next generation of television.
Legal Initiative Results In Important Partial
Stay Of FCC Order The
1994 landmark state statute that brought choice to consumers for
telecommunications services came far ahead of the 1996 federal legislation. But
the new federal law did give us an opportunity to enter the cable-TV business in
a big way, which we acted on quickly.
The FCC's first major interpretation of the new federal law was its
interconnection order. That order would have imposed unrealistic pricing
methodologies and pulled the rug out from under our pricing negotiations with
competitors. SNET took a leadership role in mounting a legal challenge to the
order. We won an important partial stay, and the appeal process is under way.
We're Reaping Success In An Explosive
Growth Industry
The companies that prevail will be those that are adaptable and invest in their
future while they remain their customers' most compelling choice for products,
price and service. We're right on track at SNET.
We have come a long way very fast. I've been in this business for many
years, and I know that SNET has the means and the will to reap continued success
in an explosive growth industry. I am confident about our ability to capture
that potential for you.
/s/ DAN MIGLIO
- ------------------------------------
Daniel J. Miglio
Chairman and Chief Executive Officer
February 12, 1997
SNET Annual Report 5
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL COMMENTARY
(Dollars in Millions, Except Per Share Amounts)
Southern New England Telecommunications Corporation ("Corporation") has business
units in the following telecommunications product groups: wireline; wireless;
and information and entertainment. Wireline includes telephone related services,
premium services and equipment sales. Wireless consists of cellular services and
equipment sales and paging services; and information and entertainment includes
publishing, internet and multimedia services. Other activities, such as real
estate and holding company operations, are included with eliminations and other
sales.
Operating Results
Income before extraordinary charge was $192.8, $168.8 and $177.6 in 1996, 1995
and 1994, respectively. The corresponding earnings per share for those years
were $2.94, $2.60 and $2.77. The financial results are summarized as follows:
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------
Income before extraordinary
charge $ 192.8 $ 168.8 $177.6
Extraordinary charge, net of tax -- (687.1) --
- -----------------------------------------------------------------
Net Income (Loss) $ 192.8 $(518.3) $177.6
=================================================================
Earnings (Loss) Per Share:
Income before extraordinary
charge $ 2.94 $ 2.60 $ 2.77
Extraordinary charge -- (10.59) --
- -----------------------------------------------------------------
Earnings (Loss) Per Share $ 2.94 $ (7.99) $ 2.77
=================================================================
Income before extraordinary charge increased $24.0 in 1996 due to strong
revenues, primarily in interstate and international toll and wireless, offset
partially by an increase in wireline expenses.
Income before extraordinary charge decreased $8.8 in 1995 due primarily to
the impact of the cellular acquisitions completed in July 1995 of approximately
$19, or $.29 per share dilution. Stronger operating cash flow in the wireline
business partially offset this decrease. Also included in 1995 was an $11.0
charge, $6.3 after-tax or $.10 per share, associated primarily with a court
ruling on the Corporation and The Southern New England Telephone Company's
("Telephone Company") labor practices [see Note 9].
In 1995, the Corporation recorded a non-cash extraordinary charge of
$1,202.6, $687.1 after-tax or $10.59 per share, related to the discontinuance of
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation" for financial reporting purposes. This
non-cash extraordinary charge consisted of the elimination of net regulatory
assets and the recognition of depreciation reserve deficiencies [see Note 3].
The Telephone Company determined that due to emerging competition and the change
in its regulatory environment, it would change from the methodology under SFAS
No. 71, which specifies accounting standards required for public utilities and
certain other regulated companies, to one which is more appropriate for a
competitive environment. As a result of this charge, net loss for 1995 was
$518.3, or $7.99 per share.
Revenues and Sales
Revenues and sales increased $125.5, or 6.9%, in 1996 and $98.6, or 5.7%, in
1995. The components of revenues and sales by product group are summarized as
follows:
For the Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------- ---------
Wireline:
Local service $ 673.7 $ 641.6 $ 618.8
Network access 388.1 369.4 354.5
Intrastate toll 251.2 266.4 295.4
Interstate and international toll 101.2 42.1 10.0
Premium services and
equipment sales 107.6 104.9 103.2
Other revenues 50.1 57.0 45.6
- ---------------------------------------------------------------------
Total Wireline 1,571.9 1,481.4 1,427.5
- ---------------------------------------------------------------------
Wireless:
Cellular service 203.0 153.1 97.0
Cellular equipment sales 10.1 7.8 4.5
Paging 6.1 12.2 17.8
- ---------------------------------------------------------------------
Total Wireless 219.2 173.1 119.3
- ---------------------------------------------------------------------
Information and Entertainment 184.2 180.9 180.5
Eliminations and Other Sales (33.4) (19.0) (9.5)
- ---------------------------------------------------------------------
Total Revenues and Sales $1,941.9 $1,816.4 $1,717.8
=====================================================================
WIRELINE Local service revenues, derived from providing local exchange, advanced
calling features and local private line services, increased $32.1, or 5.0%, in
1996 and $22.8, or 3.7%, in 1995. Growth in 1996 and 1995 was primarily
attributable to increases of 4.3% and 3.2%, respectively, in access lines in
service. The increases included significant growth in Centrex business lines in
1996, and second residential lines in both years. The 1996 increase of 90,012
access lines was the largest annual increase experienced by the Telephone
Company. Local service revenues also increased due to growth in subscriptions to
SmartLink(R) vertical calling services, including Caller ID, missed call
dialing, call blocking and call tracing. Management expects competition to
impact local service revenues in 1997 as other telecommunications providers
offer local service [see Competition].
Network access charges are assessed on interexchange carriers and end users
for access to the local exchange network. In 1996, network access revenues
increased $18.7, or 5.1%, compared with an increase of $14.9, or 4.2%, in 1995.
The increases in 1996 and 1995 were due primarily to continued growth in
interstate minutes of use of approximately 8% and 6%, respectively, and
increases in access lines in service
6 SNET Annual Report
<PAGE>
discussed previously. Partially offsetting the impact of the increase in minutes
of use was a decrease in rates due to discount plans and reduced access tariffs
[see Regulatory Matters]. In addition, intrastate access revenues increased due
primarily to an increase in intrastate minutes of use by competitive providers
of intrastate long-distance service.
In 1996, intrastate toll revenues, which include primarily revenues from
toll and WATS "800" services, decreased $15.2, or 5.7%, compared with a decrease
of $29.0, or 9.8%, in 1995. Reduced intrastate toll rates due to the migration
of customers to several of the Corporation's discount calling plans was the
primary factor in the decrease in both years. Also contributing to the decreases
was a reduction in toll message volume of approximately 1% and 2% in 1996 and
1995, respectively. In 1996, increased volume in the first half of the year from
higher customer demand during inclement weather was offset by decreased volume
in the second half of the year as a result of the increasingly competitive toll
market. Customer migration to discount calling plans and increasing competition
will continue to place downward pressure on intrastate toll revenues.
Interstate and international toll services provided to Connecticut based
customers increased $59.1 in 1996 and $32.1 in 1995. Interstate and
international access line subscriptions more than doubled in both years to
approximately 758,000 access lines at year-end 1996. The increase in 1996 was
the result of customers' response to SNET All Distancer(R), a simple,
competitively priced product providing one-second rating on intrastate,
interstate and international toll services, along with local service on one
bill.
Other wireline revenues, which include primarily services rendered on
behalf of interexchange carriers, rent and late fee revenues, decreased $6.9 in
1996 compared with an increase of $11.4 in 1995. The 1996 decrease was due
primarily to the discontinuance of the provision of billing services for a major
long-distance carrier. Higher billing service and late payment fee revenues
contributed to the increase in 1995.
WIRELESS Cellular service revenues increased $49.9, or 32.6%, in 1996 and $56.1,
or 57.8%, in 1995. The increase in 1996 was due mainly to strong growth of 21.4%
in the subscriber base in response to competitive marketing and pricing
strategies. Also contributing to the increase was the impact from the first full
year of revenues from the cellular acquisitions completed in July 1995 [see Note
2]. The 1995 increase was due primarily to growth of 94.6% in the subscriber
base, including the new subscribers from the expanded cellular area. Average
usage per subscriber continued to decline in 1996 and 1995, in line with a
nationwide trend, as lower volume users made up a larger portion of the
subscriber base.
Paging sales decreased $6.1 in 1996 and $5.6 in 1995. The impact of the
sale of paging network assets in June 1995 contributed to the reduction in sales
[see Note 2]. Wireless continues, as a reseller, to market paging services under
the Page 2000(R) brand name.
INFORMATION AND ENTERTAINMENT Information and entertainment revenues increased
$3.3 in 1996 due primarily to growth in yellow page advertising, while revenues
remained relatively flat in 1995. Internet sales, a new service offered in 1996,
also contributed to the increase. The introduction of cable television service
is anticipated to have a positive impact on revenues in 1997.
Costs and Expenses
Total costs and expenses increased $92.1, or 6.3%, in 1996 and $124.1, or 9.2%,
in 1995. Total costs and expenses are summarized as follows:
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
Operating $ 777.9 $ 732.3 $ 633.4
Maintenance 371.1 332.8 325.3
- --------------------------------------------------------------------
Total Operating Costs 1,149.0 1,065.1 958.7
Depreciation and amortization 356.1 346.0 328.6
Taxes other than income 54.6 56.5 56.2
- --------------------------------------------------------------------
Total Costs and Expenses $1,559.7 $1,467.6 $1,343.5
====================================================================
Total operating costs consist primarily of employee-related expenses,
including wages and benefits. Cost of goods sold and general and administrative
expenses, including marketing, represent the remaining portion of these
expenses. Total operating costs increased $83.9, or 7.9%, in 1996 compared with
an increase of $106.4, or 11.1%, in 1995.
Management expects to incur computer system related costs in order to avoid
complications with the recognition of the year 2000. These costs will be
incurred over the next three to four years, with related expenses estimated to
be approximately $15 to $20 in 1997.
WIRELINE Wireline operating costs increased $99.9, or 11.6%, in 1996 and $16.0,
or 1.9%, in 1995. The increase in 1996 was due primarily to the direct costs of
providing an increased volume of interstate and international toll services.
Also contributing to the increase were higher contract services, bad debt and
marketing expenses. The increase in contract services was due primarily to
outsourcing certain functions which experienced lower work force levels,
including the data processing, network and collection areas. Wireline bad debt
expenses increased primarily from higher credit risk in a competitive
environment and reduced collection efforts. The residential and business
collection efforts were negatively impacted during a period of transition when
employees departed under the early-out offer ("EOO") and most of the collection
function was outsourced to an external agency.
Employee-related expenses were relatively flat in 1996. Savings from the
EOO and severance programs
SNET Annual Report 7
<PAGE>
under the 1993 restructuring program [see Note 6] were offset partially by the
costs from a higher work force level in the second half of the year. The
Telephone Company wireline work force increased to 8,167 employees at year-end
1996, primarily in the network area to meet increased service demands. Also
offsetting the savings were higher pension and postretirement expenses
(excluding net settlement gains and curtailment losses), annual compensation
increases and additional overtime.
In 1995, the direct costs of providing an increased volume of interstate
and international toll services and the previously discussed labor practice
charge were offset partially by lower employee-related expenses, including
pension income. Work force levels decreased during 1995 due primarily to the EOO
and severance programs. The Telephone Company's wireline work force decreased to
7,742 employees at year-end 1995, compared with 8,604 employees at year-end
1994.
WIRELESS Wireless operating costs were relatively flat in 1996 compared with an
increase of $79.3, or 76.9%, in 1995. Costs from the first full year of the
expanded cellular area in 1996 were offset by lower customer acquisition costs
and roaming fraud due to preventive control programs. The 1995 increase was due
primarily to costs associated with an expanding preacquisition subscriber base,
the operation of the cellular acquisitions in the second half of the year and
increased roaming fraud.
INFORMATION AND ENTERTAINMENT Information and entertainment operating costs
decreased $4.4, or 5.6%, in 1996 compared with an increase of $12.5, or 19.0%,
in 1995. The 1996 decrease was due primarily to the discontinuance of the
multimedia trial, offset partially by costs of providing internet service and
development costs associated with the commercial deployment of the Corporation's
cable offering. Costs of the multimedia trial, offset partially by lower
publishing expenses, contributed to the increase in 1995. Management expects
information and entertainment operating costs to increase in 1997 as the
Corporation launches SNET americast, its cable television service.
DEPRECIATION AND AMORTIZATION In 1996, depreciation and amortization expense
increased $10.1, or 2.9%, compared with an increase of $17.4, or 5.3%, in 1995.
The 1996 and 1995 increases were due primarily to the amortization of assets
acquired in the cellular acquisitions, primarily cellular licenses. An increase
in the average depreciable telecommunications property, plant and equipment also
contributed to the increase. The 1995 increase also resulted from revised
depreciation rate schedules for the Telephone Company's intrastate plant, as
approved by the Connecticut Department of Public Utility Control ("DPUC"),
effective January 1, 1995.
RESTRUCTURING CHARGE In December 1993, the Corporation recorded a restructuring
charge to provide for a comprehensive restructuring program designed to reduce
costs and improve delivery of service. The restructuring charge of $355.0
before-tax was comprised of $170.0 in employee separation costs, $145.0 in
process and systems reengineering costs and $40.0 in exit and other costs.
Specifically, the program included costs to be incurred to facilitate employee
separations as well as incremental costs of implementing appropriate
reengineering solutions, including designing and developing new processes and
tools [see Note 6]. Beginning in 1997, the Corporation anticipates annual
savings of approximately $100 from reduced employee-related expenses, net of
costs for provisional employees. These anticipated savings will be offset by
growth in the business.
Interest Expense
For the Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------
Interest Expense $88.7 $85.9 $74.9
===============================================================
Interest expense increased $2.8, or 3.3%, in 1996 and $11.0, or 14.7%, in
1995. The issuance of commercial paper and medium-term notes in connection with
the cellular acquisitions was the primary contributor to the increases in both
years [see Note 2]. In 1996, the increase was offset partially by lower average
interest rates and capitalized interest of $7.2 due to a change in the reporting
of capitalized interest as a reduction of interest expense. Prior to the
discontinuance of SFAS No. 71, capitalized interest was reported as a component
of other income, net.
Other Income, net
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------
Other Income, net $6.9 $15.5 $.1
=============================================================
Other income, net is comprised primarily of interest income, income from
investments and gains or losses on the disposition of non-telephone property.
The 1996 decrease was due primarily to the absence of income from the
disposition of a real estate partnership in 1995, lower interest income and the
change in the classification of capitalized interest from other income, net to
interest expense discussed previously. Other income, net increased in 1995 due
primarily to an increase in partnership income, interest income and a gain on
the disposal of non-telephone property.
Income Taxes
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------
Income Taxes $107.6 $109.6 $121.9
==============================================================
The combined federal and state effective tax rate in 1996 was 35.8% compared
with 39.4% in 1995 and 40.7% in 1994. The lower 1996 effective tax rate was due
primarily to a higher level of state tax credits. The
8 SNET Annual Report
<PAGE>
recognition of state tax credits relating to certain personal property taxes
lowered the effective tax rate in 1995 when compared with 1994. A reconciliation
of these effective tax rates to the statutory tax rates is disclosed in Note 5.
Competition
As a result of unprecedented legislative and regulatory reform, the Corporation
continues to experience an increasingly competitive environment with respect to
telecommunications services in Connecticut. Competitors include interexchange
carriers and competitive access providers with respect to the wireline's
(Telephone Company's) existing services. In 1996, major carriers intensified
their marketing efforts to sell intrastate long-distance services with full
implementation of intrastate equal access. In addition, providers began offering
local exchange service to businesses in certain areas of the state. Management
supports bringing to customers the benefit of competition and affording all
competitors the opportunity to compete fairly under reduced regulation. The
competitive environment also provides opportunities for the Corporation to
continue to grow its interstate and international long-distance service and to
launch its cable television service in 1997.
On September 6, 1996, SNET Personal Vision, Inc. ("Personal Vision")
received an 11 year license from the DPUC to operate a community antenna
television system that will serve the entire state of Connecticut. Personal
Vision also became a partner in the americast joint venture with The Walt Disney
Company, Ameritech Corporation, BellSouth Corporation, SBC Communications Inc.
and GTE Corporation. The partnership will provide a full range of americast(TM)
programming and marketing services and access to the joint venture's innovative
technology. Personal Vision will launch its cable service, SNET americast, in
the spring of 1997.
To provide competitive toll products, wireline led the industry in 1996 by
introducing the option of one-second rating for all toll calls so customers only
pay for the time they talk. Wireline also successfully promoted the one bill
feature of SNET All Distance, a seamless toll service product line which
provides discount calling plans that include intrastate, interstate and
international calling. The migration of Connecticut customers to wireline's
bundled calling plans resulted in significant growth for interstate and
international long-distance services.
Concerning competition for local exchange service, seventeen
telecommunications providers have been granted certificates of public
convenience and necessity for local service and one additional application is
pending before the DPUC. With only a few smaller companies offering local
service in 1996, including a cable television company, competition did not have
the impact on local service revenues as originally anticipated. Local service
competition is expected to grow; however, the timing and financial impact cannot
be predicted at this time. Based on existing state and federal regulations, the
Telephone Company expects that many competitors will resell the Telephone
Company's network and that increased network access revenues will offset a
significant portion of local service revenues lost to competition.
The Corporation's ability to compete in providing all of its products and
services is dependent upon regulatory reform that will allow pricing flexibility
to meet competition and provide a level playing field with similar regulation
for similar services and with reduced regulation to reflect an emerging
competitive marketplace.
Regulatory Matters
On February 8, 1996, Congress passed the Telecommunications Act of 1996 ("Act").
The Act was designed to overhaul U.S. Telecommunications policy by removing
barriers to local competition. The Federal Communications Commission's ("FCC")
First and Second Report and Order ("Order"), adopted August 1, 1996, implements
the Act and contains numerous provisions regarding the interconnection of the
Telephone Company's network with those of its competitors. Significant changes
to network and data systems will be required for the Telephone Company to comply
with the Order. In addition, the Order would require fundamental changes in the
development of the prices that the Telephone Company would charge competitors
for purchasing regulated network products and services. These decisions are the
first of three major rule makings to carry out the Act. Future decisions will
include universal service and access charge reform, discussed below. The Order,
as well as universal service and access charge reform, could have a material
negative impact on the Telephone Company.
The Order was appealed and a stay was requested by various local telephone
companies, including the Telephone Company, the National Association of
Regulatory Utility Commissioners and individual state regulatory commissions. On
October 15, 1996, the Eighth Circuit Court of Appeals ("Court") issued a stay
delaying the effectiveness of the pricing provisions and the "pick and choose"
rule of the Order. The FCC appealed the Court's decision to stay these rules to
the Supreme Court. The Supreme Court, however, subsequently declined to hear the
appeal. Oral arguments on the Order were heard by the Court on January 17, 1997.
A decision is expected in the first half of 1997. In the meantime, the Telephone
Company has proceeded to negotiate several interconnection agreements with other
carriers in accordance with the FCC's directives not affected by the Court's
stay.
In accordance with the Act, the Federal-State Joint Board adopted a
Recommended Decision on Universal
SNET Annual Report 9
<PAGE>
Service on November 7, 1996. The recommendation addresses the universal service
provisions of the Act and proposes that one federal fund be established to
provide support for universal service. The proposal calls for interstate
telecommunications service providers to contribute to the fund based on their
telecommunications revenue, net of payments to other carriers. The revenue to be
assessed may either be total interstate and intrastate revenue, or interstate
revenue only, depending on further discussion of these issues. By May 1997, the
FCC is required to issue an order implementing the universal service section of
the Act.
On December 24, 1996, the FCC also released a Notice For Proposed Rule
Making, seeking comments on proposed changes to the way the Telephone Company
recovers interstate access charges from interstate toll providers, including
SNET America, Inc. A full analysis of the implications of the FCC's proposal has
not yet been completed. However, the industry could experience reduced access
revenues. The Telephone Company provided comments to the FCC proposal on January
27, 1997. A decision from the FCC regarding this matter is expected in April or
May 1997.
In compliance with the Act, the Telephone Company has filed with the DPUC
numerous cost studies supporting its proposed wholesale (i.e., resale) and
unbundled rates for interconnection services. In light of the Order, on January
9, 1997, the DPUC issued a draft decision setting a 17.8% discount rate for
local residence service. The Telephone Company filed its written exceptions and
a request seeking clarification of, among other things, the applicability of the
17.8% discount. A second draft decision is expected in the first quarter of
1997.
In March 1996, the DPUC issued a final decision that replaces traditional
rate of return regulation with alternative (price based) regulation to be
employed, effective April 1, 1996, during the transition to full competition.
The decision contains the following major items: price cap regulation for
non-competitive services; a five year monitoring period on financial results;
and a price cap formula on services categorized as non-competitive (utilizing an
inflation factor, a 5% productivity offset, a narrowly defined exogenous factor,
a potential service quality adjustment and various pricing bands). In addition,
basic local service rates for residence, business and coin may not be raised
above current levels until January 1, 1998, at which time the price cap formula
becomes effective for these services, unless they have been reclassified into
the emerging competitive or competitive categories. The impact of these changes
on the Telephone Company's operating results will depend on the timing of
classifying the various products and services into categories (non-competitive,
emerging competitive and competitive) for pricing (banding) changes.
On November 27, 1996, the DPUC issued a final decision granting the
Telephone Company's request to reclassify message toll and calling card services
from the non-competitive category to competitive in its entire service
territory. Reclassification provides the Telephone Company with the opportunity
to gain additional promotional and pricing flexibility for its products and
services, and to operate under regulatory guidelines similar to its competitors.
On June 24, 1996, the FCC approved the Telephone Company's 1996 annual
interstate access tariff filing. These tariffs became effective July 1, 1996.
The Telephone Company again elected a 4.0% productivity factor and will be
allowed to earn up to a 12.25% interstate rate of return annually before any
sharing. The filing is anticipated to decrease interstate network access
revenues by $2.3 for the period July 1, 1996 to June 30, 1997. Management
expects this decrease to be offset by increased demand. As of December 31, 1996,
the Telephone Company's interstate rate of return was below the 12.25%
threshold.
Employee Relations
On April 12, 1995, a new labor contract was ratified by members of the
Connecticut Union of Telephone Workers, Inc. ("CUTW"). As part of the new
contract, a voluntary EOO, which provided incentives in the form of enhanced
pension benefits, was available to bargaining-unit employees during July 1995.
Approximately 2,700 bargaining-unit employees accepted the offer at that time
and left the Corporation by June 1996. CUTW members who remained with the
Corporation received a combination of basic wage and lump sum increases to their
wages or cash balance pension plan account totaling 4.0% in January 1996 and
3.0% in January 1997. In January 1998, they will receive a combination of basic
wage and lump sum increases totaling 3.0%. In addition, the contract also
provided a sign-on bonus and health benefit and pension enhancements. The new
labor agreement will expire on August 8, 1998. The contract is intended to keep
layoffs to a minimum while enabling the Corporation to position itself to meet
increasing competition.
Liquidity and Capital Resources
OPERATING ACTIVITIES The Corporation generated cash flows from operations of
$470.2 during 1996 compared with $439.2 during 1995 and $422.6 during 1994. Cash
flows from operations increased in 1996 compared with 1995 due primarily to
strong growth in revenues.
In 1996, the consolidated balance sheet changed as a result of operating
activities. Even though revenues increased 6.9%, accounts receivable and the
related allowance for uncollectibles decreased due primarily to higher
write-offs in 1996. The higher write-offs reflect the impact of an increasingly
competitive environment
10 SNET Annual Report
<PAGE>
and reduced collection efforts discussed previously. As a result of the changing
environment, management revised its procedure to write-off uncollectible
accounts within a shorter time frame. In addition, management enhanced its
evaluation of the adequacy of the allowance for uncollectibles by placing
additional emphasis on the risks associated with a competitive environment.
Other balance sheet changes included a decrease in the current portion of
deferred income taxes due primarily to costs incurred in 1996 under the
restructuring program and a decrease in accrued postretirement benefit
obligation as a result of favorable investment returns and increased funding to
the trust. The decrease in other liabilities and deferred credits was
attributable to a pension settlement gain.
Cash outlays relating to the Corporation's restructuring charge recorded in
December 1993 totaled $110.6, $89.1 and $63.6 in 1996, 1995 and 1994,
respectively. Costs incurred for employee separations of $20.0 in 1996, $9.0 in
1995 and $27.6 in 1994 included primarily payments for severance and unused
vacation. Incremental costs of $83.1 in 1996, $74.2 in 1995 and $35.0 in 1994
were incurred for executing numerous reengineering programs. In addition, exit
and other costs were $7.5 in 1996, $5.9 in 1995 and $1.0 in 1994 and included
expenses relating to the reduction of overall corporate space requirements. All
cash expenditures were funded with cash flows from operations. Management
anticipates that cash expenditures in connection with the restructuring program
will approximate $15 in 1997 and will be funded from operations.
INVESTING ACTIVITIES The primary use of corporate funds continued to be capital
expenditures. Cash expended for capital additions was $366.6, $354.0 and $282.3
in 1996, 1995 and 1994, respectively. Capital additions for all years were
funded entirely from cash flows from operations. The majority of these additions
was for construction of the wireline network. Capital additions also included
incremental capital additions under the restructuring program and improvements
to wireless cell sites.
Management anticipates that total capital expenditures for consolidated
telecommunications plant will approximate $435 in 1997 and will be funded from
cash flows from operations. Included in total capital expenditures in 1997 are
estimated additions of $262 to the wireline network as compared with actual 1996
expenditures of approximately $251. These additions include expenditures
relating to I-SNET(sm), a statewide telephony and information superhighway.
Since 1994, the wireline business has been replacing its existing network of
twisted copper wire with low maintenance fiber-optic and coaxial cable. The
buildout of I-SNET, a $4.5 billion investment, is expected to be completed by
2007. This advanced network is capable of delivering voice, video and a full
range of information and interactive multimedia services. I-SNET passed
approximately 234,000 households as of December 1996, and is expected to pass
approximately 334,000 households by December 1997. The support of this
investment will be primarily through increased productivity from the new
technology deployed and customer demand for the new services offered.
Incremental capital expenditures relating to the restructuring program
approximated $28, $29 and $20 in 1996, 1995 and 1994, respectively.
In July 1995, the Corporation completed the acquisitions of certain
cellular properties and an increased interest in an existing partnership for
approximately $456 [see Note 2]. The properties increased wireless' service area
by 2.3 million POPs (population equivalents) along the communication intensive
Boston to New York corridor. The purchases were financed with short-term debt of
approximately $456, of which $300.0 was subsequently replaced with medium-term
notes in August 1995.
During 1995, the Corporation completed the sale of substantially all of the
paging network assets [see Note 2]. In addition, as a part of the Corporation's
reengineering solutions, certain real estate properties were sold during the
year to reduce office space. Proceeds of $74.0 primarily from these transactions
were used to repay debt associated with these assets.
FINANCING ACTIVITIES In September 1996, a total of $20.0 of 7.61% medium-term
notes matured and were satisfied with the issuance of short-term debt.
In July 1995, the Corporation filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") to sell up to $470.0 in medium-term
notes. Pursuant to the registration statement, $300.0 of unsecured notes were
sold in August 1995 with interest rates ranging from 6.50% to 7.00%. The
proceeds of the sale were used to replace a portion of short-term debt and to
establish permanent financing for the cellular acquisitions discussed
previously.
In September 1995, the Corporation's 7.66% medium-term notes of $20.0
matured and were satisfied with the issuance of short-term debt. The Corporation
also repaid long-term debt of $88.3 with proceeds from the sale of paging and
real estate assets and the issuance of short-term debt.
Dividends paid totaled $100.2, $98.0 and $97.2 in 1996, 1995 and 1994,
respectively. The quarterly dividend rate of $.44 per share has remained
unchanged for the past seven years.
On February 4, 1997, the Corporation issued $100.0 of 6.50% medium-term
notes due 2002. The issuance replaced a portion of short-term debt related to
the cellular acquisitions discussed previously.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031, which were satisfied with the issuance of short-term debt. The
SNET Annual Report 11
<PAGE>
early extinguishment of debt will result in an extraordinary charge to the
Corporation's first quarter 1997 earnings of approximately $3.7 after-tax, or
$.06 per share.
ESOP In connection with the establishment of the Employee Stock Ownership Plan
("ESOP") in 1990, the Corporation loaned the ESOP $10.0 and guaranteed a $110.0
loan to the ESOP by a third party. The Corporation has committed to make cash
contributions to the ESOP that, together with dividends received on shares held
by the ESOP, will enable the ESOP to make its principal and interest payments on
both loans. Both loans mature in the year 2000. In 1996, the Corporation made
cash payments to the ESOP for debt service of $13.5 and anticipates making
equivalent cash payments during 1997.
DEBT RATIO The Corporation's ratio of debt to total capitalization at year-end
1996 was 74.9% compared with 80.0% at year-end 1995 and 51.0% at year-end 1994.
The increase in 1995 was due primarily to the combined effect of the non-cash
extraordinary charge related to the discontinuance of SFAS No. 71 and the debt
issued to acquire the cellular properties in July 1995. The ESOP represented
2.7% of the debt ratio at December 31, 1996 compared with 3.4% and 3.8% at
December 31, 1995 and 1994, respectively.
CAPITAL RESOURCES The Corporation maintains bank lines of credit to facilitate
the issuance of commercial paper. As part of this credit facility, the
Corporation has obtained contractual commitments to $300.0 in lines of credit
provided by a syndicate of banks. The annual commitment fee is currently .05% on
the lines of credit. As of December 31, 1996, the entire $300.0 was available.
As of December 31, 1996, the Corporation and the Telephone Company had
$225.0 and $95.0, respectively, of unissued, unsecured debt securities
registered with the SEC. Subsequent to year-end, the Corporation's total
decreased to $125.0 with the February 1997 issuance of $100.0 of 6.50%
medium-term notes due 2002. Additional notes may be sold in one or more issues
from time to time as market conditions warrant.
Management believes that the Corporation has sufficient internal and
external resources to finance the anticipated requirements of business
development. Capital additions and dividends are expected to be funded primarily
with cash from operations during 1997. The purchase of Woodbury Telephone
Company will be funded through the issuance of treasury stock [see Note 2]. The
Corporation also has access to external resources including committed lines of
credit and unissued debt securities registered with the SEC.
12 SNET Annual Report
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Report of Management
The Corporation's consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The Corporation is
responsible for the preparation and reliability of the data in these
consolidated financial statements, including estimates and judgments relating to
matters not concluded by year-end. To this end, the Corporation maintains a
highly developed system of internal controls and supports an extensive program
of internal auditing to monitor compliance with the system.
Management believes that this system provides reasonable, but not absolute,
assurance at a reasonable cost that the transactions of the Corporation are
executed in accordance with management's authorizations and are recorded
properly. This system requires that the recorded assets be compared with
existing assets at reasonable intervals and it provides reasonable assurance
that access to assets is permitted only in accordance with management's
authorization. The Corporation further seeks to assure the reliability of these
consolidated financial statements by the careful selection of its managers, by
organizational arrangements that provide appropriate division of responsibility
and by communication and inspection programs aimed at assuring understanding of
and compliance with its policies, standards and managerial authorities.
The Audit Committee of the Board of Directors, which consists of five
non-employee directors, meets periodically with the Corporation's financial
management, audit services and independent accountants (Coopers & Lybrand
L.L.P.) to review their work and the relationships between them in whatever
depth considered necessary to fulfill the Committee's responsibilities. Both
audit services and the independent accountants meet privately with and have
unrestricted access to the Audit Committee.
/s/ DONALD R. SHASSIAN
Donald R. Shassian
Senior Vice President and Chief Financial Officer
January 21, 1997
Report of Independent Accountants
To the Shareholders of Southern New England
Telecommunications Corporation:
We have audited the consolidated balance sheets of Southern New England
Telecommunications Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southern New
England Telecommunications Corporation as of December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Corporation discontinued accounting for the operations of its telephone
subsidiary in accordance with Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation," effective
January 1, 1996.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Hartford, Connecticut
January 21, 1997
SNET Annual Report 13
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Statements of Income (Loss)
Dollars in Millions, Except Per Share Amounts,
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
REVENUES AND SALES $1,941.9 $1,816.4 $1,717.8
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating 777.9 732.3 633.4
Maintenance 371.1 332.8 325.3
Depreciation and amortization 356.1 346.0 328.6
Taxes other than income 54.6 56.5 56.2
- --------------------------------------------------------------------------------
Total Costs and Expenses 1,559.7 1,467.6 1,343.5
- --------------------------------------------------------------------------------
OPERATING INCOME 382.2 348.8 374.3
Interest expense 88.7 85.9 74.9
Other income, net 6.9 15.5 .1
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 300.4 278.4 299.5
Income taxes 107.6 109.6 121.9
- --------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGE 192.8 168.8 177.6
Extraordinary charge, net of tax -- (687.1) --
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ 192.8 $ (518.3) $ 177.6
================================================================================
Weighted Average Common Shares
Outstanding (thousands) 65,589 64,888 64,209
================================================================================
EARNINGS (LOSS) PER SHARE
Income before extraordinary charge $ 2.94 $ 2.60 $ 2.77
Extraordinary charge -- (10.59) --
- --------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ 2.94 $ (7.99) $ 2.77
================================================================================
The accompanying notes are an integral part of these financial statements.
14 SNET Annual Report
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Balance Sheets
Dollars in Millions, At December 31, 1996 1995
- ----------------------------------------------------------------------------
ASSETS
Cash and temporary cash investments $ 9.0 $ 11.1
Accounts receivable, net of allowance
for uncollectibles of $27.4 and $34.2,
respectively 323.3 347.3
Materials, supplies and inventories 27.4 26.1
Prepaid publishing 35.2 37.3
Deferred income taxes 45.4 66.8
Other current assets 27.7 46.3
- ----------------------------------------------------------------------------
Total Current Assets 468.0 534.9
Property, plant and equipment, net 1,597.0 1,565.2
Intangible assets, net 400.3 414.9
Deferred income taxes 91.2 92.0
Leases and other assets 114.5 117.2
- ----------------------------------------------------------------------------
Total Assets $2,671.0 $2,724.2
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 252.0 $ 261.9
Short-term debt 215.2 232.2
Advance billings and customer deposits 60.9 58.0
Accrued compensated absences 31.9 36.6
Restructuring charge 14.5 59.0
Other current liabilities 92.5 87.9
- ----------------------------------------------------------------------------
Total Current Liabilities 667.0 735.6
Long-term debt 1,169.7 1,182.4
Accrued postretirement benefit obligation 288.9 310.8
Unamortized investment tax credits 15.5 17.6
Other liabilities and deferred credits 66.9 124.9
- ----------------------------------------------------------------------------
Total Liabilities 2,208.0 2,371.3
- ----------------------------------------------------------------------------
Common stock; $1.00 par value; 300,000,000
shares authorized; 68,407,669 and
67,881,159 issued, respectively 68.4 67.9
Proceeds in excess of par value 602.8 697.9
Retained deficit (55.7) (249.5)
Treasury stock; 2,758,512 shares, at cost (104.7) (104.7)
Unearned compensation related to ESOP (47.8) (58.7)
- ----------------------------------------------------------------------------
Total Shareholders' Equity 463.0 352.9
- ----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,671.0 $2,724.2
============================================================================
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 15
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
<TABLE>
Consolidated Statements of Changes in Shareholders' Equity
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 66,608,360 $66.6 $656.7 $ 315.7 $(104.7) $(79.7) $854.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 177.6 177.6
Common stock issued, at market:
Dividend reinvestment plan 474,441 .5 15.2 15.7
Savings and incentive plans 181,634 .2 5.9 6.1
Dividends declared ($1.76 per share) (113.0) (113.0)
Reduction of ESOP debt 10.1 10.1
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.5 1.5
ESOP earned compensation
accrual .3 .3
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 67,264,435 67.3 677.8 381.8 (104.7) (69.3) 952.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss (518.3) (518.3)
Common stock issued, at market:
Dividend reinvestment plan 466,498 .5 15.4 15.9
Savings and incentive plans 150,226 .1 4.7 4.8
Dividends declared ($1.76 per share) (114.2) (114.2)
Reduction of ESOP debt 11.0 11.0
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.2 1.2
ESOP earned compensation
accrual (.4) (.4)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 67,881,159 67.9 697.9 (249.5) (104.7) (58.7) 352.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 192.8 192.8
Common stock issued, at market:
Dividend reinvestment plan 367,183 .4 14.3 14.7
Savings and incentive plans 159,327 .1 5.8 5.9
Dividends declared ($1.76 per share) (115.2) (115.2)
Reduction of ESOP debt 12.1 12.1
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.0 1.0
ESOP earned compensation
accrual (1.2) (1.2)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 68,407,669 $68.4 $602.8 $ (55.7) $(104.7) $(47.8) $463.0
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
16 SNET Annual Report
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows
Dollars in Millions, For the Years Ended December 31, 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 192.8 $(518.3) $ 177.6
Tax benefit of dividends on shares held in ESOP 1.0 1.2 1.5
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 356.1 346.0 328.6
Extraordinary charge, net of tax -- 687.1 --
Provision for uncollectible accounts 44.4 25.9 23.0
Restructuring payments (110.6) (89.1) (63.6)
Increase in deferred income taxes 22.2 30.7 30.0
Decrease in investment tax credits (2.1) (6.9) (7.9)
Changes in operating assets and liabilities, net (30.3) (34.0) (74.1)
Other, net (3.3) (3.4) 7.5
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 470.2 439.2 422.6
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash expended for capital additions (366.6) (354.0) (282.3)
Purchase of cellular properties -- (455.6) --
Proceeds from asset sales 10.8 74.0 --
Other, net 16.6 16.5 27.3
----------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (339.2) (719.1) (255.0)
----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of long-term debt (34.9) (108.3) (294.7)
Proceeds from long-term debt -- 300.0 --
Cash dividends paid (100.2) (98.0) (97.2)
Net proceeds of commercial paper 2.0 192.9 6.3
Other, net -- (2.3) (.1)
----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (133.1) 284.3 (385.7)
----------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Temporary Cash Investments (2.1) 4.4 (218.1)
Cash and temporary cash investments at beginning of year 11.1 6.7 224.8
----------------------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Year $ 9.0 $ 11.1 $ 6.7
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 17
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
NOTE 1: Summary of Significant
Accounting Policies
BASIS OF PRESENTATION The consolidated financial statements of Southern New
England Telecommunications Corporation ("Corporation") are in conformity with
generally accepted accounting principles ("GAAP"). Effective January 1, 1996,
the Corporation's telephone operating subsidiary, The Southern New England
Telephone Company ("Telephone Company"), discontinued using Statement of
Financial Accounting Standard ("SFAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation" [see Note 3].
The consolidated financial statements include the accounts of the
Corporation, all wholly-owned subsidiaries and partnerships in which the
Corporation effectively has control. All significant intercompany transactions
and accounts have been eliminated.
The Corporation derives substantially all of its revenues from the
telecommunications service industry by providing wireline, wireless and
information and entertainment services, including local, national and
international communications; network services; mobile communications; and
advertising. The Corporation's operations and customers are located primarily in
Connecticut.
The 1995 and 1994 consolidated financial statements have been reclassified
to conform to the current year presentation.
USE OF ESTIMATES The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
As a result of the increasingly competitive environment, management revised
its procedure to write-off uncollectible accounts receivable within a shorter
time frame in 1996. In addition, management enhanced its evaluation of the
adequacy of the allowance for uncollectibles by placing additional emphasis on
the risks associated with an increasingly competitive environment.
CASH AND TEMPORARY CASH INVESTMENTS Cash and temporary cash investments include
all highly liquid investments, with original maturities of three months or less.
The Corporation records payments made by draft as accounts payable until the
banks honoring the drafts have presented them for payment. At December 31, 1996
and 1995, accounts payable included drafts outstanding of $41.4 and $45.9,
respectively.
MATERIALS, SUPPLIES AND INVENTORIES Materials and supplies, which are carried at
original cost, are primarily for the construction and maintenance of telephone
plant. Inventories, principally telephone sets, wireless equipment and telephone
systems, are carried at the lower of weighted average cost or market value.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost.
Depreciation is calculated on telephone plant using either the equal life group
straight-line depreciation method or the composite vintage group method.
Property and equipment other than telephone plant is depreciated primarily using
the straight-line method.
As a result of the discontinuance of SFAS No. 71, the Corporation is using
estimated useful lives, effective January 1, 1996, that are shorter than the
economic lives historically prescribed by regulators. A comparison of average
asset lives before and after the discontinuance of SFAS No. 71, for the most
significantly affected categories of telephone plant, is as follows:
Asset Category Before After
- -----------------------------------------------------------
Digital Switch 17 10.5
Digital Circuit 11.5 8.2
Conduit 55 55
Copper 22-26 10.5-16
Fiber 32-40 30
===========================================================
Under the composite group method, the cost of depreciable telephone plant
retired, net of removal costs and salvage (i.e., gains or losses), is charged to
accumulated depreciation. When depreciable property and equipment other than
telephone plant are sold or retired, the resulting gain or loss is recognized
currently as an element of income. All long-lived assets are reviewed for
impairment whenever events or changes in circumstance indicate that the carrying
amount may not be recoverable, and any necessary adjustment is made.
Replacements, renewals and betterments that materially increase an asset's
useful or remaining life are capitalized. Minor replacements and all repairs and
maintenance are charged to expense.
INTANGIBLE ASSETS Intangible assets consist primarily of cellular licenses,
customer lists and goodwill resulting from the cellular acquisitions completed
in July 1995. The intangible assets are stated at cost and are being amortized
using the straight-line method over periods ranging from 5 to 40 years.
Accumulated amortization was $27.6 and $10.9 as of December 31, 1996 and 1995,
respectively. Intangible assets are reviewed for impairment whenever events or
changes in circumstance indicate that the carrying amount may not be
recoverable, and any necessary adjustment is made.
18 SNET Annual Report
<PAGE>
LEASE NOTES RECEIVABLE Direct-financing and leveraged lease contracts are
accounted for by recording the total minimum lease payments receivable, plus the
estimated residual value, less the unearned lease income and, for leveraged
leases, less the associated aggregate non-recourse debt obligation. The unearned
lease income for direct-financing leases represents the excess of total minimum
lease payments, plus estimated residual value expected to be realized, over the
cost of the related equipment. For leveraged leases, the unearned income
reflects the net positive cash flow to be generated from the lease.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation accounts for its Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 76-3, as
amended. Accordingly, compensation expense is measured as the cost of shares
allocated from the trust, plus the amount required to purchase any additional
shares allocated to employee accounts, less a percentage of dividends received
by the plan. Dividends on stock held by the ESOP are recorded as a reduction of
retained earnings, and all ESOP shares are treated as outstanding for earnings
per share calculations. Debt of the ESOP that has been guaranteed by the
Corporation is recorded as long-term debt and as a reduction of shareholders'
equity. As the ESOP repays the debt, a corresponding reduction in long-term debt
and an increase in shareholders' equity is recorded.
REVENUE RECOGNITION Revenues are recognized when earned regardless of the period
in which billed. Revenues for directory advertising are recognized over the life
of the related directory, normally one year.
CAPITALIZED INTEREST COST Upon the discontinuance of SFAS No. 71, effective
January 1, 1996, the Telephone Company reports capitalized interest as a cost of
telephone plant and a reduction in interest expense, in accordance with SFAS No.
34, "Capitalization of Interest Cost." Prior to the discontinuance of SFAS No.
71, the Telephone Company included in its telephone plant accounts an imputed
cost of debt and equity for funds used during the construction of telephone
plant. The Corporation's other subsidiaries account for capitalized interest in
accordance with SFAS No. 34.
ADVERTISING COSTS Costs for advertising products and services or corporate image
are expensed as incurred.
COMPUTER SOFTWARE COSTS The Telephone Company capitalizes initial operating
systems for central office switching equipment. Right-to-use fees, additions,
upgrades and modifications to operating software programs and applications are
expensed. Computer software acquired or developed for internal use by all other
subsidiaries are expensed when incurred.
INCOME TAXES The Corporation files a consolidated federal income tax return and,
where allowable, combined state income tax returns.
The Corporation computes income taxes under SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are determined based on all
temporary differences between the financial statement and tax bases of assets
and liabilities using the currently enacted rates. Additionally, the Corporation
will recognize deferred tax assets if it is more likely than not that the
related benefit will be realized.
Investment tax credits realized in prior years by the Telephone Company are
being amortized as a reduction to the provision for income taxes over the life
of the related plant.
EARNINGS PER SHARE Earnings per common share are computed by dividing net income
by the weighted average number of common stock and common stock equivalents
outstanding during the period.
NOTE 2: Acquisitions and Sale of Assets
On October 22, 1996, the Corporation entered into a definitive agreement to
acquire the remaining 63.5% of Woodbury Telephone Company ("Woodbury") which it
does not already own. Under the terms of the agreement, common shareholders of
Woodbury will exchange each outstanding share of Woodbury common stock for an
amount of the Corporation's common stock having a market value of $43 per share
at the closing of the transaction, subject to certain conditions. The
acquisition will be accounted for under the purchase method, and is expected to
close in mid-1997, pending approval by regulatory agencies. Woodbury has
approximately 19,000 access lines, all in Connecticut, and reported 1995 net
income of $1.8 on $12.6 in revenue.
In July 1995, the Corporation purchased from Bell Atlantic Corporation,
NYNEX Corporation and Richmond Telephone Company, for approximately $456 in the
aggregate, certain cellular properties in Rhode Island and New Bedford and
Pittsfield, Massachusetts, and an increased interest in Springwich Cellular
Limited Partnership ("Springwich"). In total, these acquisitions expanded
wireless' service area by 2.3 million POPs (population equivalents) along the
Boston to New York corridor.
The cellular acquisitions were financed with approximately $456 of
short-term debt issued in June 1995. Short-term debt of $300.0 was replaced with
medium-term notes in the third quarter of 1995. The acquisitions were accounted
for under the purchase method. Accordingly, the operating results of the
cellular properties and the increased interest in Springwich were included in
the consolidated financial statements subsequent to the acquisition date. The
excess of the purchase price over the estimated fair value of the net assets
acquired of approximately $24 was assigned to goodwill with an amortization
period of 15 years.
SNET Annual Report 19
<PAGE>
In June 1995, the Corporation completed the sale, for approximately $25, of
substantially all of its paging network assets to Paging Network of New York,
Inc. Wireless continues, as a reseller, to market paging services under the Page
2000(RM) brand name. The net loss from the sale represented costs incurred as a
direct result of exiting the paging network business and was charged against the
restructuring reserve [see Note 6].
NOTE 3: Discontinuance of SFAS No. 71
In the fourth quarter 1995, the Telephone Company determined it was no longer
eligible for application of SFAS No. 71, which specifies accounting standards
required for public utilities and certain other regulated companies. Effective
January 1, 1996, the Telephone Company follows accounting principles which are
more appropriate for a competitive environment. This determination was made
based on the significant changes in technology and the increase in
telecommunications competition in Connecticut brought about by legislative and
regulatory policy changes. This accounting change is for financial reporting
purposes only and does not affect the Telephone Company's accounting and
reporting for regulatory purposes. As a result of the discontinued use of SFAS
No. 71, in accordance with the provisions of SFAS No. 101, "Accounting for the
Discontinuance of Application of FASB Statement No. 71," the Corporation
recorded a non-cash, extraordinary charge of $687.1, or $10.59 per share, net of
applicable tax benefits of $515.5, in the fourth quarter of 1995.
The following table is a summary of 1995's extraordinary charge:
Before-tax After-tax
- ------------------------------------------------------------
Adjustment to net telephone plant $(1,178.0) $(703.9)
Elimination of net regulatory assets (24.6) (14.3)
Tax-related net regulatory liabilities -- 20.1
Accelerated amortization of
investment tax credits -- 11.0
- ------------------------------------------------------------
Total Non-cash, Extraordinary Charge $(1,202.6) $(687.1)
============================================================
The adjustment of $1,178.0 to net telephone plant was necessary since
estimated useful lives and depreciation methods historically prescribed by
regulators did not reflect the rapid pace of technological development and
differed significantly from those economic useful lives used by unregulated
companies. Plant balances were adjusted by increasing the accumulated
depreciation reserve. The increase to the accumulated depreciation reserve was
determined by a discounted cash flow analysis which considered technological
replacement and the estimated impact of future competition. To support this
analysis, a depreciation reserve study was also performed that identified, by
asset categories, inadequate accumulated depreciation levels (i.e.,
deficiencies) that had developed over time.
The discontinuance of SFAS No. 71 also required the Corporation to
eliminate from its consolidated balance sheet, prepared for financial reporting
purposes, the effects of any actions of regulators that had been recognized as
assets and liabilities pursuant to SFAS No. 71, but would not have been
recognized as assets and liabilities by unregulated companies. The elimination
of net regulatory assets relates principally to vacation pay costs and gross
earnings tax which were being amortized as they were recognized in the
ratemaking process.
Additionally, upon the discontinuance of SFAS No. 71, the tax-related
regulatory assets and liabilities were eliminated and the related deferred tax
balances were adjusted to reflect application of SFAS No. 109, consistent with
other unregulated companies.
As asset lives were shortened, the related investment tax credits
associated with those assets were also adjusted for the shortened lives and the
result ($11.0) was included in the extraordinary charge as a credit to income,
net of associated deferred income taxes.
NOTE 4: Employee Benefits
SEPARATION OFFERS In April 1995, the Corporation ratified a contract with the
Connecticut Union of Telephone Workers, Inc. which included a voluntary
early-out offer ("EOO"). The EOO provided enhanced pension benefits by adding
six years to the age and to the length of service of employees for purposes of
determining pension and postretirement health care benefits eligibility. The
employees also had the option to select a pension distribution method (i.e.,
lump-sum, monthly pension or a combination of both) at the time of separation.
The EOO was available to the bargaining-unit work force during July 1995 and
approximately 2,700 employees, or 40.7% of the total bargaining-unit work force,
accepted the offer and left the Corporation through June 1996. In addition,
approximately 500 management employees accepted a severance plan with enhanced
benefits during 1996. The 1996 net settlement gains and the 1995 net curtailment
losses related to these separation offers were recorded to the restructuring
reserve in the respective years [see Note 6].
PENSION PLANS The Corporation sponsors several non-contributory, defined benefit
pension plans: one for management employees and one for bargaining-unit
employees; and one supplementary non-qualified, unfunded plan for all employees.
The supplementary non-qualified plan provides a benefit equal to any pension
amount above which would otherwise be payable under the defined benefit pension
plans in the absence of Internal Revenue Code limitations. Prior to July 1,
1995, benefits for bargaining-unit employees were based on years of service and
pay during 1987 to 1991 as well as a cash balance component. Prior to 1996,
benefits for management employees were based on an adjusted career average pay
plan. The bargaining-unit and management pension plans were converted to cash
balance plans effective July 1, 1995 and January 1, 1996, respectively.
Accordingly, pension benefits are determined as a single account balance
20 SNET Annual Report
<PAGE>
and grow each year with pay and interest credits. Prior to the conversion to the
cash balance plans, the benefits for the employees' supplementary plans were
based on years of service and average eligible pay. Effective with the
conversion to the cash balance plans, the benefits are based on pay and interest
credits. The supplementary non-qualified, unfunded plan for non-employee
directors was terminated in 1996 with pension benefits payable only to current
and retired directors and with the amount of accrued pension benefits being
frozen.
Funding of the management and bargaining-unit plans is achieved through
irrevocable contributions made to a trust fund. Plan assets consist primarily of
listed stocks, corporate and governmental debt and real estate. The
Corporation's policy is to fund the pension cost for these plans in conformity
with the Employee Retirement Income Security Act of 1974 using the aggregate
cost method. For purposes of determining contributions, the assumed investment
earnings rate on plan assets was 9.5% in 1996 and declines to 7.5% in 1998.
Pension (income) cost for all plans, computed using the projected unit
credit actuarial method, includes the following components:
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
Service cost $ 20.2 $ 22.1 $ 30.9
Interest cost on projected
benefit obligation 96.3 113.5 107.0
Amortizations and deferrals, net 65.8 249.6 (136.4)
Actual return on plan assets (177.6) (393.3) 1.0
- --------------------------------------------------------------------
Net Pension Cost (Income)
Recorded to Expense 4.7 (8.1) 2.5
- --------------------------------------------------------------------
Settlement gain (76.1) (76.0) --
Costs relating to special
termination benefits -- 137.5 --
Curtailment loss 10.8 16.8 13.4
- --------------------------------------------------------------------
Net (Settlement Gain)
Curtailment Loss (65.3) 78.3 13.4
- --------------------------------------------------------------------
Net Pension (Income) Cost $ (60.6) $ 70.2 $ 15.9
====================================================================
The 1996 net settlement gain and the 1995 and 1994 net curtailment losses
were associated with the severance programs and were recorded to the
restructuring reserve in the respective years [see Note 6]. The 1996 increase in
net pension cost (income) recorded to expense was due primarily to lower returns
on plan assets, reflecting a combination of a lower asset base and a generally
weaker capital market return when compared with 1995.
The following table sets forth the plans' funded status:
At December 31, 1996 1995
- --------------------------------------------------------------------
Actuarial Present Value of Accumulated
Benefit Obligation, including vested
benefits of $1,253.3 and $1,405.8,
respectively $ 1,289.3 $ 1,475.6
====================================================================
Plan assets at fair value $ 1,690.3 $ 1,847.8
Actuarial present value of projected
benefit obligation (1,337.3) (1,565.2)
====================================================================
Assets in Excess of Projected
Benefit Obligation 353.0 282.6
Unrecognized prior service costs 129.2 151.7
Unrecognized transition asset (98.4) (130.5)
Unrecognized net gain (401.3) (383.4)
Adjustment required to recognize
minimum liability (3.2) (2.7)
- --------------------------------------------------------------------
Accrued Pension Cost $ (20.7) $ (82.3)
====================================================================
Assumptions used to calculate the plans' funded status:
At December 31, 1996 1995 1994
- -----------------------------------------------------------------
Discount rate for projected
benefit obligation 7.5% 7.0% 8.0%
Expected rate of increase in future
management compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets 8.0% 8.0% 8.0%
=================================================================
The Corporation periodically amends the benefit formulas under its pension
plans. Accordingly, pension cost has been determined in such a manner as to
anticipate that modifications to the pension plans would continue in the future.
POSTRETIREMENT HEALTH CARE BENEFITS The Corporation provides health care and
life insurance benefits for retired employees. Substantially all of the
Corporation's employees may become eligible for these benefits if they meet
certain age and service requirements. In addition, an employee's spouse and
dependents may be eligible for health care benefits. Effective July 1, 1996, all
bargaining-unit employees who retire after December 31, 1989 and all management
employees who retire after December 31, 1991 may have to share with the
Corporation the premium costs of postretirement health care benefits if these
costs exceed certain limits.
The Corporation funds trusts for postretirement health insurance benefits
using Voluntary Employee Beneficiary Association. Plan assets consist primarily
of investments in domestic corporate equity and government and corporate debt
securities.
SNET Annual Report 21
<PAGE>
The Corporation's postretirement benefit cost includes the following
components:
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------
Service cost $ 4.4 $ 4.4 $ 5.4
Interest cost of accumulated
benefit obligation 37.6 33.4 32.2
Amortizations and deferrals, net 19.8 21.0 (5.4)
Actual return on plan assets (30.9) (31.5) (2.6)
- -------------------------------------------------------------
Net Postretirement Benefit Cost
Recorded to Expense 30.9 27.3 29.6
- -------------------------------------------------------------
Costs relating to special
termination benefits -- 11.0 --
Curtailment loss .2 12.9 .8
- -------------------------------------------------------------
Net Curtailment Loss .2 23.9 .8
- -------------------------------------------------------------
Net Postretirement Benefit Cost $ 31.1 $ 51.2 $30.4
=============================================================
The 1996, 1995 and 1994 net curtailment losses were associated with the
severance programs and were recorded to the restructuring reserve in the
respective years [see Note 6].
The following table sets forth the plans' funded status:
At December 31, 1996 1995
- -------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(458.6) $(447.5)
Fully eligible active plan
participants (15.5) (21.1)
Other active plan participants (66.3) (74.2)
- -------------------------------------------------------------
Total Accumulated Postretirement
Benefit Obligation (540.4) (542.8)
Plan assets at fair value 229.4 178.6
- -------------------------------------------------------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets (311.0) (364.2)
Unrecognized net (gain) loss (11.9) 16.7
Unrecognized prior service cost 13.6 16.3
- -------------------------------------------------------------
Accrued Postretirement
Benefit Obligation $(309.3) $(331.2)
=============================================================
Assumptions used to calculate the plans' funded status:
At December 31, 1996 1995 1994
- -------------------------------------------------------------
Discount rate for projected
benefit obligation 7.5% 7.0% 8.0%
Expected rate of increase in future
compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of
return on plan assets:
Management health trust 7.0% 7.0% 7.0%
Bargaining-unit health trust 7.5% 7.5% 7.5%
Retiree life insurance trust 7.5% 7.5% 7.5%
- -------------------------------------------------------------
The assumed health care cost trend rate used to measure the expected cost
of these benefits for 1997 was 6.9% and declines to 3.8% by 2001. A one
percentage point increase in the assumed health care cost trend rate would have
increased the estimated aggregate service and interest cost components of the
1996 net postretirement benefit cost by approximately $2 and the accrued
postretirement benefit obligation by approximately $24 as of December 31, 1996.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation has established a leveraged ESOP
for substantially all employees as part of its existing savings plans. Under the
ESOP, the Corporation's matching contributions are invested entirely in common
stock of the Corporation and are held by the ESOP.
In January 1990, the Corporation loaned the ESOP $10.0 and in February
1990, the ESOP borrowed an additional $110.0, which the Corporation guaranteed,
through a third party. The proceeds of the $10.0 loan were used to acquire
shares of the Corporation's common stock through open market purchases. The
proceeds of the $110.0 loan were used to purchase shares of both unissued common
stock and treasury stock from the Corporation. All shares purchased by the ESOP
were originally pledged as collateral for its debt. The Corporation periodically
makes cash payments to the ESOP that, together with dividends received on shares
held by the ESOP, are used to make interest and principal payments on both
loans. As these payments are made, shares are released from collateral and made
available for distribution to employees' accounts, based on the proportion of
debt service paid in the year.
ESOP expense and ESOP trust activity are as follows:
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
Compensation expense(1) $11.0 $14.7 $14.3
Interest expense incurred(1) 4.4 5.1 5.9
Interest income earned (.5) (.6) (.7)
- -----------------------------------------------------------
Total Expense $14.9 $19.2 $19.5
===========================================================
Dividends Used for Debt Service $ 5.1 $ 5.3 $ 5.3
Cash Contributions Used for
Debt Service $13.5 $13.3 $13.2
===========================================================
(1) Net of applicable dividends used for debt service.
ESOP shares outstanding are as follows:
In Thousands, At December 31, 1996 1995 1994
- -----------------------------------------------------------
Allocated shares 1,389.1 1,508.0 1,164.4
Unreleased shares 1,206.4 1,301.5 1,809.6
- -----------------------------------------------------------
Total ESOP Shares 2,595.5 2,809.5 2,974.0
===========================================================
22 SNET Annual Report
<PAGE>
NOTE 5: Income Taxes
Income tax expense includes the following components:
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
Federal
Current $ 79.4 $ 62.4 $ 74.7
Deferred 16.1 27.4 19.5
Investment tax credits, net (2.1) (6.9) (7.9)
- -----------------------------------------------------------
Total Federal 93.4 82.9 86.3
- -----------------------------------------------------------
State
Current 9.8 17.3 31.1
Deferred 4.4 9.4 4.5
- -----------------------------------------------------------
Total State 14.2 26.7 35.6
- -----------------------------------------------------------
Total Income Taxes $107.6 $109.6 $121.9
===========================================================
Deferred income tax expense resulted primarily from restructuring program
costs incurred in 1996, 1995 and 1994.
In April 1995, new Connecticut state income tax rates were enacted to
accelerate the reduction of current rates. The 1996 Connecticut state income tax
rate of 10.75% will gradually decrease to 7.5% in 2000. Income taxes in 1995
included a provision to adjust deferred tax balances for the effect of the
change in state income tax rates.
A reconciliation between income taxes and taxes computed by applying the
statutory federal income tax rate to pre-tax income is as follows:
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
===========================================================
Federal income taxes at
statutory rate $105.1 $ 97.4 $104.8
State income taxes, net of federal
income tax effect 9.2 17.4 23.1
Depreciation of telephone plant
construction cost previously
deducted for tax purposes(1) -- 5.1 5.1
Amortization of investment
tax credits(1) (2.1) (6.9) (7.9)
Other differences, net (4.6) (3.4) (3.2)
- -----------------------------------------------------------
Income Taxes $107.6 $109.6 $121.9
===========================================================
Effective Tax Rate 35.8% 39.4% 40.7%
===========================================================
(1) Telephone Company only.
Consolidated deferred income tax assets (liabilities) are comprised of the
following:
At December 31, 1996 1995
- -----------------------------------------------------------
Postretirement benefits other
than pensions $124.8 $124.1
Software 13.9 15.1
Compensated absences 13.1 12.4
Restructuring charge 12.8 32.1
Allowance for uncollectibles 11.9 14.5
Pension 9.2 31.3
Other 10.6 (2.2)
Depreciation and amortization (29.3) (34.8)
Leveraged leases (28.3) (30.4)
Valuation allowance (2.1) (3.3)
- -----------------------------------------------------------
Deferred Income Taxes $136.6 $158.8
===========================================================
The 1996 decrease in the valuation allowance was due primarily to the
disposition of certain nonregulated operations. The allowance will continue to
be evaluated based on evidence of realization of all deferred tax assets.
NOTE 6: Restructuring Charge
In December 1993, the Corporation recorded a restructuring charge of $355.0,
$204.2 after-tax or $3.21 per share, to provide for a comprehensive
restructuring program. The charge included: $170.0 for employee separation
costs; $145.0 for process and systems reengineering; and $40.0 for exit and
other costs.
Costs incurred for employee separations included payments for severance,
unused vacation and health care continuation, as well as non-cash net pension
and postretirement settlement gains of $65.1 in 1996 and curtailment losses of
$102.2 and $14.2 in 1995 and 1994, respectively. Process and systems
reengineering costs included incremental costs incurred in connection with the
execution of numerous reengineering programs. Exit and other costs included
expenses related to the reduction of overall corporate space requirements and
the cost incurred as a direct result of exiting the paging network business
[see Note 2].
A summary of costs incurred under the restructuring program is as follows:
For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------
Employee separation (gains) costs $(45.1) $111.2 $41.8
Process and systems reengineering 83.1 74.2 35.0
Exit and other costs 7.5 2.5 13.3
- -------------------------------------------------------------
Total Costs Incurred $ 45.5 $187.9 $90.1
=============================================================
Total employee separations under the restructuring program approximated
4,300 employees utilizing the EOO and severance plans: 970 employees through the
end of 1994; 2,195 employees in 1995; and 1,135 employees in 1996. Total
employee separations were substantially offset by an increase in provisional
employees to support greater demand for services and expanding businesses. The
hiring of provisional employees also provides flexible work force levels as
business needs change in the future.
The Telephone Company has implemented network operations, customer service,
repair and support programs and developed new processes to reduce the costs of
business while improving quality and customer service. These new integrated
processes have enabled the Telephone Company to increase its responsiveness to
customer specific needs and to eliminate certain current labor-intensive
interfaces between the existing systems.
As of December 31, 1996, the restructuring reserve balance of $31.5 is
adequate for the future residual costs under the 1993 restructuring program,
primarily exit costs relating to the delayed reduction of overall corporate
space requirements and timing of remaining charges.
SNET Annual Report 23
<PAGE>
NOTE 7: Short-term Debt
Short-term debt, which includes commercial paper used to meet temporary cash
needs and long-term debt maturing within one year, consists of the following:
At December 31, 1996 1995
- ---------------------------------------------------------
Commercial paper $201.9 $199.9
Current maturities of
long-term debt 13.3 32.3
- ---------------------------------------------------------
Total Short-term Debt $215.2 $232.2
- ---------------------------------------------------------
Weighted Average Interest Rate
on Commercial Paper at Year-End 5.8% 5.8%
=========================================================
The Corporation maintained bank lines of credit to facilitate the issuance
of commercial paper. As part of these credit facilities, the Corporation has
obtained a contractual commitment to $300.0 in lines of credit provided by a
syndicate of banks. At December 31, 1996, the entire line remained available.
The annual commitment fee is currently .05% of the total lines of credit.
NOTE 8: Long-term Debt
The components of long-term debt are as follows:
At December 31, Maturing 1996 1995
- -------------------------------------------------------------
Unsecured notes:
6.13%-8.00% 1996-2007 $ 720.0 $ 740.0
7.25%-8.70% 2031-2033 325.0 325.0
Guaranteed ESOP:
9.35% 1996-2000 56.4 67.5
Debentures:
4.38% 2001 45.0 45.0
Bank notes:
10.00%-10.50% 1996-2009 24.4 24.9
Mortgage notes:
9.14%-9.90% 1996-2000 17.2 17.9
- -------------------------------------------------------------
Total Long-term Debt 1,188.0 1,220.3
Unamortized discount
and premium, net (5.1) (5.7)
Capital lease obligations .1 .1
Current maturities (13.3) (32.3)
- -------------------------------------------------------------
Long-term Debt $1,169.7 $1,182.4
=============================================================
Scheduled maturities of total long-term debt include $13.3 in 1997, $41.8
in 1998, $16.9 in 1999, $125.1 in 2000, $66.2 in 2001 and $924.7 thereafter.
At December 31, 1996, the Corporation and the Telephone Company had
remaining securities registered with the Securities and Exchange Commission to
issue up to $225.0 and $95.0, respectively, of medium-term unsecured notes
through shelf registrations. Subsequent to year-end, the Corporation's total
decreased to $125.0 as a result of the February 4, 1997 issuance of $100.0 of
6.50% medium-term notes due 2002. The proceeds from the issuance were used to
replace a portion of short-term debt related to the cellular acquisitions
discussed previously.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031, which were satisfied with the issuance of short-term debt. The
early extinguishment of debt will result in an extraordinary charge to the
Corporation's first quarter 1997 earnings of approximately $3.7 after-tax, or
$.06 per share.
NOTE 9: Commitments and Contingencies
The Corporation has entered into both operating and capital leases for
facilities and equipment used in its operations. Rental expense under operating
leases was $21.0, $23.7 and $24.4 for 1996, 1995 and 1994, respectively. Future
minimum rental commitments under third-party, noncancelable operating leases
include $15.3 in 1997, $14.9 in 1998, $13.2 in 1999, $11.2 in 2000, $5.6 in 2001
and $14.1 thereafter, for a total of $74.3. Capital leases were not significant.
The Corporation expects total capital expenditures of approximately $435
for additions to property, plant and equipment during 1997. In connection with
the capital program, the Corporation has made certain commitments for the
purchase of material and equipment.
In June 1995, a U.S. District Court decision was issued in favor of the
Department of Labor against the Corporation and the Telephone Company. The
decision held that the Corporation and the Telephone Company violated certain
sections of the Fair Labor Standards Act and was liable for back wages and
liquidating damages. The Corporation and the Telephone Company are appealing
this decision. The Telephone Company recorded a liability of $11.0 as its
anticipated cost of total damages for this and other litigation matters, which
was recorded to expenses in 1995.
NOTE 10: Financial Instruments
FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which
it was practicable to estimate that value:
Cash and Temporary Cash Investments The carrying amount approximates fair value
because of the short maturity of those instruments.
Long-term Investments The fair value of equity investments was estimated based
on quoted market prices for those or similar investments.
Debt The carrying amount of the Corporation's short-term debt approximates fair
value because of the short maturity of those instruments. The fair value of
long-term debt (excluding capital leases) was estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Corporation for debt of the same remaining maturities.
24 SNET Annual Report
<PAGE>
The carrying amount and estimated fair value of the Corporation's financial
instruments are as follows:
At December 31, 1996 1995
- ---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------
Cash and Temporary
Cash Investments $ 9.0 $ 9.0 $ 11.1 $ 11.1
Long-term
Investments $ 4.1 $ 13.2 $ 4.1 $ 9.6
Debt $(1,384.8) $(1,381.0) $(1,414.5) $(1,474.4)
=====================================================================
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Corporation to concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. The Corporation places its temporary cash
investments primarily with one financial institution, a New England regional
bank. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers in the Corporation's customer base.
NOTE 11: Lease Notes Receivable
Lease notes receivable includes, on an investment basis, a portfolio of
leveraged and direct-financing leases. The gross investment in these leases has
been recorded on the consolidated balance sheet in leases and other assets.
Investments in leveraged leases are in a coal-fired, electric generating
facility and other equipment. The investment in direct-financing leases are in a
commercial aircraft and other equipment.
The components of the lease notes receivable are as follows:
At December 31, 1996 1995
- -----------------------------------------------------------------
Direct- Direct-
Financing Leveraged Financing Leveraged
Leases Leases Leases Leases
- -----------------------------------------------------------------
Minimum rentals
receivable $ 61.7 $ 25.4 $ 70.1 $ 25.3
Unearned income (26.9) (14.0) (30.2) (15.7)
Estimated,
unguaranteed
residual value of
leased assets 10.3 30.6 10.3 31.5
Initial direct costs .2 -- .3 --
Allowance for losses (11.0) -- (9.7) --
- -----------------------------------------------------------------
Lease Notes
Receivable $ 34.3 42.0 $ 40.8 41.1
====== ======
Deferred taxes arising
from leveraged leases (28.3) (30.4)
- -----------------------------------------------------------------
Net Investment in
Leveraged Leases $ 13.7 $ 10.7
=================================================================
Future minimum receipts under third-party direct-financing leases include
$4.1 in 1997, $4.1 in 1998, $4.8 in 1999, $3.1 in 2000, $3.8 in 2001 and $41.8
thereafter.
NOTE 12: Shareholders' Equity
COMMON, PREFERRED AND PREFERENCE SHARES The Corporation is authorized to issue
up to 300,000,000 shares of common stock at a par value of $1.00 per share
("Common Stock") as well as 2,000,000 preferred shares at a par value of $50.00
per share and 50,000,000 preference shares at a par value of $1.00 per share. No
preferred or preference shares have been issued pursuant to these
authorizations.
DIVIDENDS DECLARED The 1996 dividends were declared out of proceeds in excess of
par value, while 1995 and 1994 dividends were declared out of retained earnings.
SHAREHOLDERS' RIGHTS PLAN On December 11, 1996, the Board of Directors approved
the 1997 shareholders' rights plan ("Rights Plan") which became effective
February 11, 1997 upon the expiration of the previous plan. Under the 1997
Rights Plan, each share of Common Stock has a purchase right that entitles the
holder to purchase 1/100 of a preference share (equivalent of one share of
Common Stock) at an exercise price of $180.00. The rights are not exercisable or
transferable apart from the Common Stock until a person or group has acquired,
or has made an offer for, 20% or more of the outstanding Common Stock. In the
event that a person or group acquires 20% or more of the outstanding Common
Stock, each outstanding right, other than those held by the 20% acquirer, is
entitled to purchase, at the exercise price of the rights, a number of shares of
Common Stock having a market value of two times the exercise price of the right.
The Board also may exchange the rights generally at an exchange ratio of one
share of Common Stock per right. The Rights Plan may be amended by the Board of
Directors to reduce the threshold at which the rights are triggered to not less
than 10% of the then outstanding Common Stock. Additionally, if the person or
group acquires the Corporation in a merger or other business combination
transaction, each right will entitle the owner to purchase common stock of the
acquirer having a market value of two times the exercise price of the right. The
rights are redeemable at one cent each prior to public announcement that a
person or group has acquired beneficial ownership of 20% or more of the
outstanding Common Stock. The rights expire on February 11, 2007.
NOTE 13: Stock-Based Compensation Plans During 1996, the Corporation sponsored
two employee stock option plans, and a restricted stock plan for non-employee
directors.
The SNET 1986 Stock Option Plan ("1986 Plan") provided stock options to
certain key employees at the discretion of a committee of the Board of Directors
("Committee"). Options are no longer granted under the 1986 Plan, as it expired
on June 30, 1996. The SNET 1995 Stock Incentive Plan is a stock-based
compensation plan which enables the awarding of incentive compensation,
including stock options, to all employees at the discretion of the Board of
Directors or the Committee. Under both plans, the exercise price of each option
may not be less than 100% of the fair market value of the shares on the date of
grant. All options are exercisable no earlier than one year after the date of
grant, with most options vesting ratably over two or four years, and have a
maximum life of ten years.
SNET Annual Report 25
<PAGE>
The plans allow stock appreciation rights ("SARs") to be granted in tandem with
the related stock option. No SARs have been granted since 1992 and the
Corporation presently does not intend to grant additional SARs in the future.
The Corporation has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock-based compensation plans.
Accordingly, no compensation cost has been recognized for the plans. Had the
Corporation adopted the cost recognition method provided under SFAS No. 123,
"Accounting for Stock-Based Compensation" for 1996 and 1995, the Corporation's
net income (loss) and earnings (loss) per share would approximate the pro forma
amounts below:
For the Years Ended
December 31, 1996 1995
- ---------------------------------------------------------------
As Pro As Pro
Reported Forma Reported Forma
- ---------------------------------------------------------------
Net Income (Loss) $192.8 $189.4 $(518.3) $(518.9)
Earnings (Loss)
Per Share $ 2.94 $ 2.90 $ (7.99) $ (8.00)
===============================================================
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
The Black-Scholes option pricing model was used to estimate the options'
grant date fair value with the following assumptions: 20% volatility; risk free
interest rate ranging from 5.2% to 7.9%; dividends of $1.76 per share per year;
and an estimated period to exercise of three or five years. The weighted average
fair value of options granted during the year was $7.85 and $6.13 in 1996 and
1995, respectively.
Information with respect to plan activity is as follows:
Options Shares
Available Under Average
for Grant Option SARs Price
- -------------------------------------------------------------
Balance at 1/1/94 1,112,200 544,025 172,600 $34.20
Granted (360,500) 360,500 -- $31.86
SARs exercised -- (8,100) (8,100) $29.82
Options exercised -- (1,100) -- $24.69
Canceled 33,600 (33,600) (1,800) $34.78
- ---------------------------------------------------
Balance at 12/31/94 785,300 861,725 162,700 $33.25
- ---------------------------------------------------
Approved for grant 4,600,000 -- -- --
Granted (2,535,950) 2,535,950 -- $37.59
SARs exercised -- (41,475) (41,475) $28.44
Options exercised -- (15,775) -- $30.86
Canceled 34,500 (34,500) -- $33.15
- ---------------------------------------------------
Balance at 12/31/95 2,883,850 3,305,925 121,225 $36.65
- ---------------------------------------------------
1986 Plan unused (65,525) -- -- --
Granted (223,500) 223,500 -- $42.48
SARs exercised -- (66,975) (66,975) $32.60
Options exercised -- (53,625) -- $33.37
Canceled 364,725 (364,725) -- $38.04
- ---------------------------------------------------
BALANCE AT 12/31/96 2,959,550 3,044,100 54,250 $37.05
=============================================================
Options exercisable were 1,334,388, 403,850 and 310,475 at December 31,
1996, 1995 and 1994, respectively. The respective weighted average exercise
prices were $36.72, $33.67 and $32.74. All outstanding SARs were exercisable at
each year-end.
The following table summarizes information with regard to stock options
outstanding and exercisable by ranges of exercise prices:
Weighted
Weighted Average
Average Remaining
Exercise Contractual
At December 31, 1996 Shares Price Life
- -----------------------------------------------------------
Stock Options Outstanding:
$24.69 to $35.99 1,035,500 $33.21 7.4 years
$36.00 to $43.38 2,008,600 $39.03 8.7 years
- ------------------------------------
$24.69 to $43.38 3,044,100 $37.05 8.3 years
===========================================================
Stock Options Exercisable:
$24.69 to $35.99 416,950 $32.80 --
$36.00 to $39.00 917,438 $38.50 --
- ------------------------------------
$24.69 to $39.00 1,334,388 $36.72 --
===========================================================
The 1994 SNET Non-Employee Director Stock Plan ("1994 Plan"), which was
terminated upon ratification of the 1996 Non-Employee Director Stock Plan ("1996
Plan"), allowed each director to receive between 25% and 100% of their annual
retainer in shares of Common Stock. The 1996 Plan, approved on May 8, 1996,
provides each non-employee director with 300 shares of Common Stock in lieu of
cash compensation. A director may also elect to receive up to 100% of his or her
cash retainer in shares. All shares distributed have voting and dividend rights,
and are subject to restrictions on transferability. Upon granting of the shares,
compensation expense is recorded in the amount of the market value of the
shares.
A summary of restricted stock activity is as follows:
At December 31, 1996 1995 1994
- -----------------------------------------------------------
Shares available for grant,
beginning of period 143,852 147,152 --
New shares approved
for issuance 200,000 -- 150,000
1994 Plan unused (141,619) -- --
Shares granted (5,833) (3,300) (2,848)
- -----------------------------------------------------------
Shares Available for Grant,
End of Period 196,400 143,852 147,152
===========================================================
Weighted Average Market
Value of Stock on Grant Date $41.21 $35.02 $29.91
Compensation Expense Recorded
for Restricted Stock Grants $ .2 $ .1 $ .1
===========================================================
26 SNET Annual Report
<PAGE>
NOTE 14: Supplemental Financial Information
SUPPLEMENTAL INCOME STATEMENT INFORMATION
For the Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Advertising Expense $ 42.1 $ 38.8 $ 32.4
============================================================
Depreciation and amortization:
Depreciation $331.1 $328.1 $ 320.6
Amortization 25.0 17.9 8.0
- ------------------------------------------------------------
Total Depreciation and Amortization $356.1 $346.0 $ 328.6
============================================================
Taxes other than income:
Property $ 48.0 $ 43.7 $ 45.5
Other 6.6 12.8 10.7
- ------------------------------------------------------------
Total Taxes Other Than Income $ 54.6 $ 56.5 $ 56.2
============================================================
Interest expense:
Long-term debt $ 83.0 $ 74.7 $ 70.3
Short-term debt 10.0 8.5 2.2
Capitalized interest (7.2) -- --
Other 2.9 2.7 2.4
- ------------------------------------------------------------
Total Interest Expense $ 88.7 $ 85.9 $ 74.9
============================================================
During 1996, 1995 and 1994, revenues earned from providing services to AT&T
Corp. accounted for 7.9%, 9.2% and 10.2%, respectively, of total revenues and
sales.
SUPPLEMENTAL BALANCE SHEET INFORMATION
At December 31, 1996 1995
- ------------------------------------------------------------
Materials, supplies and inventories:
Materials and supplies $ 14.3 $ 10.6
Inventories 13.1 15.5
- ------------------------------------------------------------
Total Materials, Supplies and
Inventories $ 27.4 $ 26.1
============================================================
Property, plant and equipment, at cost:
Telephone plant:
Land $ 16.8 $ 17.5
Buildings 386.4 396.2
Central office equipment 1,743.0 1,657.2
Outside plant facilities and equipment 1,732.4 1,640.3
Furniture and office equipment 310.0 310.6
Station equipment and connections 22.5 22.7
Plant under construction 98.0 122.4
Telecommunications property
and equipment 398.2 365.2
- ------------------------------------------------------------
Total Property, Plant and Equipment,
at cost 4,707.3 4,532.1
Accumulated Depreciation (3,110.3) (2,966.9)
- ------------------------------------------------------------
Total Property, Plant and Equipment,
net $ 1,597.0 $1,565.2
============================================================
Leases and other assets:
Lease notes receivable $ 76.3 $ 81.9
Prepaid pension cost 7.3 --
Other assets 30.9 35.3
- ------------------------------------------------------------
Total Leases and Other Assets $ 114.5 $ 117.2
============================================================
Other current liabilities:
Dividends payable $ 28.9 $ 28.7
Accrued postretirement benefit
obligation 20.4 20.4
Accrued interest 19.2 19.8
Other current liabilities 24.0 19.0
- ------------------------------------------------------------
Total Other Current Liabilities $ 92.5 $ 87.9
============================================================
Other liabilities and deferred credits:
Accrued pension cost $ 28.0 $ 82.3
Restructuring charge 17.0 18.0
Other liabilities 21.9 24.6
- ------------------------------------------------------------
Total Other Liabilities and Deferred
Credits $ 66.9 $ 124.9
============================================================
SUPPLEMENTAL CASH FLOW INFORMATION
For the Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Interest Paid, net of
amounts capitalized $ 89.2 $ 79.7 $ 81.2
============================================================
Income Taxes Paid $ 84.0 $ 87.8 $109.5
============================================================
Changes in operating assets and
liabilities, net:
Increase in accounts
receivable, net $(18.5) $(78.3) $(48.9)
Increase in materials,
supplies and inventories (1.2) (.1) (4.9)
(Decrease) increase in accounts
payable, accrued expenses and
compensated absences (18.2) 65.0 11.0
Changes in other assets and
liabilities, net 7.6 $(20.6) (31.3)
- ------------------------------------------------------------
Changes in Operating Assets and
Liabilities, net $(30.3) $(34.0) $(74.1)
============================================================
OPERATING CASH FLOW(1) The following unaudited financial data on the
Corporation's product groups is not required by generally accepted accounting
principles and is provided for informational purposes only:
For the Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------
Wireline(2) $564.8 $569.0 $531.3
Wireless(3) 31.3 (10.8) 14.8
Information and Entertainment(4) 110.2 102.6 114.7
Other(5) 32.0 34.0 42.1
- ------------------------------------------------------------
Total Operating Cash Flow $738.3 $694.8 $702.9
===========================================================
(1) Represents operating income before depreciation and amortization. Operating
cash flow is not a generally accepted accounting principle measurement.
(2) Includes Telephone Company's telecommunications operations, SNET
Diversified Group, Inc. and SNET America, Inc.
(3) Includes the wholesale and retail cellular operations, SNET Cellular, Inc.
and SNET Mobility, Inc., net of cellular intercompany amounts. Also
includes paging operations which have changed from a network-based service
to a resale service in 1995.
(4) Includes publishing and SNET Personal Vision, Inc.
(5) Includes SNET Real Estate, Inc. and holding company operations.
SNET Annual Report 27
<PAGE>
<TABLE>
<CAPTION>
NOTE 15: Quarterly Financial Information (Unaudited)
1st QTR 2nd QTR 3rd QTR 4th QTR Full Year
- -----------------------------------------------------------------------------------------------------------------------------
1996
- ----
<S> <C> <C> <C> <C> <C>
Revenues and Sales $474.0 $487.8 $488.2 $ 491.9 $1,941.9
Operating Income $102.1 $100.2 $ 90.5 $ 89.4 $ 382.2
Net Income $ 52.2 $ 50.5 $ 45.8 $ 44.3 $ 192.8
Earnings Per Share $ .80 $ .77 $ .70 $ .67 $ 2.94
=============================================================================================================================
1995
- ----
Revenues and Sales $440.4 $447.5 $464.9 $ 463.6 $1,816.4
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income $ 93.7 $ 86.0 $ 83.4 $ 85.7 $ 348.8
- -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge $ 46.7 $ 40.1 $ 41.3 $ 40.7 $ 168.8
Extraordinary charge [see Note 3] -- -- -- (687.1) (687.1)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 46.7 $ 40.1 $ 41.3 $ (646.4) $ (518.3)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share:
Income before extraordinary charge $ .72 $ .62 $ .64 $ .62 $ 2.60
Extraordinary charge(1) -- -- -- (10.54) (10.59)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share $ .72 $ .62 $ .64 $ (9.92) $ (7.99)
=============================================================================================================================
</TABLE>
(1) Earnings (loss) per share is computed independently for the quarter based
on weighted average common shares outstanding for the quarter. The
calculations resulted in a difference of $.05 between loss per share for
the quarter and for the year.
28 SNET Annual Report <PAGE>
<TABLE>
<CAPTION>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL AND STATISTICAL DATA (UNAUDITED)
Dollars in Millions, Except as Noted 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Data
Revenues and sales $ 1,942 $ 1,816 $ 1,718 $ 1,657 $ 1,629
Costs and expenses(1) $ 1,204 $ 1,121 $ 1,015 $ 1,361 $ 1,004
Interest expense $ 89 $ 86 $ 75 $ 91 $ 97
Income taxes $ 108 $ 110 $ 122 $ (44) $ 110
Income (loss) from continuing operations(2) $ 193 $ 169 $ 178 $ (44) $ 159
Net income (loss) $ 193 $ (518) $ 178 $ (318) $ 151
Earnings (loss) per share (dollars):
From continuing operations(2) $ 2.94 $ 2.60 $ 2.77 $ (.68) $ 2.56
Net income (loss) $ 2.94 $ (7.99) $ 2.77 $ (4.99) $ 2.44
Dividends declared per share (dollars) $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76
Net cash provided by operating activities $ 470 $ 439 $ 423 $ 479 $ 504
Cash expended for capital additions $ 367 $ 354 $ 282 $ 267 $ 290
Depreciation and amortization $ 356 $ 346 $ 329 $ 291 $ 250
Property, plant and equipment, net $ 1,597 $ 1,565 $ 2,712 $ 2,770 $ 2,767
Total assets $ 2,671 $ 2,724 $ 3,505 $ 3,762 $ 3,485
Shareholders' equity $ 463 $ 353 $ 953 $ 855 $ 1,254
Long-term debt $ 1,170 $ 1,182 $ 952 $ 984 $ 1,048
========================================================================================================================
Statistical Data
Network access lines in service (thousands) 2,163 2,073 2,009 1,964 1,937
Annual growth 4.3% 3.2% 2.3% 1.4% .8%
Network interstate access minutes
of use (millions) 7,906 7,298 6,917 6,522 6,230
Annual growth 8.3% 5.5% 6.1% 4.7% 4.0%
Cellular subscribers (thousands) 392 323 166 88 68
Annual growth 21.4% 94.6% 88.6% 29.4% 19.3%
Operating cash flow(3) $ 738 $ 695 $ 703 $ 296 $ 625
Telephone Company wireline cost per
access line (dollars)(4) $ 332 $ 320 $ 340 $ 365 $ 359
Return on average total capital 15.9% --(5) 12.8% --(6) 10.3%
Return on average equity 45.6% --(5) 19.4% --(6) 12.5%
Debt ratio(7) 74.9% 80.0% 51.0% 59.9% 47.4%
Pre-tax interest coverage (times) 4.1 4.2 5.0 .1 3.8
Average total debt cost 6.6% 6.9% 6.8% 7.7% 7.8%
Current ratio (times) .70 .73 .88 .82 .84
Average dividend yield 4.4% 5.1% 5.4% 4.9% 5.4%
Payout ratio 59.9% --(5) 63.5% --(6) 72.1%
Market price per share (dollars):
High $45.500 $40.250 $36.250 $38.375 $38.000
Low $36.000 $31.750 $28.250 $33.625 $28.250
Book value per share (dollars) $ 7.05 $ 5.42 $ 14.77 $ 13.38 $ 19.79
Average market price per share (dollars) $ 40.07 $ 34.47 $ 32.63 $ 35.70 $ 32.70
Average book value per share (dollars) $ 6.44 $ 15.14 $ 14.26 $ 17.69 $ 19.49
Average price/earnings ratio (times) 14 --(5) 12 --(6) 13
Average trading volume 105,028 91,797 59,437 79,086 60,360
Number of shareholders 50,917 53,332 55,693 57,352 59,089
Telephone Company wireline employees 8,167 7,742 8,604 9,087 9,532
Total employees 9,441 9,070 9,797 10,476 11,216
========================================================================================================================
</TABLE>
Certain amounts have been restated to conform to the current year
presentation.
(1) Excludes depreciation and amortization. 1993 includes a charge of $355.0,
$204.2 after-tax or $3.21 per share, for restructuring.
(2) 1995 excludes an extraordinary charge of $687.1, or $10.59 per share,
related to the discontinuance of SFAS No. 71. 1993 includes the after-tax
restructuring charge and excludes discontinued operations of $10.3, or $.16
per share, an extraordinary charge of $44.0, or $.69 per share and the
cumulative effect of accounting changes of $220.2, or $3.46 per share.
(3) Represents operating income before depreciation and amortization. Operating
cash flow is not a generally accepted accounting principle measurement.
Management provides this measurement for informational purposes only.
Excluding the impact of the 1993 before-tax restructuring charge, operating
cash flow would have been $650 in 1993.
(4) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses. 1993 also excludes the before-tax
restructuring charge.
(5) Not presented for 1995 based upon a loss per share. A return on average
total capital of 11.6%, a return on average equity of 17.2%, a payout ratio
of 67.7% and an average price/earnings ratio of 13 were calculated
excluding the loss per share impact of the extraordinary charge of $10.59.
(6) Not presented for 1993 based upon a loss per share. A return on average
total capital of 10.4%, a return on average equity of 12.3%, a payout ratio
of 69.6% and an average price/earnings ratio of 14 were calculated
excluding the loss per share impact of the restructuring charge of $3.21,
discontinued operations of $.16, extraordinary charge of $.69 and the
cumulative effect of accounting changes of $3.46.
(7) Excluding the effect of the non-cash extraordinary charge related to the
discontinuance of SFAS No. 71, the 1995 debt ratio would have been 57.6%.
Excluding the combined effect of the charge related to SFAS No. 71 and the
debt issued to acquire the cellular properties, the 1995 debt ratio would
have been 48.0%.
SNET Annual Report 29
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
INVESTOR INFORMATION
Corporate Information
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Executive Office: Stock Exchange Listings: Auditors:
SNET New York Stock Exchange Coopers & Lybrand L.L.P.
227 Church Street Pacific Stock Exchange Independent Accountants
New Haven, CT 06510 Symbol: SNG 100 Pearl Street
(203) 771-5200 Hartford, CT 06103
Shareholder Information
- ---------------------------------------------------------------------------------------------------------------------
Annual Meeting of Shareholders: The Form 10-K may be obtained For Shareholder Information
May 14, 1997, 10:00 a.m. by contacting the Transfer Agent including quarterly results,
Oakdale Theatre and Registrar: latest recorded news
95 South Turnpike Road State Street Bank and Trust Company and information, call
Wallingford, CT 06492 P.O. Box 8200 1-800-SNG-6220 or visit
Boston, MA 02266-8200 our Internet web site
From anywhere in the continental at www.snet.com
U.S.: 1-800-243-1110
Security Analysts and Dividend Reinvestment
Portfolio Managers and Stock Purchase Plan
- ---------------------------------------------------------------------------------------------------------------------
Direct inquiries to: All owners of common stock are Shareholders do not pay any
Mr. James A. Magrone eligible for the plan, which allows brokerage or administrative fees
Director-Investor Relations participants to apply dividends and/or when purchasing additional shares
227 Church Street optional cash payments toward through the plan. You can obtain a
New Haven, CT 06510 increased investment in the prospectus and enrollment forms by
(203) 771-4662 Corporation. contacting State Street Bank and
Trust Company, Plan Administrator.
Market and Dividend Data
- ---------------------------------------------------------------------------------------------------------------------
Market information was obtained Market Price
from the composite tape, which ----------------------------------------------------------------------------------
encompasses trading on the 1996 1995
principal U.S. stock exchanges Quarter High Low Close Quarter High Low Close
as well as offboard trading. Cash ----------------------------------------------------------------------------------
dividends of $.44 per share were First $43.750 $37.500 $40.250 First $34.500 $31.750 $33.375
declared for each quarter in 1996 Second $45.500 $40.500 $42.000 Second $35.500 $32.375 $35.250
and 1995. The number of holders Third $42.750 $36.750 $36.875 Third $36.125 $32.625 $35.375
of SNET stock at February 28, Fourth $41.125 $36.000 $38.875 Fourth $40.250 $35.125 $39.750
1997 was 50,458.
</TABLE>
30 SNET Annual Report
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
OTHER INFORMATION
Executive Officers of the Corporation
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Daniel J. Miglio Chairman and Chief Executive Officer
Jean M. LaVecchia Senior Vice President--Organization Development
Fred T. Page Senior Vice President--Network Services
Ronald M. Serrano Senior Vice President--Communication, Information and Entertainment Group
Donald R. Shassian Senior Vice President and Chief Financial Officer
Representative Servicemarks and Trademarks
- ---------------------------------------------------------------------------------------------------------------------
SNET(r) is a registered trademark We Go Beyond The Call(r), SmartLink(r) americast is a trademark of the
and I-SNET is a servicemark of and All Distance(r) are registered trademarks americast partnership.
Southern New England of The Southern New England Telephone
Telecommunications Corporation. Company. Page 2000(r) is a registered
trademark of SNET Mobility, Inc.
</TABLE>
SNET Annual Report 31
Southern New England Telecommunications Corporation
Subsidiaries of the Registrant
Name State of Incorporation
The Southern New England
Telephone Company Connecticut
SNET America, Inc. Connecticut
SNET Cellular, Inc. Connecticut
SNET Mobility, Inc. Connecticut
SNET Diversified Group, Inc. Connecticut
SNET Real Estate, Inc. Connecticut
SNET Credit, Inc. Connecticut
SNET Personal Vision, Inc. Connecticut
Coopers Coopers & Lybrand L.L.P.
& Lybrand
a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our reports dated
January 21, 1997, which include an explanatory paragraph
related to the discontinuance of SFAS No. 71, "Accounting for
Certain Types of Regulation," effective January 1, 1996, on our
audits of the consolidated financial statements and financial
statement schedule of Southern New England Telecommunications
Corporation as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996,
included or incorporated by reference in this Annual Report
on Form 10-K, in the following documents filed by Southern
New England Telecommunications Corporation:
Registration Statement No. 33-59713 on Form S-3 relating
to the Shareholder Dividend Reinvestment and Stock
Purchase Plan.
Post-Effective Amendment No. 3 to Registration Statement
No. 33-6326 on Form S-8 relating to the SNET Bargaining
Unit Retirement Savings Plan.
Post-Effective Amendment No. 2 to Registration Statement
No. 33-6325 on Form S-8 relating to the SNET Management
Retirement Savings Plan.
Registration Statement No. 33-19058 on Form S-8 relating
to the SNET 1986 Stock Option Plan.
Registration Statement No. 33-41237 on Form S-3 relating
to the registration of $165 million of Debt Securities.
Registration Statement No. 33-51055 on Form S-8 relating
to the SNET Non-Employee Director Stock Plan.
Registration Statement No. 33-64975 on Form S-8
relating to the SNET 1995 Stock Incentive Plan.
Registration Statement No. 33-60133 on Form S-3
relating to the registration of $470 million of Debt
Securities.
Registration Statement No. 333-05757 on Form S-8
relating to the SNET 1996 Non-Employee Director
Stock Plan.
Registration Statement No. 333-22841 on Form S-4
relating to the proposed acquisition of the
Woodbury Telephone Company.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut Coopers & Lybrand L.L.P.
March 20, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Southern New England Telecommunications Corporation, a
Connecticut corporation (hereinafter referred to as the "Corporation"),
proposes to file shortly with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended,
an annual report on Form 10-K; and
WHEREAS, each of the undersigned is an officer or director, or both,
of the Corporation, and holds the office, or offices, in the Corporation
herein below indicated under his or her name;
NOW, THEREFORE, the undersigned, and each of them, hereby constitutes
and appoints Donald R. Shassian their attorney-in-fact for them and in their
name, place and stead, and in each of their offices and capacities with
the Corporation, to execute and file such annual report, and thereafter
to execute and file any amendment or amendments thereto, hereby
giving and granting to said attorney full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises, as fully, to all intents and purposes, as
the undersigned might or could do, if personally present at the doing
thereof, hereby ratifying and confirming all that said attorney may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF each of the undersigned has executed this Power of
Attorney this 12th day of March 1997.
Principal Executive Officer: Directors:
/s/ Daniel J. Miglio
Daniel J. Miglio
Chairman, President,
Chief Executive Officer
and Director
/s/ William F. Andrews
William F. Andrews, Director
/s/ Richard H. Ayers
Richard H. Ayers, Director
/s/ Zoe Baird
Zoe Baird, Director
/s/ Robert L. Bennett
Robert L. Bennett, Director
/s/ Barry M. Bloom
Barry M. Bloom, Director
/s/ Frank J. Connor
Frank J. Connor, Director
/s/ William R. Fenoglio
William R. Fenoglio, Director
/s/ James R. Greenfield
James R. Greenfield, Director
/s/ Ira D. Hall
Ira D. Hall, Director
/s/ Burton G. Malkiel
Burton G. Malkiel, Director
/s/ Frank R. O'Keefe, Jr.
Frank R. O'Keefe, Jr., Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Southern New England Telecommunications
Corporation, a Connecticut corporation (hereinafter referred
to as the "Corporation"), proposes to file shortly with the
Securities and Exchange Commission, under the provisions of
the Securities Exchange Act of 1934, as amended, an annual
report on Form 10-K; and
WHEREAS, the undersigned is a director of the Corporation;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Donald R. Shassian her attorney-in-fact for her and
in her name, place and stead, and in her capacity as director
of the Corporation, to execute and file such annual report,
and thereafter to execute and file any amendment or
amendments thereto, hereby giving and granting to said
attorney full power and authority to do and perform each and
every act and thing whatsoever requisite and necessary to be
done in and about the premises, as fully, to all intents and
purposes, as the undersigned might or could do, if personally
present at the doing thereof, hereby ratifying and confirming
all that said attorney may or shall lawfully do, or cause to
be done, by virtue hereof.
IN WITNESS WHEREOF the undersigned has executed this Power
of Attorney this 17th day of March 1997.
/s/ Claire L. Gaudiani
Claire L. Gaudiani, Director
C E R T I F I C A T E
This is to certify that at a regular meeting of the Board of
Directors of Southern New England Telecommunications Corporation held on
March 12, 1997, the following vote was adopted and, as of the date of this
Certificate, has not been amended, modified or rescinded and is in full
force and effect:
"VOTED: That the Chief Executive Officer and the Chief Financial
Officer are, or either one of them is, authorized to execute, personally
or by attorney, in the name and on behalf of the Company, and to cause
to be filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, the Company's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1996, in substantially
the form submitted to this meeting, but with such changes, additions and
revisions as the officer executing the same shall approve, such approval
to be conclusively evidenced by such execution and thereafter to execute
personally, and to cause to be filed, any amendments or supplements to
such report and to do any other acts and to execute and deliver any other
documents necessary or advisable in connection with the foregoing."
Attest:
/s/ Paula M. Anderson
Paula M. Anderson
Assistant Secretary
New Haven, Connecticut
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 1996 ANNUAL REPORT ON FORM 10-K
OF SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,000
<SECURITIES> 0
<RECEIVABLES> 350,700
<ALLOWANCES> 27,400
<INVENTORY> 27,400
<CURRENT-ASSETS> 468,000
<PP&E> 4,707,300
<DEPRECIATION> 3,110,300
<TOTAL-ASSETS> 2,671,000
<CURRENT-LIABILITIES> 667,000
<BONDS> 1,169,700
0
0
<COMMON> 68,400
<OTHER-SE> 394,600
<TOTAL-LIABILITY-AND-EQUITY> 2,671,000
<SALES> 0
<TOTAL-REVENUES> 1,941,900
<CGS> 0
<TOTAL-COSTS> 1,559,700
<OTHER-EXPENSES> (6,900)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,700
<INCOME-PRETAX> 300,400
<INCOME-TAX> 107,600
<INCOME-CONTINUING> 192,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,800
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.94
</TABLE>
