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, 1997.
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
per share Exchanges
Rights to purchase common New York and Pacific Stock
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 the settlement date of February 27, 1998, 67,292,621 common
shares were outstanding.
At the settlement date of February 27, 1998, the aggregate market
value of the voting stock held by non-affiliates was $4,244,461,433.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's combined 1997 Annual Report to Shareholders
and Proxy Statement dated March 26, 1998 issued in connection with the
1998 Annual Meeting of Shareholders [Part II and Part III]
1
TABLE OF CONTENTS
Item Page
PART I
1. Business...........................................................3
2. Properties........................................................13
3. Legal Proceedings.................................................14
4. Submission of Matters to a Vote of Security Holders...............14
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters.............................................14
6. Selected Financial Data...........................................15
7. Management's Discussion and Analysis of Financial Condition
and Operating Results...........................................15
8. Financial Statements and Supplementary Data.......................15
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................15
PART III
10. Directors and Executive Officers of the Registrant................15
11. Executive Compensation............................................15
12. Security Ownership of Certain Beneficial Owners and
Management.......................................................15
13. Certain Relationships and Related Transactions....................15
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K...17
See page 16 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 wholly-owned subsidiaries in telecommunications
services principally in Connecticut with expanded cellular
services in Rhode Island and portions of 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 ("Telephone Company") and Woodbury
Telephone Company ("Woodbury"), acquired in 1997, providing
telecommunications services in Connecticut; SNET America, Inc.
("SAI"), 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.
and SNET Mobility, Inc., providing retail and wholesale cellular
services, personal communications, equipment sales and paging
resale services. Information and entertainment includes SNET
Information Services, Inc. (providing publishing and internet
services) and SNET Personal Vision, Inc. (providing cable
television service). Other business activities include SNET Real
Estate, Inc. (engaging in leasing commercial real estate
primarily to affiliates) and the holding company (engaging in
financial and strategic planning for the Corporation and its
subsidiaries).
In 1997, approximately 67% 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 activities of the Corporation's other
subsidiaries, and activities associated with the provision of
facilities and non-access services to interexchange carriers.
Approximately 68% 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 number of access lines in service grew to 2,286,000 at
December 31, 1997 (including approximately 21,000 lines acquired
in the Woodbury purchase) from 2,163,000 at December 31, 1996, an
increase of 5.7%. The increase excluding the Woodbury purchase
was 4.7%. The increase included significant growth in Centrex
business lines and second residential lines. The network access
lines provided by the Telephone Company and Woodbury to
customers' premises can be interconnected with the access lines
of other telephone companies in the United States and with
telephone systems in most other countries. The following table
sets forth the number of network access lines in service at the
end of each year:
Network Access Lines in
Service (thousands): 1997 1996 1995 1994 1993
Residence 1,513 1,444 1,415 1,379 1,355
Business 773 719 658 630 609
Total 2,286 2,163 2,073 2,009 1,964
3
Planned Merger
On January 4, 1998, the Corporation's Board of Directors approved
a definitive merger agreement ("Agreement") with SBC
Communications Inc. ("SBC") whereby the Corporation will become a
wholly-owned subsidiary of SBC. The Board's deliberations
focused on the complementary strengths and the possible
advantages of a combination. Under the original terms of the
Agreement, each share of the Corporation's common stock was to be
exchanged for 0.8784 shares of SBC common stock. On January 30,
1998, SBC announced a two-for-one stock split, which modified the
exchange ratio to 1.7568. The transaction is intended to be
accounted for as a pooling-of-interests and as a tax-free
reorganization under the applicable provisions of the Internal
Revenue Code. In addition, the Agreement does not require any
changes to the Corporation's quarterly dividend prior to closing.
The process leading to the Board's adoption of the merger began
in late 1996 with a review of strategic goals in the context of
rising costs (including non-recurring items such as Year 2000
costs) and a rapidly changing regulatory environment. As a
result of this review, the Board concluded that the Corporation
would need to substantially increase the scale and scope of its
operations in order to continue to compete successfully and in a
cost-effective manner in the increasingly competitive
telecommunications industry, and to provide customers with the
broad range of telecommunications products and services they
would demand and to meet the goals of its shareholders. During
1997, management explored possibilities for various joint
ventures and business alliances in specific product areas with a
view toward increasing the scale and scope of operations. In the
fall of 1997, management ultimately concluded that a combination
with a major telecommunications company was the best alternative
in order to achieve the Corporation's strategic and financial
objectives.
The merger has been reviewed by the U.S. Department of Justice
and must still be approved by the Corporation's shareholders, the
Connecticut Department of Public Utility Control ("DPUC") and the
Federal Communications Commission ("FCC"). The Corporation is
currently authorized to provide interexchange services in 46
states. For the majority of these states these authorizations
have been utilized solely to provide calling card services to
Connecticut-based customers traveling in the respective states.
The Corporation does, however, provide long-distance service to a
small number of customers in states where SBC is an Incumbent
Local Exchange Carrier ("ILEC"). The Corporation may be required
to modify or withdraw its interexchange authorizations in the
states where SBC is an ILEC. In addition, authorizations may be
required from a number of other states to allow the Corporation
to transfer its existing long-distance authorizations to SBC.
Once the necessary approvals are obtained, the merger is expected
to close by December 31, 1998.
Management believes that the merger with SBC is in the best
interest of shareholders because it offers them the opportunity
of becoming investors in a company with global presence and a
track record of success in growing long-term value for
shareholders. In addition, the merger will likely strengthen the
Corporation's ability to compete in the increasingly competitive
telecommunications industry.
4
Corporate Restructure
In a decision issued June 25, 1997, the DPUC approved the
Corporation's proposal to establish separate wholesale and retail
organizations [see Regulatory Matters - State]. As a result, the
Telephone Company will become an ILEC, providing network services
and functionality to retail providers under the wholesale
provisions of the Federal Telecommunications Act of 1996 ("Act").
The Telephone Company will be treated as a public service
company, and will continue to be subject to alternative forms of
regulation. In a separate order, SNET America, Inc. ("SAI"), a
subsidiary of the Corporation, was certified to operate as a
competitive local exchange carrier ("CLEC"), allowing it to
provide competitive retail service to customers with the same
flexibility as all other CLECs in the state. As part of the
DPUC's decision allowing the restructure, Connecticut customers
must choose their local exchange provider via a balloting
process. Until balloting is complete, the Telephone Company and
SAI will jointly offer retail telecommunication services to the
public. Once the balloting process is completed, SAI will become
the sole provider of retail service for the Corporation. In
addition, as part of the restructure, the directory publishing
operations were incorporated into a separate subsidiary of the
Corporation on January 1, 1998.
WIRELINE
The Southern New England Telephone Company
The Southern New England Telephone Company, a local exchange
carrier, 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.
The Telephone Company is subject to the jurisdiction of the 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 Telephone Company, in providing telecommunications services
in Connecticut, is subject to regulation by the 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. In 1996, the DPUC
replaced the Telephone Company's traditional rate of return
regulation with alternative (price-based) regulation to be
employed during the transition to full competition [see
Regulatory Matters - State].
5
As a result of legislative and regulatory reform, the Corporation
continues to experience an increasingly competitive environment.
Competitors include companies that construct and operate their
own communications systems and networks and/or companies that
resell the telecommunications systems and networks of underlying
carriers.
In 1997, major interexchange carriers continued to intensify
their marketing efforts to sell intrastate long-distance services
since the Telephone Company's full implementation of intrastate
equal access. Since the introduction of intrastate long-distance
toll competition, in excess of 230 telecommunications providers
have received approval from the DPUC to offer intrastate long-
distance services with an additional 70 filed and awaiting DPUC
approval. The reduction in intrastate toll rates and the
increasingly competitive intrastate toll market continue to place
significant downward pressure on the Telephone Company's
intrastate toll revenues.
Thirty-five telecommunications providers have been granted
approvals for local service and twelve additional applications
are pending before the DPUC. These providers began offering
local exchange service to business and residential customers
throughout the state. There has been growth in local service
competition in 1997 and continued growth is expected,
particularly upon commencement of the DPUC-mandated balloting
process [see Regulatory Matters - State], however, the financial
impact cannot be predicted at this time. Based on existing state
and federal regulations, the Corporation expects that many
competitors will resell the Telephone Company's network and that
increased network access revenues will offset a significant
portion of local service revenues lost to competition.
Management supports bringing customers the benefits of
competition and affording all competitors the opportunity to
compete fairly under reduced regulation.
The Corporation's ability to compete is dependent upon regulatory
reform that will allow pricing flexibility to meet competition
and provide a level playing field with similar regulation for
similar services. In addition, the Corporation's restructure
into wholesale and retail affiliates will provide additional
flexibility to compete at the retail level [see Regulatory
Matters - State].
The competitive environment also allows opportunities for the
Corporation to continue to increase its provision of interstate,
international long-distance and cable television services.
SNET America, Inc.
SAI was incorporated in 1993 under the laws of the State of
Connecticut. SAI 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.
Currently, SAI 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[R], 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[R] has produced such features as one-second rating
and one bill for all toll calls. The migration of Connecticut
customers to wireline's bundled calling plans resulted in
significant growth for interstate and international long-distance
services.
As previously discussed, the DPUC has granted SAI the authority
to operate as a CLEC in the state of Connecticut and as a result,
SAI will be able to provide competitive retail services to end
user customers with the same regulatory and pricing flexibility
as all other CLEC's in the state [see Regulatory Matters -
State].
6
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 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.
Woodbury Telephone Company
Woodbury was incorporated in 1899 under the laws of the State of
Connecticut. On July 23, 1997, the DPUC approved the
Corporation's acquisition of Woodbury and on July 30, 1997, the
Corporation completed its acquisition of Woodbury by issuing
approximately 528,000 shares of the Corporation's treasury stock
for the remaining 63.5% of Woodbury's common stock not formerly
held by the Corporation. The total cost of completing the
acquisition was $30.1 million, which includes the assumption of
$9.0 million in long-term debt. Woodbury is the primary provider
of local exchange telephone services, intrastate toll services,
and access to long-distance telephone services in the major
portions of the towns of Woodbury, Southbury, and Bethlehem, and
also serves small portions of the towns of Oxford and Roxbury,
Connecticut.
Regulatory Matters
The Telephone Company is regulated by the FCC and the DPUC.
Historically, the FCC has regulated the Corporation's provision
of interstate services, both at the wholesale (access service
provided by the Telephone Company) and retail (long-distance toll
charges provided by SAI as a non-dominant carrier) levels. Since
the passage of the Federal Telecommunications Act ("Act") in
1996, the FCC has also been charged, by Congress, with the
implementation of many of the provisions of the Act designed to
foster local competition.
The DPUC regulates the Telephone Company's provision of services
within the state of Connecticut including local and in-state long-
distance services. Since the passage of state legislation in
1994, regarding local competition, as well as the Act, the DPUC
also regulates the provision of wholesale services within the
state that are required for interconnection to the Telephone
Company's network. A synopsis of key Federal and State
regulatory decisions follows.
Regulatory Matters - Federal
On February 8, 1996, Congress passed the Act which was designed
to overhaul U.S. telecommunications policy by removing barriers
to local competition. The FCC's First and Second Report and
Order ("Order") implements the Act and contains numerous
provisions regarding the interconnection of the Telephone
Company's network with those of its competitors. The Order
requires significant changes in the way business is conducted,
how the network is designed and the systems that support it
(including repair and service ordering). In addition, the Order
requires fundamental changes in the development of the prices
that the Telephone Company would charge competitors for
purchasing regulated network products and services. This Order,
as well as the orders discussed below, could have a material
adverse financial impact on the Telephone Company.
7
Certain provisions in the Order have been appealed by various
local telephone companies, including the Telephone Company, the
National Association of Regulatory Utility Commissioners and
individual state regulatory commissions. On July 18, 1997, the
Eighth Circuit Court of Appeals ("Eighth Circuit") issued a
partial stay of the Order, delaying the effectiveness of the
pricing provisions and the rule allowing competitors to "pick and
choose" isolated terms out of negotiated interconnection
agreements and struck down those key provisions and other terms
under which potential competitors can lease pieces of the
Telephone Company's network. The Eighth Circuit declared that
the FCC had overstepped its authority and concluded that "the Act
plainly grants the state commissions, not the FCC, the authority
to determine the rates involved in the implementation of the
local competition provisions of the Act." The Eighth Circuit's
decision is a strong endorsement of Congress' intention that the
states play a primary role in implementing local
telecommunications competition. This decision should allow the
Corporation to implement local competition on the course mapped
out by the DPUC and the Connecticut state legislature.
On October 14, 1997, the Eighth Circuit also vacated a portion of
the FCC's rules which required ILECs to provide combinations of
network elements that effectively recreated the end-to-end
service at a significant discount to CLECs. The Eighth Circuit
indicated that the Act requires ILECs to provide access to
unbundled network elements, not access to platforms used by ILECs
in which network elements are combined. The Eighth Circuit's
decisions have now been appealed to the Supreme Court which has
agreed to review the case in the fall 1998 session. A decision
is expected in 1999.
On August 18, 1997, the FCC also released its Third Report and
Order requiring ILECs, including the Telephone Company, to
provide shared transport to new entrants as an unbundled network
element at cost-based prices. Several companies, including the
Telephone Company, have filed Petitions for Review, which will be
heard by the Eighth Circuit. A decision in this matter is
expected in 1998.
On May 8, 1997, the FCC issued an order regarding Universal
Service. The order revises the current universal service
programs for low income customers and high cost areas (including
Woodbury) and establishes new federal support for
telecommunications services provided to schools, libraries and
rural health care facilities. The federal universal service
mechanisms are funded, beginning January 1, 1998, by an
assessment on the end user revenues of all telecommunications
service providers. Funding for the new federally supported
services provided to schools, libraries and rural healthcare
facilities will come from both interstate and intrastate end user
revenues, while funding for the revised high cost support and low
income support programs will be from interstate end user
revenues. ILECs can recover their contributions to the federal
universal service mechanisms through their interstate access
charges. The Universal Service Order is on appeal in the Fifth
Circuit Court. The Telephone Company has intervened in the
appeal. The FCC has no timeline currently to resolve this issue
and the Corporation cannot determine when it will be resolved.
On May 16, 1997, the FCC also issued an order regarding access
charge reform which changes the way the Telephone Company
recovers interstate access charges from interstate toll
providers, including SAI. Specifically, the order establishes
flat-rated per-call carrier access charges, rather than usage
based charges. This order establishes a prescriptive mechanism
to ensure that interstate access charges will be driven toward
the levels that competition would be expected to produce.
Management expects this order to pressure earnings but is
currently unable to quantify any such impact. The Access Charge
Reform Order is being appealed and is pending in the Eighth
Circuit. The Telephone Company has intervened in the appeal.
The FCC is also expected to release a Pricing Flexibility Order
in 1998. This order will establish a market-based approach to
pricing.
8
On May 21, 1997, the FCC released its Price Cap Order revising
its price cap plan for regulating ILECs including the Telephone
Company. This order establishes a single productivity factor of
6.5% and eliminates the sharing requirements of the prior rules.
This order is being appealed in the District of Columbia Circuit
Court. On August 13, 1997, the Telephone Company filed a
Petition for Waiver from the 6.5% productivity factor, requesting
that the FCC establish a productivity factor of 5.3% for the
Telephone Company. A decision is still pending.
The Telephone Company filed its 1997 annual interstate access
price cap revisions, in which the Telephone Company elected to
use a 6.5% productivity factor, which took effect July 1, 1997.
The FCC required all price cap ILECs, including the Telephone
Company, to adjust their Price Cap Indices, effective July 1,
1997, to reflect the 6.5% productivity factor for both the 1996-
1997 and 1997-1998 tariff years. The filing would decrease
interstate network access rates by approximately $28 million for
the period July 1, 1997 to June 30, 1998. The Telephone Company
expects that this decrease will be partially offset by increased
demand.
In addition, the FCC has released Reports and Orders on the
Implementation of the Pay Telephone Reclassification and
Compensation Provisions of the Act. The orders, among other
things, mandate that all ILECs, including the Telephone Company,
unbundle payphone instruments, file tariffs on payphone service
lines and make them available on a non-discriminatory basis to
Payphone Service Providers ("PSPs"). Additionally, the orders
establish mechanisms for the full and fair compensation to PSPs,
including per-call compensation for subscriber "800" and access
code calls from payphones. The Telephone Company has filed the
necessary revisions to its interstate access charges with the FCC
and has filed with the DPUC new retail and wholesale Pay
Telephone Access Line Service offerings in accordance with the
FCC's order.
In December 1996, the FCC acted on an outstanding petition by the
New England Public Communications Council, Inc. and preempted a
prior DPUC decision which only authorized ILECs and CLECs to
provide payphone service in Connecticut. On July 1, 1997, the
District of Columbia Circuit Court rendered its decision in
Illinois Public Telecommunications Association v. FCC remanding
back to the FCC its decision setting the per-call compensation
rate for subscriber "800" and access code calls. The FCC on
August 5, 1997, established a pleading and comment cycle on these
remanded issues. The FCC released a subsequent order setting the
per-call compensation rate at $.284.
Noting the need to revise its jurisdictional separations rules as
a result of the increasingly competitive nature of the
telecommunications industry, the FCC initiated on October 7,
1997, a rulemaking proceeding to begin separations reform.
Jurisdictional separations assigns telecommunications property
costs, revenues, expenses, taxes and reserves to specific
categories that are then allocated between the interstate and
intrastate jurisdictions. Comprehensive reform in this area
could result in changes to the structure of ILEC pricing.
Management is currently unable to determine the impact any change
would have on the Telephone Company.
In accordance with the Act, the FCC requires ILECs, including the
Telephone Company, to implement a long-term solution for
portability of local telephone numbers. The Telephone Company is
required to construct and operate a system that will permit end
user customers to retain their telephone numbers when they elect
a different carrier for local service. The system is to be
operational by mid-1998 for a large percentage of the Telephone
Company's access lines. The FCC, however, has not yet decided on
a method to recover the substantial investment and operating
costs relating to the number portability system. Local number
portability expenditures were approximately $4 million in 1997
and are estimated to be $19 million in 1998.
9
Regulatory Matters - State
Effective April 1, 1996, the DPUC replaced traditional rate of
return regulation with alternative (price-based) regulation,
during the transition to full competition. Alternative
regulation includes a five-year monitoring period on financial
results and a price cap formula based on certain services
categorized as non-competitive. In addition, basic local service
rates for residence, business and coin may not be raised above
current levels until January 1, 1998, at which time the price cap
plan becomes effective for these services, unless they have been
reclassified into the emerging-competitive or competitive
categories. The impact of these changes on the Telephone
Company's operating results will depend on the timing of
classifying the various products and services from non-
competitive into the emerging-competitive and competitive
categories for pricing changes.
On June 25, 1997, the DPUC issued a final decision allowing the
Corporation to establish separate wholesale and retail
affiliates. Under the decision, the new retail organization, a
CLEC, will compete under the same regulations as all other retail
telecommunications providers in the state. As such, the CLEC
will not be subject to price cap regulations. The wholesale
organization, an ILEC, will provide network services and
functionality to retail providers, including SAI, the
Corporation's new CLEC, on comparable terms. The ILEC will be
treated as a public service company and will continue to be
subject to alternative forms of regulation. The directory
publishing operations were incorporated into a separate
subsidiary of the Corporation on January 1, 1998. As part of the
decision, however, the DPUC mandated that Connecticut customers
must choose their local exchange provider via a balloting
process. Customers who do not choose a carrier will be assigned
a CLEC based on the proportion of votes in a local service area.
The specific details of the balloting process will be addressed
in further technical discussions among the participants and the
DPUC. The balloting process is scheduled to begin on January 4,
1999 and to be completed by May 1999.
In order for the balloting process to commence, the ILEC must
demonstrate that the systems offered to CLECs provide full
technical and operational support as required by the Act. The
DPUC will examine and critically evaluate the respective
Operations Support System ("OSS") platforms offered to the CLECs.
The DPUC's evaluation will establish a set of tests and standards
that can be used to determine the suitability of the ILEC's OSS
to support a competitive local exchange market and will determine
if the interfaces proposed by the ILEC offer the comparability
required under the provisions of the Act. A final decision is
due on June 24, 1998. The DPUC's decision to allow the
Corporation to establish separate wholesale and retail affiliates
has been challenged by other parties in both state court and
federal court. In an oral decision, the federal court has denied
the other parties' motion for summary judgment and granted the
Corporation's motion for summary judgment. A written decision is
expected in the first quarter of 1998. A decision is also
expected from the state court in 1998.
On March 18, 1997, SAI filed an application with the DPUC to
provide local and intrastate toll services throughout
Connecticut. The DPUC issued a final decision granting approval
on June 25, 1997. This grants SAI the authority to operate as a
CLEC in the state of Connecticut and to provide competitive
retail services to end user customers with the same regulatory
and pricing flexibility as all other CLECs in the state.
In compliance with the Act, the ILEC has filed with the DPUC
numerous cost studies supporting its proposed wholesale (i.e.,
resale) and unbundled rates for interconnection services. On
March 24, 1997, the DPUC issued a final decision setting a
uniform 17.8% discount rate off the Telephone Company's current
retail prices for telecommunications services sold to CLECs.
10
On April 23, 1997, the DPUC issued a final decision addressing
the proposal for allocation of Hybrid Fiber Coax ("HFC") network
joint costs between broadband and telephony and the Telephone
Company's costs and rates associated with unbundled loops, ports,
multiplexing and inter-wire center transport. In this decision,
the DPUC approved the Telephone Company's proposed 50/50
allocation of HFC network joint costs between broadband and
telephony. In addition, the DPUC approved the cost studies based
on Total Service Long Run Incremental Cost ("TSLRIC").
Subsequently, the DPUC opened a new docket to determine
appropriate TSLRIC-based rates for the remaining unbundled
elements (non-loop) defined by the FCC. The cost allocation
decision has been appealed by the cable television industry to
state Superior Court. A decision is expected in 1998.
WIRELESS
The Corporation provides cellular (wholesale and retail),
personal communications, equipment sales and resale of paging
services in Connecticut, Rhode Island and portions of
Massachusetts, through its subsidiaries SNET Cellular, Inc.
("Cellular") and SNET Mobility, Inc. ("Mobility").
SNET Cellular, Inc.
Cellular was incorporated in 1985 under the laws of the State of
Connecticut and provides directly or indirectly through
affiliates retail and wholesale services in the states of
Connecticut and Rhode Island and portions of Massachusetts.
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. If wireless service is determined to be a replacement
for landline service, the DPUC may petition the FCC for rate
regulation authority.
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 four Rural Service Areas, Windham
and Litchfield Counties in Connecticut and Franklin and Berkshire
Counties in Massachusetts. The Corporation through its
subsidiaries holds over a 99.6% partnership interest in
Springwich.
Cellular has "roaming 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 facing considerable competition as a result of the
completion of the Bell Atlantic and NYNEX merger which created
the largest wireless service provider on the East Coast and the
second largest provider in the United States. In addition,
Cellular expects increasing competition from new alliances and
the impact from auctions of personal communications services
("PCS") and other licenses. A major long-distance provider has
launched a digital PCS service in Connecticut during 1997,
creating the third wireless provider in the state. Other
wireless carriers are expected to begin offering services in the
near future. Cellular has made and will continue to make
investments in network expansion and enhancements.
11
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 in the
Connecticut retail market. In addition, Mobility also provides
paging services.
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. 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.
INFORMATION AND ENTERTAINMENT
SNET Information Services, Inc.
In January 1998, the Telephone Company's directory publishing
operations and internet services were transferred to SNET
Information Services, Inc. which was incorporated in 1997 under
the laws of the State of Connecticut. The directory publishing
operations, in addition to selling the advertising, 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
introduced electronic publishing services, such as SNET Access[SM],
Consumer Tips and Electronic Yellow Pages.
The Connecticut advertising marketplace continues to undergo
major structural changes and is increasingly more fragmented and
competitive. The publishing division faces increased competition
from traditional directory publishers, established media, and
emerging competitors such as on-line services, electronic
shopping services, CD-ROM, and the expansion of cable television.
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.
Internet customers have increased to over 85,000 at the end of
1997 from approximately 35,000 at the end of 1996.
SNET Personal Vision, Inc.
SNET Personal Vision, Inc. ("Personal Vision") was incorporated
in 1996 under the laws of the state of Connecticut. On September
6, 1996, Personal Vision received an 11-year license from the
DPUC to operate a cable television system that will serve the
entire state of Connecticut. Personal Vision also became a
partner in the americast joint venture with The Walt Disney
Company and several large local exchange carriers. The
partnership provides a full range of americast[TM] programming and
marketing services. Personal Vision began deploying its cable
service during the first quarter of 1997. The DPUC's decision
granting the statewide franchise was appealed to state Superior
Court by members of the cable industry. The Superior Court
upheld the DPUC's decision and the cable industry has now
appealed to the state Appellate Court. A decision is anticipated
in 1998.
12
OTHER BUSINESS ACTIVITIES
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
The DPUC had limited the amount that the Corporation could invest
in unregulated diversified activities, without DPUC approval, to
40% of its total assets. In January 1997, the Corporation
requested the DPUC to completely lift the restriction. In June
1997, the DPUC lifted the restriction.
EMPLOYEE RELATIONS
The Corporation and its subsidiaries employed 9,841 persons at
February 27, 1998, of whom approximately 63% are represented by
the Connecticut Union of Telephone Workers, Inc. ("CUTW"), an
unaffiliated union.
In January 1998, under the current union contract, bargaining-
unit employees received a general wage increase totaling 3.0%;
made up of various forms and combinations of basic wage
increases, one-time cash payments and/or Cash Balance Plan
Account credits. The current labor agreement will expire on
August 8, 1998. Management and the union expect to begin
negotiations on a new labor agreement early in 1998.
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, 1997, central office equipment
represented 43%; 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 11%; 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 10%.
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.
13
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 $4.1 billion at December 31, 1992 to
approximately $4.9 billion at December 31, 1997, after giving
effect to retirements, but before deducting accumulated
depreciation at either date. Since 1993, cash expended for
capital additions was as follows:
Dollars in Millions,
For the Years Ended 1997 1996 1995 1994 1993
Cash Expended for
Capital Additions $472 $374 $357 $283 $269
In 1997, the Corporation funded its cash expenditures for capital
additions entirely through cash flows from operations. In 1998,
capital additions are expected to be approximately $475 million,
including estimated additions of $290 to the wireline network.
These additions include expenditures primarily related to the
modernization, growth and upgrading of wireline's central office
switching and circuit equipment, to meet customer demand for new
services. Additionally, to reduce maintenance costs and to meet
access line growth, increased focus is being placed on replacing
and supplementing the existing core network of twisted copper
wire and fiber-optic and coaxial cable.
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.
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 47,787 as of
February 27, 1998. 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 combined 1997 Annual Report to Shareholders and
Proxy Statement on page 34 under the caption "Market and Dividend
Data" and is incorporated herein by reference pursuant to General
Instruction G(2).
14
Items 6 through 8.
Information required under Items 6 through 8 is included in the
registrant's combined 1997 Annual Report to Shareholders and
Proxy Statement dated March 26, 1998 on pages 6 through 33 in
their entirety and is incorporated herein by reference pursuant
to General Instruction G(2).
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 1997 Annual Report to Shareholders and
Proxy Statement dated March 26, 1998 on pages 38 through 47.
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 as follows:
15
Executive Officers of the Registrant(1)
(as of February 27, 1998)
Executive
Officer
Name Age(2) Position Since
Daniel J. Miglio 57 Chairman, President and
Chief Executive Officer 1/86
Madelyn M. DeMatteo 49 Senior Vice President-
General Counsel and Secretary 1/98
Karin D. Mayhew(3) 46 Senior Vice President-
Organization Development 1/98
Fred T. Page 51 Senior Vice President-
Network Services 2/96
Ronald M. Serrano 42 Senior Vice President-Communication
Information and Entertainment Group 1/93
Donald R. Shassian 42 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, 1997.
(3) Replaced Jean M. LaVecchia whose employment with the Corporation
ended December 31, 1997.
Mr. Miglio, Ms. DeMatteo, Ms. Mayhew 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.
16
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, 1997, 1996 and 1995 *
Consolidated Balance Sheets - as of
December 31, 1997 and 1996 *
Consolidated Statements of Changes in
Shareholders' Equity - for
the years ended December 31, 1997, 1996 and 1995 *
Consolidated Statements of Cash Flows -
for the years ended
December 31, 1997, 1996 and 1995 *
Notes to Consolidated Financial Statements *
(2) Consolidated Financial Statement Schedule for the
year ended December 31, 1997
Report of Independent Accountants 22
II - Valuation and Qualifying Accounts 23
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 1997 Annual Report to Shareholders
and Proxy Statement dated March 26, 1998 [see Part II].
17
(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)17 are management
contracts or compensatory plans required to be filed as exhibits
pursuant to Item 14(c) of Form 10-K.
Exhibit
Number
2 Agreement and Plan of Merger dated January 4, 1998,
between Southern New England Telecommunications
Corporation, SBC Communications Inc. and SBC (CT),
Inc. (Exhibit 2 to Form 8-K dated 1/5/98, File No. 1-
9157).
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). Amendment No. 1 dated January 4, 1998
(Exhibit 4.2 to Form 8-K dated 1/5/98, File No. 1-
9157).
4b Stock Option Agreement dated January 4, 1998,
between Southern New England Telecommunications
Corporation, SBC Communications Inc. and SBC (CT)
Inc. (Exhibit 4.1 to Form 8-K dated 1/5/98, File No.
1-9157).
4c 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).
4d 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, $200,000,000 of 7% Medium-Term Notes,
Series 2, due August 15, 2005 and $100,000,000 of 6
1/2% Medium-Term Notes, Series 2, due February 15,
2002 (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).
18
(3) Exhibits (continued):
Exhibit
Number
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 through January
1, 1998.
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
(Exhibit 10(iii)(A)6 to 1996 Form 10-K dated 3/20/97,
File No. 1-9157). Amendments effective July 9, 1997
through January 1, 1998.
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). Amendment dated January
4, 1998.
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
(Exhibit 10(iii)(A)12 to 1996 Form 10-K dated
3/20/97, File No. 1-9157).
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 SNET Executive Retirement Savings Plan as amended
through January 1, 1998.
10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to
Registration No. 33-64975, File No. 1-9157).
Amendment dated January 4, 1998.
19
(3) Exhibits (continued):
Exhibit
Number
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).
10(iii)(A)17 SNET Stay Bonus Program effective January 4, 1998.
12 Computation of Ratio of Earnings to Fixed Charges.
13 Pages 6 through 34 of the registrant's combined 1997
Annual Report to Shareholders and Proxy Statement for
the fiscal year ended December 31, 1997.
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, 1997 for the SNET Management Retirement
Savings Plan will be filed as an amendment prior to
June 30, 1998.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1997 for the SNET Bargaining-Unit
Retirement Savings Plan will be filed as an amendment
prior to June 30, 1998.
The Corporation will furnish, without charge, to a shareholder
upon request a copy of the combined 1997 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 23, 1997, the Corporation and the Telephone Company
filed, separately, reports on Form 8-K, dated October 23, 1997
announcing the Corporation's financial results for the third
quarter of 1997.
On January 5, 1998 and January 6, 1998, the Corporation and
the Telephone Company respectively filed, separately, reports
on Form 8-K, dated January 5, 1998, announcing the execution
of an agreement with SBC Communications Inc., whereby the
Corporation will become a wholly-owned subsidiary of SBC.
On January 27, 1998, the Corporation and the Telephone Company
filed, separately, reports on Form 8-K, dated January 27,
1998, announcing the Corporation's 1997 financial results.
20
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, 1998
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
Senior Vice President and By /s/ Donald R. Shassian
Chief Financial Officer (Donald R. Shassian, as attorney-
in-fact and on his own behalf)
DIRECTORS:
William F. Andrews*
Richard H. Ayers*
Robert L. Bennett*
Barry M. Bloom* March 20, 1998
Frank J. Connor*
William R. Fenoglio*
Claire L. Gaudiani*
Ira D. Hall*
Burton G. Malkiel*
Frank R. O'Keefe, Jr.*
Joyce M. Roche* * by power of attorney
21
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 1997 Annual
Report to Shareholders and Proxy Statement of Southern New
England Telecommunications Corporation on page 15 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, 1997 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 /s/ COOPERS & LYBRAND L.L.P.
January 27, 1998
22
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 1997 $27.4 $43.4 $11.3 (a) $49.6 (b) $32.5
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
Allowance for Uncollectible
Direct-Financing Lease Notes Receivable:
Year 1997 $11.0 $ - $ - $ - $11.0
Year 1996 9.7 1.8 - 0.5 (b) 11.0
Year 1995 8.4 1.4 - 0.1 (b) 9.7
Restructuring Charge:
Year 1997 $31.5 $ - $ - $25.0 $ 6.5
Year 1996 77.0 - - 45.5 (c) 31.5
Year 1995 264.9 - - 187.9 (c) 77.0
(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. 1997
reflects the continuous collection difficulties as the
competitive environment increases despite the Corporation's
increased emphasis on collections. 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 in 1995.
23
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the SEC,
are incorporated herein by reference as exhibits hereto.
Exhibit
Number
2 Agreement and Plan of Merger dated January 4, 1998,
between Southern New England Telecommunications
Corporation, SBC Communications Inc. and SBC (CT),
Inc. (Exhibit 2 to Form 8-K dated 1/5/98, File No. 1-
9157).
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). Amendment No. 1 dated January 4, 1998
(Exhibit 4.2 to Form 8-K dated 1/5/98, File No. 1-
9157).
4b Stock Option Agreement dated January 4, 1998,
between Southern New England Telecommunications
Corporation, SBC Communications Inc. and SBC (CT)
Inc. (Exhibit 4.1 to Form 8-K dated 1/5/98, File No.
1-9157).
4c 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).
4d 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, $200,000,000 of 7% Medium-Term Notes,
Series 2, due August 15, 2005 and $100,000,000 of 6
1/2% Medium-Term Notes, Series 2, due February 15,
2002 (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 through January
1, 1998.
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
(Exhibit 10(iii)(A)6 to 1996 Form 10-K dated 3/20/97,
File No. 1-9157). Amendments effective July 9, 1997
through January 1, 1998.
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). Amendment dated January
4, 1998.
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
(Exhibit 10(iii)(A)12 to 1996 Form 10-K dated
3/20/97, File No. 1-9157).
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 SNET Executive Retirement Savings Plan as amended
through January 1, 1998.
10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to
Registration No. 33-64975, File No. 1-9157).
Amendment dated January 4, 1998.
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).
10(iii)(A)17 SNET Stay Bonus Program effective January 4, 1998.
12 Computation of Ratio of Earnings to Fixed Charges.
13 Pages 6 through 34 of the registrant's combined 1997
Annual Report to Shareholders and Proxy Statement for
the fiscal year ended December 31, 1997.
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, 1997 for the SNET Management Retirement
Savings Plan will be filed as an amendment prior to
June 30, 1998.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1997 for the SNET Bargaining-Unit
Retirement Savings Plan will be filed as an amendment
prior to June 30, 1998.
SNET PENSION BENEFIT PLAN
With Amendments Effective Through January 1, 1998
January 19, 1998
TABLE OF CONTENTS
ARTICLE A. SNET PENSION BENEFIT PLAN EXCESS BENEFIT PROGRAM
SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN 2
SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE A OF THIS PLAN 3
SECTION 3. ADMINISTRATION OF ARTICLE A OF THIS PLAN 5
SECTION 4. EXCESS PENSION BENEFITS - BENEFIT LIMITATION 7
1. PARTICIPATION 7
2. AMOUNT AND METHOD OF PAYMENT 7
3. RELATIONSHIP TO OTHER PLANS 9
SECTION 5. EXCESS PENSION BENEFITS - COMPENSATION LIMITATION 10
1. PARTICIPATION 10
2. CASH BALANCE PLAN ACCOUNT 10
3. CBPA DISTRIBUTION OPTIONS 11
4. CBPA BENEFIT PAYABLE IN EVENT OF PRERETIREMENT DEATH 12
5. PRERETIREMENT DEATH BENEFIT 12
6. BENEFICIARY IN EVENT OF PRERETIREMENT DEATH 12
7. EXCESS DEATH BENEFIT 12
SECTION 6. GENERAL PROVISIONS 13
1. EFFECTIVE DATE 13
2. RIGHTS TO BENEFITS 13
3. ASSIGNMENT OR ALIENATION 13
4. BREAKS IN SERVICE 13
5. LEAVES OF ABSENCE 13
6. MULTIPLE PARTICIPATING COMPANY EMPLOYMENT 13
7. PAYMENT TO OTHERS 13
8. PLAN TERMINATION 14
9. SOURCE OF PAYMENTS 14
10. UNFUNDED STATUS 14
SECTION 7. CHANGE OF CONTROL 15
SECTION 8. PLAN MODIFICATION APPLICABLE TO ARTICLE A 18
ARTICLE B. SNET PENSION BENEFIT PLAN EXECUTIVE NON-QUALIFIED
PENSION AND DEATH BENEFIT PROGRAM
SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN 19
SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE B OF THIS PLAN 20
SECTION 3. ADMINISTRATION OF THIS ARTICLE B 23
SECTION 4. NON-QUALIFIED PENSION BENEFITS 25
1. PARTICIPATION 25
2. ELIGIBILITY 25
3. BENEFIT AMOUNTS 26
4. PAYMENTS TO EXECUTIVES 30
5. NO SURVIVING SPOUSE 30
6. POST-TERMINATION JOINT AND SURVIVOR ANNUITY 30
7. DEFERRAL OF PAYMENTS 31
8. TREATMENT DURING SUBSEQUENT EMPLOYMENT 31
9. TERMINATION OF NON-QUALIFIED PENSION BENEFIT PROGRAM 32
SECTION 5. DEATH BENEFITS 33
1. PARTICIPATION AND ADMINISTRATION 33
2. DEFINITION OF DEATH BENEFIT AMOUNT 33
3. PAYMENT OF DEATH BENEFITS 33
4. WAIVER OF BENEFIT 33
SECTION 6. POST-RETIREMENT LIFE INSURANCE SUPPLEMENT PROGRAM 34
1. DESCRIPTION 34
2. PARTICIPATION 34
3. BENEFICIARY 34
4. COVERAGE AMOUNTS 34
SECTION 7. POST-RETIREMENT SURVIVOR'S ANNUITY OPTION 36
1. DESCRIPTION 36
2. BENEFICIARY 36
3. ELECTION OF BENEFIT 36
4. BENEFIT AMOUNT 37
SECTION 8. GENERAL PROVISIONS 38
1. EFFECTIVE DATE 38
2. RIGHTS TO BENEFITS 38
3. ASSIGNMENT OR ALIENATION 38
4. BREAKS IN SERVICE 38
5. LEAVES OF ABSENCE 38
6. LUMP SUM PAYMENTS 38
7. MULTIPLE PARTICIPATING COMPANY EMPLOYMENT 39
8. PAYMENT TO OTHERS 39
9. PLAN TERMINATION 39
10. SOURCE OF PAYMENTS 39
11. UNFUNDED STATUS 40
SECTION 9. CHANGE OF CONTROL 41
SECTION 10. PLAN MODIFICATION 44
ARTICLE C. SNET MID-CAREER PENSION PLAN PROGRAM
SECTION 1. PURPOSE OF ARTICLE C OF THIS PLAN 45
SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE C OF THIS PLAN 46
SECTION 3. ADMINISTRATION OF THIS ARTICLE C 47
SECTION 4. MID-CAREER PENSION BENEFITS 49
1. PARTICIPATION 49
2. MID-CAREER PENSION BENEFIT 49
3. TERMINATION OF NON-QUALIFIED PENSION BENEFIT 49
SECTION 5. GENERAL PROVISIONS 50
1. EFFECTIVE DATE 50
2. RIGHTS TO BENEFITS 50
3. ASSIGNMENT OR ALIENATION 50
4. SOURCE OF PAYMENTS 51
5. UNFUNDED STATUS 51
SECTION 6. CHANGE OF CONTROL 52
SECTION 7. PLAN MODIFICATION APPLICABLE TO ARTICLE C 55
SNET PENSION BENEFIT PLAN
SECTION 1. PURPOSE
The purpose of the SNET Pension Benefit Plan (the "Plan") is to
provide for eligible management, bargaining unit and highly
compensated employees of Southern New England Telecommunications
Corporation (the "Corporation") (and its subsidiaries which have
determined, with the consent of the Committee, to participate in this
Plan), employer-provided benefits (i) for certain benefits not
otherwise available under the SNET Management Pension Plan
("SNETMPP") by reason of the application of Section 401(a)(17) of the
Internal Revenue Code ("Code"); and (ii) for certain benefits which
would have been otherwise payable under the SNETMPP or the SNET
Pension Plan ("SNETPP") but for the limitations imposed by Section
415 of the Code; and (iii) for certain non-qualified pension and
death benefits for highly compensated employees.
The Plan is intended to constitute an unfunded "excess benefit
plan" as defined in Section 3(36) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), to the extent it provides
benefits that would be distributed under the SNET Management Pension
Plan or the SNET Pension Plan but for the limitations of Section 415
of the Code, and an "unfunded plan of deferred compensation for a
select group of management or highly compensated employees" for
purposes of Title I of ERISA, to the extent it provides other
benefits.
This Plan shall consist of three components: (1) Article A which
contains the excess benefit plan program; (2) Article B which
contains the non-qualified pension and death benefit plan program;
and (3) Article C which incorporates the non-qualified pension
program provisions which were previously provided under the SNET Mid-
Career Pension Plan.
1
ARTICLE A. SNET PENSION BENEFIT PLAN EXCESS BENEFIT PROGRAM
SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN
The purpose of this Article A of the Plan is to provide eligible
management, bargaining unit and highly compensated employees of the
Corporation (and its subsidiaries which have determined, with the
consent of the Committee, to participate in this Plan), employer-
provided benefits (i) for certain benefits not otherwise available
under the SNETMPP by reason of the application of Section 401(a)(17)
of the Internal Revenue Code ("Code"); and (ii) for certain benefits
which would have been otherwise payable under the SNETMPP or the
SNETPP but for the limitations imposed by Section 415 of the Code.
2
SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE A OF THIS PLAN
1. The term "ADEA" shall mean the Age Discrimination in
Employment Act of 1967 as amended in 1978 and as it may be amended
from time to time.
2. The term "Benefit Limitation" shall mean the maximum
"annual benefit" payable to participants under the SNETMPP or the
SNETPP in accordance with Section 415 of the Code, but after
application of the Compensation Limitation, if any, under the SNETMPP
or the SNETPP.
3. The words "Chairman of the Board", "President", and "Board
of Directors" or "Board" shall mean the Chairman of the Board of
Directors, President, and Board of Directors, respectively, of the
Corporation.
4. The term "Change of Control" shall be defined as set forth
in Section 7 of this Article A.
5. The term "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
6. The word "Committee" shall mean the Employees' Benefit
Committee appointed by the Board of Directors to administer the Plan.
7. The word "Company" shall mean The Southern New England
Telephone Company, a Connecticut corporation, or its successors.
8. The term "Compensation Limitation" shall mean the maximum
amount of compensation which may be included in the SNETMPP under
Section 401(a)(17) of the Code that may be taken into account in any
Plan Year for benefit accrual purposes under the SNETMPP.
9. The word "Corporation" shall mean Southern New England
Telecommunications Corporation, a Connecticut corporation, or its
successors.
10. The term "Excess Pension Benefit" means the benefit, if
any, described in Section 4 of this Article A which is payable to a
Participant under the terms of the Plan.
11. The term "Participant" shall mean an individual who has
satisfied the eligibility requirements of Paragraph 1 of Section 4 of
this Article A and/or of Paragraph 1 of Section 5 of this Article A,
for receipt of an excess pension benefit payable under the provisions
of this Article A.
12. The term "Participating Company" shall mean the Corporation
or any Subsidiary of the Corporation which shall have determined,
with the concurrence of the Committee, to participate in the Plan.
3
13. The words "Pension Act" shall mean the Employee Retirement
Income Security Act of 1974 (ERISA), as it may be amended from time
to time.
14. The word "Plan" shall mean the SNET Pension Benefit Plan.
15. The term "SNETMPP" shall mean the SNET Management Pension
Plan.
16. The term "SNETPP" shall mean the SNET Pension Plan.
17. The words "Subsidiary or Subsidiaries" shall mean any
corporation, partnership or other entity of which at least 50% of the
Voting Stock is owned directly or indirectly by the Corporation.
18. The words "Surviving Spouse" shall mean a spouse who is
married to the Participant on the earlier of (a) the Participant's
annuity starting date under the SNETMPP or SNETPP, whichever is
applicable, or (b) the date of the Participant's death.
19. The expression "Term of Employment", except as expressly
limited or stated elsewhere in the Plan, shall have the same meaning
as that expression is used in the SNETMPP or the SNETPP.
20. The use in this Plan of personal pronouns of the masculine
gender is intended to include both the masculine and feminine
genders.
4
SECTION 3. ADMINISTRATION OF ARTICLE A OF THIS PLAN
1. The Corporation shall be the Sponsor of the Plan and the
Plan Administrator of the Plan as those terms are defined in the
Pension Act. The Committee shall have the administrative
responsibilities set forth below.
2. (a) The Committee shall have the specific powers elsewhere
herein granted to it and shall have such other powers as may be
necessary in order to enable it to administer the Plan, except for
powers herein granted or provided to be granted to others.
(b) The procedures for adoption of by-laws, and rules of
procedure, for the employment of a Secretary and assistants, with
authority with respect to claims of Participants, shall be the same
as are set forth in the SNETMPP.
(c) In accordance with the terms of the Plan, the
Secretary of the Committee shall grant or deny claims for benefits
under the Plan with respect to Participants and authorize
disbursements according to the terms of this Plan. Adequate notice,
pursuant to applicable law, shall be provided in writing to any
Participant or beneficiary whose claim has been denied, setting forth
the specific reasons for such denial and any other information
required to be furnished under the Pension Act.
3. The review and appeal procedures for Participants whose
claims have been denied shall be the same as those procedures set
forth in the SNETMPP.
4. The Committee shall serve as the final review committee
under the Plan, with the authority to determine conclusively for all
parties any and all questions arising from administration of the
Plan, and shall have sole and complete discretionary authority and
control to manage the operation and administration of the Plan,
including, but not limited to, the determination of all questions
relating to eligibility for participation and benefits,
interpretation of all Plan provisions, determination of the amount
and kind of benefits payable to any Participant or Surviving Spouse,
and the construction of disputed and doubtful terms. Such decisions
by the Committee shall be conclusive and binding on all parties and
not subject to further review.
5. The expenses of the Committee in administering the Plan
shall be borne by the Participating Companies.
6. The Corporation, the Company and the Committee are each a
named fiduciary as that term is used in the Pension Act with respect
to the particular duties and responsibilities herein provided to be
allocated to each of them.
7. The Corporation may allocate responsibilities for the
operation and administration of the Plan consistent with the Plan's
terms. The Corporation and other named fiduciaries may designate in
writing other persons to carry out their respective responsibilities
under the Plan, and may employ persons to advise them with regard to
any such responsibilities.
5
8. Any person or group of persons may serve in more than one
fiduciary capacity with respect to the Plan.
6
SECTION 4. EXCESS PENSION BENEFITS - BENEFIT LIMITATION
1. Participation
Participation in Section 4 of this Article A shall be limited to
those individuals classified as a Regular or Provisional Regular
Management or Bargaining Unit Employee on the SNET payroll system or
their Surviving Spouse whose benefits under the SNETMPP or SNETPP are
limited by reason of the application of the Benefit Limitation.
2. Amount and Method of Payment
(a) Excess Pension Benefit. If the benefit payable to a
Participant or a Surviving Spouse under the SNETMPP or the SNETPP is
limited by reason of the application of the Benefit Limitation, an
Excess Pension Benefit shall be distributed as provided under Section
4 of this Article A in favor of such Participant or Surviving Spouse.
(b) Amount of Excess Pension Benefit. The amount, if any, of
the Excess Pension Benefit payable to a Participant or a Surviving
Spouse pursuant to Section 4 of this Article A shall be equal to the
difference between (i) and (ii) where:
(i) is the amount of the monthly pension benefit which
would be provided to the Participant or Surviving Spouse under the
SNETMPP or the SNETPP, without regard to the Benefit Limitation,
based upon the SNETMPP or the SNETPP formula, as applicable, in
effect as of the date of termination of employment or death; and
(ii) is the amount of the monthly pension benefits actually
payable to such Participant or Surviving Spouse under the SNETMPP or
the SNETPP.
The amount of the Excess Pension Benefit payable as a
result of the application of the Benefit Limitation under the SNETMPP
or the SNETPP shall be determined or redetermined, based upon the
SNETMPP or the SNETPP formula, as applicable, in effect as of the
date of termination of employment or death, (a) as of the date when
benefits are to commence pursuant to Paragraph (c) of Section 4 of
this Article A; (b) as of the effective date of any subsequent
increases and/or decreases in the Benefit Limitation, and/or (c) as
of the effective date of any cost of living increases in the monthly
benefit payable to a Participant, prior to application of the Benefit
Limitation, as a result of amendments to the SNETMPP and/or the
SNETPP, whichever is applicable.
(c) Payment of Pension Benefit. Subject to Section 7 of this
Article A, Excess Pension Benefits, if any, payable under Section 4
of this Article A, (a) shall commence at the same time as the
Participant's pension benefit payable under the SNETMPP or SNETPP
and, (b) shall be distributed as follows: (i) for any Participant who
terminated employment prior to January 1, 1997, for as long as and in
the same form as the Participant's pension benefit under the SNETMPP
or SNETPP, provided, however, that the Committee shall have the right
to approve the Participant's election of the form of benefit payment;
or (ii) for any Participant who terminated employment on or after
January 1, 1997 and: (A) for distributions
7
effective prior to January 1, 1998, for as long as and in the same
form as the Participant's pension benefit under the SNETMPP or SNETPP,
provided, however, that the Committee shall have the right to approve
the Participant's election of the form of benefit payment; or
(B) for distributions effective on or after January 1, 1998, in
a single lump sum payment, unless the Participant has elected
at least one year prior to the commencement of payment of the
Excess Pension Benefit, one of the following forms of payment:
(i) a single life annuity, (ii) a 50% joint and survivor annuity,
(iii) a lump sum certain, with or without a 50% survivor annuity,
(iv) a combination 75% annuity, 25% lump sum, with or without a 50%
survivor annuity or (v) a combination 50% annuity, 50% lump sum,
with or without a 50% survivor annuity.
(d) CBPA Benefit Payable in Event of Preretirement Death. If a
Participant dies before the date as of which his or her vested CBPA
benefit commences under the SNETMPP or the SNETPP, the vested CBPA
payable under this Article A shall be distributed in a single lump
sum payment to the Participant's Surviving Spouse (or if there is no
Surviving Spouse, to the Participant's estate) after the death of the
Participant, except as otherwise provided in Paragraph 2(e) of this
Article A, Section 4. There shall be no benefit payable under
Section 4 of this Article A upon the death of any non-vested
Participant.
(e) Beneficiary in Event of Preretirement Death . Effective
May 22, 1996, a Participant, prior to termination of employment, may
designate a beneficiary other than a Surviving Spouse or his estate
to receive a single lump sum payment of his or her vested CBPA
payable under this Article A in the event the Participant dies prior
to termination of employment or prior to commencement of the payment
of the vested CBPA payable under this Article A following his or her
termination of employment. If there is no Beneficiary designated,
the vested CBPA shall be distributed in accordance with Paragraph
2(d) of this Article A, Section 4 in a single lump sum payment.
There shall be no benefit payable under Section 4 of this Article A
upon the death of any non-vested Participant.
(f) Determination of Pension Benefits. Payments under Section
4 of this Article A shall be calculated in accordance with the rules,
procedures and assumptions utilized under the SNETMPP or the SNETPP,
whichever is applicable. Whenever it is necessary to determine
whether one benefit is less than, equal to, or larger than another,
or to determine the equivalent actuarial value of any benefit, such
determination shall be made at the Committee's discretion by the
Corporation's enrolled actuary or by an independent actuary selected
by the Committee, using mortality, interest and other assumptions
normally used at the time by such actuary in determining actuarial
equivalence under the SNETMPP or the SNETPP, whichever is applicable.
(g) Treatment During Subsequent Employment. Employment with
any Participating Company subsequent to retirement or termination of
employment with entitlement to any type of benefit described
heretofore shall not suspend the right of a former Participant
receiving pension payments or a person otherwise entitled to receive
a pension payment during the period he continues in such employment
and the form of distribution of such pension payments shall not be
changed as a result of such employment.
8
(h) Future Benefit Adjustments. If a Participant has commenced
receiving a benefit under Article A of this Plan in the form of a
joint and 50 percent survivor annuity and his or her surviving
annuitant subsequently predeceases him or her, the Participant's
Excess Pension Benefit under this Plan shall be calculated in
accordance with Paragraph 2(b) of this Section 4 and thereafter
distributed, prospectively, by restoring the original cost of the
joint and 50 percent survivor annuity form of benefit under this
Article A. Such adjustment shall be effective as of the first day of
the first month following the death of the Participant's surviving
annuitant. In the event that, following commencement of benefits to
a Participant under the Plan, the SNETMPP or SNETPP benefit is
subsequently increased, the Excess Pension Benefit to the Participant
under this Plan shall be recalculated as soon as practicable after
the SNETMPP or the SNETPP benefit is adjusted.
3. Relationship to Other Plans
Benefits payable to a Participant under Section 4 of this
Article A shall not duplicate benefits payable to such Participant
from any other plan or arrangement of the Corporation or any
Subsidiary.
9
SECTION 5. EXCESS PENSION BENEFITS - COMPENSATION LIMITATION
1. Participation
Participation in Section 5 of this Article A shall be limited to
those individuals (a) whose benefits under the SNETMPP are vested,
under the terms and conditions of the SNETMPP; (b) who are considered
to be within "a select group of management or highly compensated
employees" for purposes of Title I of the Pension Act; and (c) whose
annual compensation in any year exceeds the Compensation Limitation.
2. Cash Balance Plan Account
(a) Effective Date
Effective on or after January 1, 1996, each Participant
under this Section 5 shall have a Cash Balance Plan Account (CBPA)
established under this Plan.
(b) Cash Balance Plan Account Opening Balance
The balance in each Participant's account as of the
effective date shall be calculated as is set forth in the SNETMPP,
except that the calculation shall include only eligible compensation
(as defined in the SNETMPP ) in excess of the maximum amount of
compensation which may be included in the SNETMPP under Section
401(a)(17) of the Code.
(c) Interest Credits
Each Participant's CBPA will be credited with interest at
the same time, at the same rate, and in the same manner as is set
forth in the SNETMPP.
(d) Annual Pay Related Credits
On the last day of each year commencing December 31, 1996,
each Participant's CBPA shall be credited with basic pay related
credits at the same time, at the same rate and in the same manner as
is set forth in the SNETMPP, provided, however, that such credit
shall be applied only to eligible compensation, as defined in the
SNETMPP, in excess of the maximum amount of compensation which may be
included in the SNETMPP under Section 401(a)(17) of the Code.
(e) Supplemental Pay Credits
On the last day of each year, commencing December 31, 1996,
each Participant's CBPA shall be credited with supplemental pay
credits at the same time, at the same rate and in the same manner as
is set forth in the SNETMPP, provided, however, that such supplemental
pay credit shall be applied only to eligible compensation, as defined in
10
the SNETMPP, in excess of the maximum amount of compensation which
may be included in the SNETMPP under Section 401(a)(17) of the Code.
(f) Accounts for New Participants
If an individual is hired on or after January 1, 1996, no
CBPA shall be established on his behalf until a CBPA is established
on his behalf in the SNETMPP. At such time, the basic pay related
credits and supplemental pay credits shall be based on his eligible
compensation, as defined in the SNETMPP, for the entire plan year in
which a CBPA is established, in excess of the maximum amount of
compensation which may be included in the SNETMPP under Section
401(a)(17) of the Code.
(g) Determination of Pension Benefits. Payments under Section
5 of this Article A shall be calculated in accordance with the rules,
procedures and assumptions utilized under the SNETMPP. Whenever it
is necessary to determine whether one benefit is less than, equal to,
or larger than another, or to determine the equivalent actuarial
value of any benefit, such determination shall be made at the
Committee's discretion by the Corporation's enrolled actuary or by an
independent actuary selected by the Committee, using mortality,
interest and other assumptions normally used at the time by such
actuary in determining actuarial equivalence under the SNETMPP.
(h) Relationship to Other Plans. Benefits payable to a
Participant under Section 5 of this Article A shall not duplicate
benefits payable to such Participant from any other plan or
arrangement of the Corporation or any Subsidiary.
3. CBPA Distribution Options
Subject to Section 7 of this Article A, the distribution of a
Participant's CBPA, if any, payable under Section 5 of this Article
A, (a) shall commence at the same time time as the pension benefit
payable under the SNETMPP and (b) shall be distributed (b) shall be
distributed as follows: (i) for any Participant who terminated
employment prior to January 1, 1997, for as long as and in the same
form as the Participant's pension benefit under the SNETMPP,
provided, however, that the Committee shall have the right to approve
the Participant's election of the form of benefit payment; or (ii)
for any Participant who terminated employment on or after January 1,
1997 and: (A) for distributions effective prior to January 1, 1998,
for as long as and in the same form as the Participant's pension
benefit under the SNETMPP, provided, however, that the Committee
shall have the right to approve the Participant's election of the
form of benefit payment; or (B) for distributions effective on or
after January 1, 1998, in a single lump sum payment, unless the
Participant has elected at least one year prior to the commencement
of payment of the Excess Pension Benefit, one of the following forms
of payment (i) a single life annuity, (ii) a 50% joint and survivor
annuity, (iii) a lump sum certain, with or without a 50% survivor
annuity, (iv) a combination 75% annuity, 25% lump sum, with or
without a 50% survivor annuity or (v) a combination 50% annuity, 50%
lump sum, with or without a 50% survivor annuity.
11
4. CBPA Benefit Payable in Event of Preretirement Death
If a Participant dies before the date as of which his or her
vested CPBA benefit commences under the SNETMPP, the vested CBPA
payable under this Article A shall be distributed in a single lump
sum payment to the Participant's Surviving Spouse (or if there is no
Surviving Spouse, to the Participant's estate), except as otherwise
provided in Paragraph 5 of Section 5 of this Article A. There shall
be no benefit payable under Section 5 of this Article A upon the
death of any non-vested Participant.
5. Beneficiary in Event of Preretirement Death
Effective May 22, 1996, a Participant, prior to termination of
employment, may designate a beneficiary other than a Surviving Spouse
or his estate, to receive a single lump sum payment of his or her
vested CBPA payable under this Article A in the event the Participant
dies prior to termination of employment or prior to commencement of
the payment of the vested CBPA payable under this Article A following
his or her termination of employment. If there is no Beneficiary
designated, the the vested CBPA shall be distributed in accordance
with Paragraph 4 of this Article A, Section 5 in a single lump sum
payment. There shall be no benefit payable under Section 5 of this
Article B upon the death of any non-vested Participant.
6. Excess Death Benefit
(a) If the actual Active Employee Death Benefit or Retiree
Death Benefit ("Death Benefit") payable to any person as a result of
the death of a Participant under the terms of the SNETMPP is reduced
or limited by reason of the Compensation Limitation, an Excess Death
Benefit shall be distributed as provided in this Section 5 to the
beneficiary otherwise entitled to receive the Death Benefit under the
terms and conditions of the SNETMPP.
(b) The amount, if any, of the Excess Death Benefit payable
shall be equal to the difference between (A) and (B) where:
(A) is the amount of the Death Benefit which would be
provided to the beneficiary under the SNETMPP without regard to
the Compensation Limitation under the SNETMPP in effect as of
the date of death; and
(B) is the amount of the Death Benefit actually payable to
such beneficiary under the SNETMPP.
(c) The Excess Death Benefit provided under this Plan (i) shall
commence at the same time, (ii) shall be distributed for as long as,
and (iii) shall be distributed in the same benefit form as the
Committee or its delegate has determined with respect to the Death
Benefit payable under the SNETMPP.
12
SECTION 6. GENERAL PROVISIONS OF ARTICLE A
1. Effective Date
This Plan is effective with amendments through January 1, 1998.
2. Rights to Benefits
Neither the action of the Board of Directors in establishing
this Plan nor any action hereafter taken by the Board or the
Committee shall be construed as giving to any employee a right to be
retained in the service of any Participating Company or any right or
claim to any benefit after discharge from the service of any
Participating Company, unless the right to such benefit has accrued
prior to such discharge. No employee shall have any right against
any Participating Company to any benefit under the Plan other than
the amount to which the employee has theretofore become entitled and
which the Committee has directed be distributed to that employee
under the Plan. Benefits previously awarded may be discontinued at
any time at the sole discretion of the Corporation or any
Participating Company in accordance with the terms of the Plan.
3. Assignment or Alienation
Assignment or alienation of pensions or other benefits under
this Plan will not be permitted or recognized except as otherwise
required by law.
4. Breaks in Service
For purposes of this Plan, a break in service shall be defined
and treated in the same manner as is set forth in the SNETMPP.
5. Leaves of Absence
For purposes of this Plan, a leave of absence shall be defined
and administered in the same manner as is set forth in the SNETMPP.
6. Multiple Participating Company Employment
If a Participant is also a Participant of one or more other
Participating Companies, any benefit to which such Participant may
become entitled under the Plan shall be computed on the basis of the
total combined pay which he is receiving from all such companies.
Any maximum or minimum amounts fixed by the Plan for benefits shall
apply to the total amount payable by all companies and not to the
portion payable to any Participating Company or Companies.
7. Payment to Others
Benefits payable to any person to whom an amount is or
was payable under the Plan who is unable to execute a proper
receipt may be distributed to other person(s) in
13
accordance with the standards and procedures set forth in the
SNETMPP or the SNETPP, as applicable.
8. Plan Termination
The Board retains the right to terminate the Plan in whole or in
part, and each Participating Company retains the right to withdraw
from this Plan, at any time, for any reason, with or without notice.
Unless the Participant provides prior written consent, however, said
withdrawal or termination, as applicable, shall not affect the rights
of any Participant or Surviving Spouse to any benefit under this
Article A of the Plan to which such person may have previously become
entitled as a result of the Participant's disability, death,
termination of employment or a Change in Control which occurred prior
to the effective date of the withdrawal or termination.
9. Source of Payments
Benefits arising under this Plan and all costs, charges, and
expenses relating thereto will be payable from SNET's general assets.
SNET may, however, establish a trust to pay all or a portion of such
benefits and related expenses, provided such trust does not cause the
Plan to be "funded" within the meaning of ERISA. To the extent trust
assets are available, they may be used to pay benefits arising under
this Plan and all costs, charges, and expenses relating thereto. To
the extent that the funds held in the trust, if any, are insufficient
to pay such benefits, costs, charges and expenses, SNET shall pay
such benefits, costs, charges, and expenses from its general assets.
10. Unfunded Status
The Plan at all times shall be entirely unfunded for purposes of
the Code and ERISA and no provision shall at any time be made with
respect to segregating any assets of a Participating Company for
payment of any benefits hereunder. Funds that may be invested
through a trust described in Paragraph 9 of Section 6 of this Article
A shall continue for all purposes to be part of the general assets of
the Participating Company which invested the funds. The Plan
constitutes a mere promise by SNET and the Participating Companies to
make benefit payments, if any, in the future. No Participant,
Surviving Spouse or any other person shall have any interest in any
particular assets of a Participating Company by reason of the right
to receive a benefit under the Plan and to the extent the
Participant, Surviving Spouse or any other person acquires a right to
receive benefits under this Plan, such right shall be no greater than
the right of any unsecured general creditor of a Participating
Company.
14
SECTION 7. CHANGE OF CONTROL
Any provision of the Plan to the contrary notwithstanding, in
the event of a Change of Control (as defined below), any benefit
accrued as of and through the Change of Control, including, without
limitation, by current Participants, former Participants or their
annuitants or beneficiaries, including those currently receiving
payments under the Plan, shall not be subject to forfeiture or
suspension and shall be distributed in a single lump sum on the last
day of the month following the month in which the Change of Control
occurred, for those individuals currently receiving payments under
Article A of the Plan, and on the last day of the month following the
month in which occurs the event (e.g., termination of employment,
disability or death) giving rise to the obligations of the Company or
Participating Company to pay such benefit, for those individuals not
currently receiving payments under Article A of the Plan. For this
purpose, the accrued benefit shall be calculated based upon the
provisions of the Plan in effect immediately prior to the Change of
Control as if the event giving rise to the obligation of the
Corporation or Participating Company to pay such benefit pursuant to
the preceding sentence had occurred on the date of the Change of
Control and shall not be adversely affected because of any subsequent
events, including, without limitation, termination or amendment of
the Plan or the SNETMPP or SNETPP, or lack of continued status.
For purposes of this Section 7 of Article A, a Change of Control
shall mean:
(A) an acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more
of either (i) the then outstanding shares of common stock of the
Corporation (the Outstanding Corporation Common Stock") or (ii)
the combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in the
election of directors (the "Outstanding Corporation Voting
Securities"); excluding, however, the following: (1) any
acquisition directly from the Corporation, other than an
acquisition by virtue of the exercise of a conversion privilege
unless the security being so converted was itself acquired
directly from the Corporation, (2) any acquisition by the
Corporation, (3) any acquisition by any employee benefit plan
(or related trust) participated in by the Corporation or any
corporation controlled by the Corporation or (4) any acquisition
by any corporation pursuant to a reorganization, merger,
consolidation or similar corporate transaction (in each case, a
"Corporate Transaction"), if, pursuant to such Corporate
Transaction, the conditions described in clauses (i), (ii) and
(iii) of Paragraph (C) of this Section 7 of this Article A are
satisfied; or
(B) a change in the composition of the Board of Directors
of the Corporation (the "Board") such that the individuals who,
as of December 12, 1990, constitute the Board (the Board as of
the above date shall be hereinafter referred to as the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes of this
Section 7, that any individual who becomes a member of the Board
subsequent to the above date whose election, or nomination for
15
election by the shareholders of the Corporation, was approved by
a vote of at least a majority of those individuals who are
members of the Board and who were also members of the Incumbent
Board (or deemed to be such pursuant to this provision) shall be
considered as though such individual were a member of the
Incumbent Board; but, provided further, that any such individual
whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used
in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board shall
not be so considered as a member of the Incumbent Board; or
(C) the approval by the shareholders of the Corporation of
a Corporate Transaction or, if consummation of such Corporate
Transaction is subject, at the time of such approval by
shareholders, to the consent of any government or governmental
agency, the obtaining of such consent (either explicitly or
implicitly by consummation); excluding, however, such a
Corporate Transaction pursuant to which (i) all or substantially
all of the individuals and entities who are the beneficial
owners, respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately
prior to such Corporate Transaction will beneficially own,
directly or indirectly, more than 60% of, respectively, the
outstanding shares of common stock of the corporation resulting
from such Corporate Transaction and the combined voting power of
the outstanding voting securities of such corporation entitled
to vote generally in the election of directors, in substantially
the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities, as
the case may be, (ii) no Person (other than the Corporation, any
employee benefit plan (or related trust) participated in by the
Corporation or such Corporation resulting form such Corporate
Transaction and any Person beneficially owning, immediately
prior to such Corporate Transaction and any person beneficially
owning, immediately prior to such Corporate Transaction,
directly or indirectly, 20% or more of the Outstanding
Corporation Common Stock or Outstanding Voting Securities, as
the case may be) will beneficially own, directly or indirectly,
20% or more of, respectively, the outstanding shares of common
stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally
in the election of directors and (iii) individuals who were
members of the Incumbent Board will constitute at least a
majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or
(D) the approval by the shareholders of the Corporation of
(i) a complete liquidation or dissolution of the Corporation or
(ii) the sale or other disposition of all or substantially all
of the assets of the Corporation; excluding, however, such a
sale or other disposition to a corporation, with respect to
which following such sale or other disposition, (l) more than
60% of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the then
16
outstanding voting securities of such corporation entitled
to vote generally in the election of directors will be then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities
immediately prior to such sale of other disposition in
substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the
Outstanding Corporation Common Stock and Outstanding corporation
Voting Securities, as the case may be, (2) no Person (other than
the Corporation and any employee benefit plan (or related trust)
participated in by the Corporation or such corporation and any
Person beneficially owning, immediately prior to such sale or
other disposition, directly or indirectly, 20% or more of the
Outstanding Corporation Common Stock or Outstanding corporation
Voting Securities, as the case may be) will beneficially own,
directly or indirectly, 20% or more for, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the election
of directors and (3) individuals who were members of the
Incumbent Board will constitute at least a majority of the
members of the board of directors of such corporation.
17
SECTION 8. PLAN MODIFICATION APPLICABLE TO ARTICLE A
The Board may from time to time make changes in the Plan. In
addition, the Senior Vice President-Organization Development of the
Corporation (or any successor to that officer's responsibilities),
with the concurrence of the Senior Vice President and General Counsel
of the Corporation (or any successor to that officer's
responsibilities), shall be authorized to make minor or
administrative changes to the Plan, as well as changes dictated by
the requirements of federal or state statutes applicable to any
Participating Company or authorized or made desirable by such
statutes. Such changes shall not affect the rights of any
Participant, Surviving Spouse or parent, without the Participant's
consent, to any benefit under the Plan to which such person may have
previously become entitled as a result of a disability, death,
termination of employment or a Change in Control which occurred prior
to the effective date of such change.
18
ARTICLE B. SNET PENSION BENEFIT PLAN EXECUTIVE NON-QUALIFIED PENSION
AND DEATH BENEFIT PROGRAM
SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN
The purpose of this Article B of the Plan is to provide eligible
management and highly compensated employees of the Corporation and
its subsidiaries which have determined, with the consent of the
Committee, to participate in this Plan, employer-provided benefits
(i) for certain forms of compensation otherwise excluded under the
SNETMPP accrued benefit formula; and (ii) for supplementary death
benefit coverage, as set forth more fully herein, to Non-
Grandfathered Executives of the Corporation who retire from service,
or in the event of death after retirement, to their annuitants,
dependent relatives or beneficiaries, as applicable. The benefits
provided under this Article B were formerly provided under the SNET
Executive Non-Qualified Pension Plan and Excess Benefit Plan.
Benefits are payable to Participants who retire from service, or in
the event of death after retirement, to their dependent relatives or
in certain cases, to their annuitants. These pension and death
benefits are predicated on the actual and/or Standard Awards under
SNET's Short Term Incentive Plan and on benefit entitlements payable
from the SNETMPP but for the limitations more fully described herein.
19
SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE B OF THIS PLAN
1. The term "Active Payroll" shall mean in the active
employment of the Corporation or its Subsidiaries as determined in
accordance with their normal practices and procedures.
2. The term "ADEA" shall mean the Age Discrimination in
Employment Act of 1967 as amended in 1978 and as it may be amended
from time to time.
3. The term "Annual Basic Pay" shall mean annual base salary
rate, excluding (1) all differentials regarded as temporary or extra
payments and (2) all cash payments and incentive awards and
distributions made under the Bell System Senior Management Long Term
Incentive Plan or the SNET Short Term Incentive Plan or the SNET Long
Term Incentive Plan or any other similar plan, as determined by the
Committee.
4. The words "Chairman of the Board", "President", and "Board
of Directors" or "Board" shall mean the Chairman of the Board of
Directors, President, and Board of Directors, respectively, of the
Corporation.
5. The term "Change of Control" shall be defined as set forth
in Section 9 of this Article B.
6. The term "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
7. The word "Committee" shall mean the Employees' Benefit
Committee appointed by the Board of Directors to administer the Plan.
8. The word "Company" shall mean The Southern New England
Telephone Company, a Connecticut corporation, or its successors.
9. The word "Corporation" shall mean Southern New England
Telecommunications Corporation, a Connecticut corporation, or its
successors. 10. The word "Executive" shall mean a management
employee classified as a Regular Employee on the Active Payroll of
any Participating Company on or after August 10, 1980 who has
attained a level of or higher than Executive Salary Grade Level 2, or
its equivalent, or who on or after January 1, 1985 has attained a
level of or higher than Executive Salary Grade Level 1, or its
equivalent.
11. The term "Grandfathered Executives" shall mean Executives
who died prior to January 1, 1987, or retired prior to January 1,
1987 if they had attained age 55 on or before December 31, 1983.
12. The term "Mandatory Retirement Age" shall mean, in
accordance with applicable law, (1) for those employees referred to
in Section 12(c)(1) of the ADEA, age 65 or at such later time as may
be permissible under such section of the ADEA and (2) for those
20
employees for whom age is a bona fide occupational qualification
within the meaning of Section 4(f)(1) of the ADEA, at such time as
may be applicable under the ADEA.
13. The term "Non-Grandfathered Executive" shall mean an
Executive who is not a Grandfathered Executive and who was a Non-
Grandfathered Executive on or before December 8, 1993.
14. The term "Participating Company" shall mean the Corporation
or any Subsidiary of the Corporation which shall have determined,
with the concurrence of the Committee, to participate in the Plan.
15. The words "Pension Act" shall mean the Employee Retirement
Income Security Act of 1974 (ERISA), as it may be amended from time
to time.
16. The term "SNETMPP" shall mean the SNET Management Pension
Plan.
17. The word "Plan" shall mean the SNET Pension Benefit Plan.
18. The term "Position Rate" shall mean the mid-point of the
Executive's salary grade level established periodically for each
Executive's grade level.
19. The term "Short Term Incentive Award" shall mean that
amount distributed annually to an Executive which constitutes a
percentage of the Standard Award as determined pursuant to the SNET
Short Term Incentive Plan.
20. The term "Standard Award" shall mean an amount determined
annually under the SNET Short Term Incentive Plan.
21. The words "Subsidiary or Subsidiaries" shall mean any
corporation, partnership or other entity of which at least 50% of the
Voting Stock is owned directly or indirectly by the Corporation.
22. The words "Surviving Spouse" shall mean, except as
otherwise provided, (a) for an Executive who retires prior to
January 1, 1996 with a service or disability benefit payable under
this Article B or who dies while an active employee prior to January
1, 1996, a spouse married to the Executive as of the termination of
employment date; and (b) for an Executive who terminates employment
prior to January 1, 1996 with a deferred benefit payable under this
Article B, a spouse who has been married to the Executive throughout
the one-year period ending on the earlier of (a) the Executive's
annuity starting date under this Article B, or (b) the date of the
Executive's death; provided, however, if the Executive marries within
one year before the annuity starting date, and the Executive and the
Executive's spouse in such marriage have been married for at least a
one-year period ending on or before the date of the Executive's
death, such Executive and such spouse shall be treated as having been
married throughout the one-year period ending on the annuity starting
date.
21
23. The expression "Term of Employment", except as expressly
limited or stated elsewhere in the Plan, shall have the same meaning
as that expression is used in the SNETMPP.
27. The use in this Plan of personal pronouns of the masculine
gender is intended to include both the masculine and feminine
genders.
22
SECTION 3. ADMINISTRATION OF THIS ARTICLE B
1. The Corporation shall be the Sponsor of the Plan and the
Plan Administrator of the Plan as those terms are defined in the
Pension Act. The Committee shall have the administrative
responsibilities set forth below.
2. (a) The Committee shall have the specific powers elsewhere
herein granted to it and shall have such other powers as may be
necessary in order to enable it to administer the Plan, except for
powers herein granted or provided to be granted to others.
(b) The procedures for adoption of by-laws, and rules of
procedure, for the employment of a Secretary and assistants, with
authority with respect to claims of Executives shall be the same as
are set forth in the SNETMPP.
(c) In accordance with the terms of the Plan, the
Secretary of the Committee shall grant or deny claims for benefits
under the Plan with respect to Executives and Participants and
authorize disbursements according to the terms of this Plan.
Adequate notice, pursuant to applicable law, shall be provided in
writing to any Executive or beneficiary whose claim has been denied,
setting forth the specific reasons for such denial and any other
information required to be furnished under the Pension Act.
3. The review and appeal procedures for Executives whose
claims have been denied shall be the same as those procedures set
forth in the SNETMPP.
4. The Committee shall serve as the final review committee
under the Plan, with the authority to determine conclusively for all
parties any and all questions arising from administration of the
Plan, and shall have sole and complete discretionary authority and
control to manage the operation and administration of the Plan,
including, but not limited to, the determination of all questions
relating to eligibility for participation and benefits,
interpretation of all Plan provisions, determination of the amount
and kind of benefits payable to any Executive or Surviving Spouse,
and the construction of disputed and doubtful terms. Such decisions
by the Committee shall be conclusive and binding on all parties and
not subject to further review.
5. The expenses of the Committee in administering the Plan
shall be borne by the Participating Companies.
6. The Corporation, the Company and the Committee are each a
named fiduciary as that term is used in the Pension Act with respect
to the particular duties and responsibilities herein provided to be
allocated to each of them.
7. The Corporation may allocate responsibilities for the
operation and administration of the Plan consistent with the Plan's
terms. The Corporation and other named fiduciaries may designate in
writing other persons to carry out their respective responsibilities
under the Plan, and may employ persons to advise them with regard to
any such responsibilities.
23
8. Any person or group of persons may serve in more than one
fiduciary capacity with respect to the Plan.
24
SECTION 4. NON-QUALIFIED PENSION BENEFITS
1. Participation
All persons who were Grandfathered Executives or Non-
Grandfathered Executives on or before December 13, 1995 and who
retired or terminated employment prior to January 1, 1996 ("Eligible
Executives") are deemed participants in Section 4 of this Article B.
2. Eligibility
(a) Service Benefit: An individual who is an Eligible
Executive at the time of employment termination and (i) has received
or is eligible to receive an award under the SNET Short Term
Incentive Plan, and (ii) is eligible for a service pension pursuant
to the terms of the SNETMPP, is eligible for a service benefit
pursuant to this Plan, if the computation of a benefit amount
pursuant to Paragraph 3 of this Section 4 of this Article B results
in an amount payable to such Eligible Executive.
(b) Deferred Benefit: Except as otherwise specified in
Paragraph 8 of this Section 4 of this Article B, any individual who
is an Eligible Executive at the time of employment termination and
(i) has received or is eligible to receive an award under the SNET
Short Term Incentive Plan, and (ii) is eligible for a deferred vested
pension pursuant to the terms and conditions of the SNETMPP, is
eligible for a deferred benefit pursuant to this Article B, if the
computation of a benefit amount pursuant to Paragraph 3 of this
Section 4 of this Article B results in an amount payable to such
Eligible Executive.
(c) Disability Benefit: An individual who, while an Eligible
Executive, has become eligible for a disability pension pursuant to
the terms of the SNETMPP shall be eligible for a disability benefit
hereunder, if the computation of a benefit amount pursuant to
Paragraph 3 of this Section 4 of this Article B results in an amount
payable to such Eligible Executive. Should the disability pension be
discontinued pursuant to the terms of the SNETMPP, the disability
benefit hereunder shall be discontinued as well.
(d) Normal Retirement Age: "Normal Retirement Age" is the age
of sixty-five years.
(e) Mandatory Retirement Age: Each Eligible Executive shall be
retired from the Active Payroll or shall cease to be eligible for
continued employment, as applicable, no later than the last day of
the month in which such Executive attains the Mandatory Retirement
Age.
25
3. Benefit Amounts
(a) Computation of Benefit
(i) Benefit Formula: Effective December 8, 1993, for all
Eligible Executives in such executive position as of December 8,
1993, the monthly benefit shall equal the difference between A and B:
Where:
A = Adjusted career income as determined in Subparagraph
3(a)(ii) of this of this Section 4 of Article B
multiplied by 1.6% and the result then divided by 12; and
B = Adjusted career income as is set forth in the SNETMPP,
except that it shall be determined solely on actual
Short Term Incentive Awards granted for services
performed after 1988, multiplied by 1.6% and the result
then divided by 12;
Effective December 13, 1995, for all Eligible Executives
actively employed by SNET in such executive positions as of such
date, A and B above shall be determined as of December 13, 1995 and
shall not, in any year subsequent to 1995, be increased or decreased.
Such frozen benefit determined under this Section 4, Paragraph
3(a)(i) of this Article B shall be considered with the accrued
benefits calculated for each such Eligible Executive effective
January 1, 1996 under the initial cash balance plan account
provisions of the SNETMPP for purposes of ensuring that the total
SNET pension benefit shall never be less than the amount to which
each such Eligible Executive was previously entitled before
application of any plan amendments adopted effective December 13,
1995; provided, however, that such frozen pension benefit will not be
separately available under the provisions of this Article B.
(ii) Adjusted Career Income:
(1) The "adjusted career income" referred to in
Subparagraph 3(a)(i), of each Executive who retires during the period
January 1, 1991 to December 13, 1995, inclusive, shall equal the
product of the Executive's average annual compensation earned for the
highest five full performance years preceding such Executive's date
of retirement and such Executive's Term of Employment as of the date
of retirement. For purposes of this Paragraph 3(a)(ii)(1), the term
"compensation" shall mean an Executive's earned actual Short Term
Incentive Award which is not more than 50% of the Annual Basic Pay as
of December 31 of each performance year in which it is earned.
(2) The "adjusted career income", referred to in
Subparagraph 3(a)(i), of each Executive who retires during the period
beginning January 1, 1989 to December 31, 1990 shall equal the product of
the Executive's average annual compensation earned for the five full
performance years preceding such Executive's date of retirement and such
26
Executive's Term of Employment as of the date of retirement. For
purposes of this Paragraph 3(a)(ii)(2), the term "compensation"
shall mean an Executive's earned actual Short Term Incentive Award
which is not more than 50% of the Position Rate as of December 31
of each performance year in which it is earned.
(3) The "adjusted career income", referred to in
Subparagraph 3(a)(i), of each Executive who retired during the period
beginning January 1, 1985 to December 31, 1988, shall equal the sum
of (A) the product of the Executive's average annual compensation
earned for the period from January 1, 1979 to October 31, 1983,
inclusive, and such Executive's Term of Employment as of December 31,
1983, plus (B) such Executive's earned compensation for all periods
after December 31, 1983 which are included in his Term of Employment.
For purposes of this paragraph 3(a)(ii)(3), the term "compensation"
shall mean an Executive's earned actual Short Term Incentive Award
which is not more than 50% of the Position Rate as of December 31 of
each performance year in which it is earned.
(4) The "adjusted career income", referred to in
Subparagraph 3(a)(i), of each Executive who retired during the period
beginning September 15, 1983 to December 31, 1984, inclusive, shall
equal the sum of (A) the product of the Executive's average annual
compensation earned for the period from April 1, 1978 to March 31,
1983, inclusive, and such Executive's Term of Employment as of March
31, 1983, plus (B) such Executive's earned compensation for all
periods after March 31, 1983 which are included in his Term of
Employment. For purposes of this Paragraph 3(a)(ii)(4), the term
"compensation shall mean an Executive's earned actual Short Term
Incentive Award which is not more than 50% of the Position Rate as of
December 31 of each performance year in which it is earned.
(5) The "adjusted career income", referred to in
Subparagraph 3(a)(i), of each Executive who retired during the period
beginning January 31, 1982 to September 14, 1983, inclusive, shall
equal the sum of (A) the product of the Executive's average annual
compensation earned for the period from October 1, 1976 to September
30, 1981, inclusive, and such Executive's Term of Employment as of
September 30, 1981, plus (B) such Executive's earned compensation for
all periods after September 30, 1981 which are included in his Term
of Employment. For purposes of this Paragraph 3(a)(ii)(5), the term
"compensation" shall mean an Executive's earned actual Short Term
Incentive Award which is not more than 15% of the Position Rate as of
December 31 of each performance year in which it is earned.
(6) The "adjusted career income", referred to in
Subparagraph 3(a)(i), of each Executive who retired during the period
beginning August 10, 1980 to January 30, 1982, inclusive, shall equal the
sum of (A) the product of the Executive's average annual compensation
earned for the period from January 1, 1975 to December 31, 1979,
inclusive, and such Executive's Term of Employment as of December 31,
1979, plus (B) such Executive's earned compensation or all periods after
December 31, 1979 which are included in his Term of Employment. For
purposes of this Paragraph 3(a)(ii)(6), the term "compensation"
shall mean an Executive's earned actual Short Term Incentive Award which
27
is not more than 15% of the Position Rate as of December 31 of
each performance year in which it is earned.
(b) Year of Retirement Proration
When determining the extent to which the 15% or 50% limitation,
respectively, may apply to limit the pensionable portion of the Short
Term Incentive Award, the Position Rate will be prorated by
multiplying such Position Rate by a fraction, the numerator of which
shall be the number of months worked (to the next full month) in the
final year of employment and the denominator of which shall be
twelve.
(c) Early Retirement Discount
The monthly service benefit allowance, determined in accordance
with the provisions of this Paragraph 3, for each Eligible Executive
who is granted a service benefit for reasons other than total
disability as a result of sickness or injury, shall be reduced by one-
half percent (0.5%) for each calendar month or part thereof by which
his age at time of retirement is less than 55 years, except that each
Executive retired with thirty (30) or more years of service shall
receive a monthly benefit allowance reduced by one-quarter percent
(0.25%) for each calendar month or part thereof by which such
Executive's age at the time of retirement is less than 55 years.
(d) Deferred Benefit Amount
The monthly benefit allowance for each Executive who terminated
employment on or before January 1, 1996 and who is eligible for a
deferred benefit under the provisions of Paragraph 2(b) of this
Section 4 shall be calculated exclusively in accordance with the
provisions specified as applicable to those receiving a benefit under
Paragraph 2(a) or 2(c) of this Section 4 effective as of the date
such Executive leaves the service of a Participating Company other
than for reasons of transfer to another Participating Company, or the
date which is the last day of the month in which the 65th birthday
occurs, whichever is earlier, and, in any case, as if such Executive
had retired on such date and no recomputation of the benefit shall be
made after such date or as a result of amendments made to this Plan
subsequent to such date. An Executive who leaves the service of a
Participating Company with eligibility for a deferred benefit in
accordance with Paragraph 2(b) of this Section 4 but is not entitled
to any other class of pension or benefit shall not be considered a
retiree pursuant to the SNETMPP or a retired Executive.
(e) Automatic Survivor Annuity
In the event of the death of an Executive who (i) is eligible
to participate in this Plan pursuant to Paragraph 1 of this
Section 4 as of December 8, 1993 and (ii) is on the Active Payroll
as of the time of his death on or before January 1, 1996 and
(iii) is eligible for a deferred benefit under Paragraph 2(b)
of this Section 4 at the time of his death or who is
28
eligible for a service benefit under Paragraph 2(a) of this
Section 4 at the time of his death and (iv) who leaves a
Surviving Spouse married to him at the time of his death, such
Surviving Spouse shall receive a survivor annuity in the amount of
45% of the benefit which would have been payable had such Executive
retired with a service benefit, regardless of his actual eligibility
therefore, on the date of his death; provided, however, that if an
Executive has less than 10 years of service (as defined under the
SNETMPP) and is eligible for deferred benefit under Section 4,
Paragraph 2(b) of this Article B as of his date of death, the present
value (as determined under the SNETMPP) of the automatic survivor
annuity provided under this Paragraph 3(e) shall be distributed to
the Surviving Spouse in a single lump sum as of the last day of the
month following the month in which the Executive has died. For
purposes of calculating the automatic survivor annuity provided in
this Paragraph 3(e), the early retirement discount in Paragraph 3(c)
of this Section 4 of this Article B shall not apply. No annuity or
lump sum under this Paragraph 3(e) shall be payable at the death of a
pensioner or former employee or upon the death of an Executive who
does not have a Surviving Spouse.
(f) Service Beyond Normal Retirement Age
Service after the last day of the month in which an Executive
attains Normal Retirement Age shall be considered in the same manner
as is set forth in the SNETMPP.
(g) Special Increases
Monthly service and disability benefit payments as determined
under Paragraphs 3(a) and (c) of this Section 4 to retired
Executives, and automatic survivor annuity payments to Surviving
Spouses married to an Executive at the time of his death as
determined under Paragraph 3(e) of this Section 4, shall be increased
by the same percentage and pursuant to the same terms and conditions
as are set forth in the SNETMPP for similar forms of benefits.
(h) Minimum Benefit
The monthly benefit of (i) each Executive eligible to
participate in the Plan during the period December 8, 1993 to
December 13, 1995, inclusive, and (ii) each Executive in such
executive position as of December 8, 1993 to December 13, 1995,
inclusive, to the extent this monthly benefit exceeds the benefit
provided in Paragraph 3(a)(i) of this Section 4, shall equal one-
twelfth of the excess, if any, of (A) over (B) below, where--
(A) is the product of (i) for an Executive with less than
twenty-five years of service, two percent (2%) and Term of Employment
(not exceeding forty percent) multiplied by Average Annual Basic Pay;
or (ii) for an Executive with twenty-five or more years of service,
the product of one and six-tenths percent (1.6%) and Term of
Employment multiplied by Average Annual Basic Pay. For this purpose,
Average Annual Basic Pay shall mean Annual Basic Pay for the 36
month period immediately preceding the date the Executive terminates
from service;
29
(B) is the sum of:
(1) the annual amount, if any, payable under
Paragraph 3(a)(i) of this Article B in a single life annuity form to
the Executive as of the termination of employment date;
(2) the annual amount, if any, payable under Article
C of this Plan, payable in a single life annuity form to the
Executive as of the termination of employment date; and
(3) the annual amount, if any, payable under the
SNETMPP, payable in a single life annuity form to the Executive as of
the termination of employment date.
The monthly benefit provided in this Paragraph 3(h) shall
be subject to the early retirement discount, if any, as determined
under Paragraph 3(c) of Section 4 of this Article B.
Effective December 31, 1995, eligibility for a
determination of a monthly benefit as provided in this Paragraph 3(h)
shall be eliminated for all Executives on the Active Payroll on or
after such date.
4. Payments to Executives
Subject to Paragraph 3(e) of this Section 4 and Sections 7 and 9
of this Article B, benefits to an Executive (a) shall commence at the
same time, (b) shall be distributed for as long as and (c) shall be
distributed in the same form as the Executive's pension benefit under
the SNETMPP. Payments under this Section 4 shall be calculated in
accordance with the rules, procedures and assumptions utilized under
the SNETMPP, except as otherwise expressly provided in this Article
B.
5. No Surviving Spouse
If an Executive dies before the date as of which his or her
benefit commences under Section 4 of this Article B and he or she
does not have a Surviving Spouse on his or her date of death, no
benefit otherwise payable under this Section 4 shall be distributed
after the death of the Executive with respect to the Executive.
6. Post-Termination Joint and Survivor Annuity
a) Eligibility. The Post-Termination Joint and Survivor
Annuity option ("Joint and Survivor Annuity") provides a monthly
benefit to a Surviving Spouse upon the death, after termination of
employment for reasons other than retirement with a service or
disability benefit, of a Non-Grandfathered Executive. The benefit is
payable to the Surviving Spouse only if the Non-Grandfathered
Executive leaves a Participating Company with eligibility for a
deferred vested pension under the SNETMPP and this Article B on or
after August 10, 1980. If there is no Surviving Spouse, or if the
Non-Grandfathered Executive waived the provisions
30
under this Paragraph 6, no Joint and Survivor Annuity benefit will
be paid under this Section 4.
b) Election of Benefit. A Non-Grandfathered Executive shall be
deemed to have elected to receive the Joint and Survivor Annuity
option for all benefits under this Section 4 if the Non-Grandfathered
Executive has a Surviving Spouse as of the date the Executive
commences deferred vested pension benefits under the SNETMPP;
provided, however, that a Non-Grandfathered Executive may make a one-
time irrevocable election to waive this Joint and Survivor Annuity
option with respect to payments which would otherwise be made to a
Surviving Spouse following the death of the Executive. Such election
shall be made within sixty (60) days of an employee becoming
classified as an Executive or within sixty (60) days of adoption of
this election procedure, whichever is later, and shall permit the Non-
Grandfathered Executive to waive the Joint and Survivor Annuity
regardless of his marital status at the time of election. A Non-
Grandfathered Executive shall not otherwise be entitled to the Joint
and Survivor Annuity option under this Plan.
c) Benefit Amount. If the Joint and Survivor Annuity option is
applicable as of the date a Non-Grandfathered Executive is entitled
to commence deferred vested pension benefits under this Section 4,
such deferred vested pension benefits payable to the Non-
Grandfathered Executive shall be reduced to eighty-five percent (85%)
of such amount; provided, however, if the Non-Grandfathered Executive
elects to commence receipt of such pension payments prior to the
Normal Retirement Age, the aforementioned reduction shall be
consistent with the early retirement factors (with joint and survivor
annuity election) under the SNETMPP. If the Non-Grandfathered
Executive's Surviving Spouse predeceases the Non-Grandfathered
Executive, the aforementioned percentage reduction shall not be
restored. Subject to Section 9 of this Article B, the amount to be
paid the Surviving Spouse for as long as such Surviving Spouse
survives the Executive shall be computed as of the time of
commencement of such Executive's deferred vested pension as an amount
equal to fifty percent (50%) of the reduced pension payable to the
Executive under Section 4 of this Article B.
7. Deferral of Payments
If an Executive, who terminates employment on or after September
8, 1993, elects the Pension Deferral Option in accordance with the
terms and conditions under the SNETMPP, benefit payments under
Section 4 of this Article B shall commence simultaneously with the
commencement of the service pension under the SNETMPP. If the
Executive who elected the Pension Deferral Option should die prior to
commencement of benefit payments under this Article B, the provisions
of Section 4, Paragraph 3(e) of this Article B shall apply.
8. Treatment During Subsequent Employment
Employment with any Participating Company subsequent to retirement or
termination of employment with entitlement to any type of benefit described
in this Section 4 shall not suspend the right of a former Participant
receiving pension payments or a person otherwise entitled to receive
a pension to payment payments during the period he continues in such
31
employment and the form of distribution of such
pension payments shall not be changed as a result of such employment.
9. Termination of Non-Qualified Pension Benefit Program
Effective December 13, 1995, the provisions of Section 4 of this
Article B will no longer be effective on the date that the last
benefit payment is made pursuant to this Section 4.
32
SECTION 5. DEATH BENEFITS
1. Participation and Administration
Only Executives who were on the Active Payroll as of September
17, 1989 shall be eligible under Section 5 of this Article B to
receive a death benefit in an amount described below in Paragraph 2
while an Executive and remaining on the Active Payroll. Only those
Executives who were eligible for a service pension on or before
September 17, 1989 will be eligible under Section 5 of this Article B
to receive a death benefit during retirement in an amount described
below in Paragraph 2. The death benefits described in this Section 5
provide for active employee and retiree death benefits in addition
to, and subject to the same terms and conditions and administered in
the same manner as the Death Benefit provisions within the SNETMPP,
except as is herein specified.
2. Definition of Death Benefit Amount
For purposes of death benefits under Section 5 of this Article
B, the death benefit amount is defined as follows:
(a) For an Executive who dies while on the Active Payroll
or who retires on or after October 31, 1981, the death benefit
amount shall be the lesser of (i) the Executive's Standard Award
in effect as of the earlier of retirement or death; (ii) 50% of
the Executive's Position Rate as of the earlier of retirement or
death; (iii) the Executive's Standard Award in effect as of
January 1, 1992; or (iv) 50% of the Executive's Position Rate on
such date.
(b) For an Executive who retired during the period from
August 10, 1980 through October 30, 1981, inclusive, the death
benefit amount shall be the lesser of the Executive's Standard
Award in effect as of his retirement, or 15% of the Executive's
Position Rate as of retirement.
3. Payment of Death Benefits
Payment of death benefits under this Section 5 shall be made as
of the last day of the month following the month in which the
Executive's death occurred.
4. Waiver of Benefit
If a Grandfathered Executive is deemed to have waived the death
benefit for which he was eligible under the SNETMPP, he will be
deemed to have irrevocably waived the death benefit pursuant to
Section 5 of this Article B as well. Effective November 1, 1991, no
Grandfathered Executive shall be permitted to waive the death benefit
or revoke an existing waiver of such death benefit under Article B of
this Plan.
33
SECTION 6. POST-RETIREMENT LIFE INSURANCE SUPPLEMENT PROGRAM
1. Description
The Post-Retirement Life Insurance Supplement Program makes up
for the post-age 65 reduction in the level of Company- provided Group
Life Insurance for Non-Grandfathered Executives and for individuals
who become Executives after December 8, 1993 ("Eligible
Individuals"). In combination with the post-retirement Company-
provided level of Group Life Insurance, it assures a total death
benefit equal to the Annual Basic Pay at retirement rounded to the
coverage amount at retirement, to the extent required by Paragraph 4
of this Section 6.
2. Participation
All persons who retire as an Eligible Individual from a
Participating Company with a service benefit or disability benefit as
defined under Section 4 of this Article B are participants in this
program.
3. Beneficiary
An Eligible Individual may name any person or persons, his or
her estate, any organization or a trust as beneficiary. Beneficiary
designations need not be the same as under other coverages.
Beneficiary designations can be changed any time by submitting a new
form to the Corporation or its delegate. In the event of death, the
Post-Retirement Life Insurance Supplement Program provides a benefit
that is distributed in a lump sum to the beneficiary or
beneficiaries; if there are no surviving beneficiaries, the benefit
is distributed in a lump sum to the Eligible Individual's estate.
Payments are made as of the last day of the month following the month
in which the Eligible Individual's date of death occurred.
4. Coverage Amounts
The Company-provided level of Group Life Insurance equals Annual
Basic Pay at the time of retirement rounded to the next higher $1,000
for Eligible Individual's retiring prior to April 1, 1986, and, for
Eligible Individual's retiring on or after April 1, 1986, Annual
Basic Pay shall be determined for purposes of this Section 6 as of
the September 1 of the year immediately preceding the year of the
Eligible Individual's retirement, rounded to the next higher $10,000.
This level of coverage shall remain in effect through age 65. At age
66 and on each of the next four anniversaries of that coverage,
coverage under the Company-provided Group Life Insurance is reduced
by 10% until, during the year in which age 70 is attained, it equals
50% of the Company-provided level of Group Life Insurance. To offset
this reduction, the Post-Retirement Life Insurance Supplement Program
provides a schedule of death benefit coverage equal to:
34
10% of final active Company-provided Group Life Insurance
beginning at age 66 increased to
20% at age 67
30% at age 68
40% at age 69
to a maximum of
50% at age 70 -- which continues in effect until death.
Nothing contained in this Section 6 shall require the
Corporation or any Participating Company to purchase life insurance
on the life or lives of any Eligible Individuals. Benefits payable
under this Section 6 shall represent an obligation of the Corporation
or Participating Company, if applicable, and shall not entitle an
Eligible Individual to rights or payments under any life insurance
policy.
35
SECTION 7. POST-RETIREMENT SURVIVOR'S ANNUITY OPTION
1. Description
The Post-Retirement Survivor's Annuity Option provides a monthly
benefit to the eligible beneficiary (spouse or parent) upon the
death, after retirement, of a Non-Grandfathered Executive. The
benefit is payable to the beneficiary only if the Non-Grandfathered
Executive retires from a Participating Company with a service pension
or disability pension under the SNETMPP on or after August 10, 1980
and is a Non-Grandfathered Executive on the Active Payroll on
December 8, 1993 and retired prior to January 1, 1996.
2. Beneficiary
The benefit is payable, in the order of priority shown, to the
eligible beneficiary as follows:
(a) the Surviving Spouse, if living with the Non-
Grandfathered Executive at the time of death; otherwise to
(b) a surviving parent. (If both parents survive, benefit
will be distributed in equal shares to both.)
If there is no Surviving Spouse or parent, or if the Non-
Grandfathered Executive waived the provisions of this Section 7 and
terminated employment prior to January 1, 1996, no benefit will be
distributed under this Section 7.
3. Election of Benefit
A Non-Grandfathered Executive who was on the Active Payroll on
December 8, 1993 and who retired prior to January 1, 1996 shall be
deemed to have elected to receive the Survivor Annuity option for all
benefits payable under Section 4 of this Article B if the Non-
Grandfathered Executive is married or has a surviving parent as of
the date the Executive commences benefits under the SNETMPP;
provided, however, that a Non-Grandfathered Executive may make a one-
time irrevocable election to waive this Survivor Annuity option with
respect to payments which would otherwise be made to a Surviving
Spouse or parent following the death of the Executive. Such election
shall be made within sixty (60) days of an Executive becoming
eligible for a benefit under Section 4 of this Article B prior to
December 13, 1995 or within sixty (60) days of adoption of this
election procedure, whichever is later, and shall permit the Non-
Grandfathered Executive to waive the Survivor Annuity regardless of
his marital status or whether he has parents surviving at the time of
election. A Non-Grandfathered Executive shall not otherwise be
entitled to a Survivor's Annuity option under this Article B.
36
4. Benefit Amount
If the Survivor's Annuity option is applicable as of the date a
Non-Grandfathered Executive is entitled to commence benefits under
Section 4 of this Article B, the amount of the pension otherwise
payable under Section 4 of this Article B to the Non-Grandfathered
Executive shall be reduced to ninety percent (90%) of such amount.
Notwithstanding the foregoing, if the Non-Grandfathered Executive's
spouse, if any, and parents predecease the Non-Grandfathered
Executive, the aforementioned percentage shall be increased from
ninety percent (90%) to one hundred percent (100%) as of the first
day of the month following the month in which the last surviving
parent or spouse has died. Subject to Section 9 of this Article B,
the amount to be distributed the annuitant for as long as such
annuitant survives the Executive shall be computed as of the time of
retirement of such Executive as an amount equal to fifty percent
(50%) of the reduced pension payable to the Executive under Section 4
of this Article B.
37
SECTION 8. GENERAL PROVISIONS
1. Effective Date
This Plan is effective with amendments through January 1, 1998.
2. Rights to Benefits
Neither the action of the Board of Directors in establishing
this Plan nor any action hereafter taken by the Board or the
Committee shall be construed as giving to any employee a right to be
retained in the service of any Participating Company or any right or
claim to any benefit after discharge from the service of any
Participating Company, unless the right to such benefit has accrued
prior to such discharge. No employee shall have any right to a
service or deferred benefit unless he meets the conditions specified
in Paragraph 2(a) or 2(b) of Section 4 of the Plan, respectively, nor
any right against any Participating Company to any benefit under the
Plan other than the amount to which the employee has theretofore
become entitled and which the Committee has directed be distributed
to that employee under the Plan. Benefits previously awarded may be
discontinued at any time at the sole discretion of the Corporation or
any Participating Company in accordance with the terms of the Plan.
In addition to the prerequisites for a service benefit, a deferred
benefit, a disability benefit, and/or a death benefit set forth
herein, an individual, or his annuitants or beneficiaries, as
applicable, shall only be eligible for a benefit if the individual is
an Executive with respect to the respective benefits at the time of
retirement, termination of employment or death. There shall be no
eligibility for benefits in the case of an individual who was an
Executive for any period during his Term of Employment, but who is
not an Executive at the time of his retirement, termination of
employment or death.
3. Assignment or Alienation
Assignment or alienation of pensions or other benefits under
this Plan will not be permitted or recognized except as otherwise
required by law.
4. Breaks in Service
For purposes of this Plan, a break in service shall be defined
and treated in the same manner as is set forth in the SNETMPP.
5. Leaves of Absence
For purposes of this Plan, a leave of absence shall be defined
and administered in the same manner as is set forth in the SNETMPP.
6. Lump Sum Payments
A lump sum payment or payments to applicable beneficiaries and
annuitants of retired Executives (except Grandfathered Executives)
who have retired as of January 1, 1987 or who were Executives as of
January 1, 1987 and eligible to participate in this Plan pursuant
38
to Paragraph 1 of Section 4 as of December 8, 1993 will be reasonably
estimated so that applicable beneficiaries and annuitants shall
receive a tax differential payment equal to the difference between
(a) the beneficiary's or annuitant's assumed Federal income tax
liability from payment of the SNETMPP death benefit and payment of
this Article B's survivor annuity and death benefits and (b) the
beneficiary's or annuitant's assumed Federal income tax liability had
such benefits been distributed under the SNET Executive Life
Insurance Program.
7. Multiple Participating Company Employment
If an Executive of the Corporation is also an Executive of one
or more other Participating Companies, any benefit to which such
Executive may become entitled under the Plan shall be computed on the
basis of the total combined pay which he is receiving from all such
companies. Any maximum or minimum amounts fixed by the Plan for
benefits shall apply to the total amount payable by all companies and
not to the portion payable to any Participating Company or Companies.
8. Payment to Others
Benefits payable to any person to whom an amount is or was
payable under the Plan who is unable to execute a proper receipt may
be distributed to other person(s) in accordance with the standards
and procedures set forth in the SNETMPP.
9. Plan Termination
The Board retains the right to terminate the Plan in whole or in
part, and each Participating Company retains the right to withdraw
from this Plan, at any time, for any reason, with or without notice.
Unless the Executive provides prior written consent, however, said
withdrawal or termination, as applicable, shall not affect the rights
of any Executive, Surviving Spouse or parent to any benefit under
this Article B to which such person may have previously become
entitled as a result of the Executive's disability, death,
termination of employment or Change in Control which occurred prior
to the effective date of the withdrawal or termination.
10. Source of Payments
Benefits arising under this Plan and all costs, charges, and
expenses relating thereto will be payable from SNET's general assets.
SNET may, however, establish a trust to pay such benefits and related
expenses, provided such trust does not cause the Plan to be "funded"
within the meaning of ERISA. To the extent trust assets are
available, they may be used to pay benefits arising under this Plan
and all costs, charges, and expenses relating thereto. To the extent
that the funds held in the trust, if any, are insufficient to pay
such benefits, costs, charges and expenses, SNET shall pay such
benefits, costs, charges, and expenses from its general assets.
39
11. Unfunded Status
The Plan at all times shall be entirely unfunded for purposes of
the Code and ERISA and no provision shall at any time be made with
respect to segregating any assets of a Participating Company for
payment of any benefits hereunder. Funds that may be invested
through a trust described in Paragraph 10 of Section 8 of this
Article B continue for all purposes to be part of the general assets
of the Participating Company which invested the funds. The Plan
constitutes a mere promise by SNET and the Participating Companies to
make payments, if any, in the future. No Participant, Surviving
Spouse or any other person shall have any interest in any particular
assets of a Participating Company by reason of the right to receive a
benefit under the Plan and to the extent the Participant, Surviving
Spouse or any other person acquires a right to receive benefits under
this Plan, such right shall be no greater than the right of any
unsecured general creditor of a Participating Company.
40
SECTION 9. CHANGE OF CONTROL
Any provision of the Plan to the contrary notwithstanding, in
the event of a Change of Control (as defined below), any benefit
accrued as of and through the Change of Control, including, without
limitation, by current Executives, retired Executives or their
annuitants or beneficiaries, including those currently receiving
payments under the Plan, shall not be subject to forfeiture or
suspension and shall be distributed in a single lump sum on the last
day of the month following the month in which the Change of Control
occurred, for those individuals currently receiving payments under
Article B of the Plan, and on the last day of the month following the
month in which occurs the event (e.g., termination of employment,
disability or death) giving rise to the obligations of the Company or
Participating Company to pay such benefit, for those individuals not
currently receiving payments under Article B of the Plan. For this
purpose, the accrued benefit shall be calculated based upon the
provisions of the Plan in effect immediately prior to the Change of
Control as if the event giving rise to the obligation of the
Corporation or Participating Company to pay such benefit pursuant to
the preceding sentence had occurred on the date of the Change of
Control and shall not be adversely affected because of any subsequent
events, including, without limitation, termination or amendment of
the Plan or the SNETMPP, or lack of continued status; provided,
however, that any early retirement discount pursuant to Paragraph
2(c) of Section 4 of this Article B as in effect immediately prior to
the Change of Control shall be taken into account, if applicable, to
reduce such accrued benefit only based on actual date of retirement.
For purposes of this Section 9 of Article B, a Change of Control
shall mean:
(A) an acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more
of either (i) the then outstanding shares of common stock of the
Corporation (the Outstanding Corporation Common Stock") or (ii)
the combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in the
election of directors (the "Outstanding Corporation Voting
Securities"); excluding, however, the following: (1) any
acquisition directly from the Corporation, other than an
acquisition by virtue of the exercise of a conversion privilege
unless the security being so converted was itself acquired
directly from the Corporation, (2) any acquisition by the
Corporation, (3) any acquisition by any employee benefit plan
(or related trust) participated in by the Corporation or any
corporation controlled by the Corporation or (4) any acquisition
by any corporation pursuant to a reorganization, merger,
consolidation or similar corporate transaction (in each case, a
"Corporate Transaction"), if, pursuant to such Corporate
Transaction, the conditions described in clauses (i), (ii) and
(iii) of Paragraph (C) of this Section 9 of this Article B are
satisfied; or
(B) a change in the composition of the Board of Directors
of the Corporation (the "Board") such that the individuals who,
as of December 12, 1990, constitute the Board (the Board as of
the above date shall be hereinafter referred to as the
41
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes of this
Section 9 of Article B, that any individual who becomes a member
of the Board subsequent to the above date whose election, or
nomination for election by the shareholders of the Corporation,
was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also
members of the Incumbent Board (or deemed to be such pursuant to
this provision) shall be considered as though such individual
were a member of the Incumbent Board; but, provided further,
that any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board shall not be so considered as a
member of the Incumbent Board; or
(C) the approval by the shareholders of the Corporation of
a Corporate Transaction or, if consummation of such Corporate
Transaction is subject, at the time of such approval by
shareholders, to the consent of any government or governmental
agency, the obtaining of such consent (either explicitly or
implicitly by consummation); excluding, however, such a
Corporate Transaction pursuant to which (i) all or substantially
all of the individuals and entities who are the beneficial
owners, respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately
prior to such Corporate Transaction will beneficially own,
directly or indirectly, more than 60% of, respectively, the
outstanding shares of common stock of the corporation resulting
from such Corporate Transaction and the combined voting power of
the outstanding voting securities of such corporation entitled
to vote generally in the election of directors, in substantially
the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities, as
the case may be, (ii) no Person (other than the Corporation, any
employee benefit plan (or related trust) participated in by the
Corporation or such Corporation resulting form such Corporate
Transaction and any Person beneficially owning, immediately
prior to such Corporate Transaction and any person beneficially
owning, immediately prior to such Corporate Transaction,
directly or indirectly, 20% or more of the Outstanding
Corporation Common Stock or Outstanding Voting Securities, as
the case may be) will beneficially own, directly or indirectly,
20% or more of, respectively, the outstanding shares of common
stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally
in the election of directors and (iii) individuals who were
members of the Incumbent Board will constitute at least a
majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or
(D) the approval by the shareholders of the Corporation of
(i) a complete liquidation or dissolution of the Corporation or
(ii) the sale or other disposition of all or substantially all of
the assets of the Corporation; excluding, however, such a sale or
42
other disposition to a corporation, with respect to
which following such sale or other disposition, (l) more than
60% of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled
to vote generally in the election of directors will be then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities
immediately prior to such sale of other disposition in
substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the
Outstanding Corporation Common Stock and Outstanding corporation
Voting Securities, as the case may be, (2) no Person (other than
the Corporation and any employee benefit plan (or related trust)
participated in by the Corporation or such corporation and any
Person beneficially owning, immediately prior to such sale or
other disposition, directly or indirectly, 20% or more of the
Outstanding Corporation Common Stock or Outstanding corporation
Voting Securities, as the case may be) will beneficially own,
directly or indirectly, 20% or more for, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the election
of directors and (3) individuals who were members of the
Incumbent Board will constitute at least a majority of the
members of the board of directors of such corporation.
43
SECTION 10. PLAN MODIFICATION APPLICABLE TO ARTICLE B
The Board may from time to time make changes in the Plan. In
addition, the Senior Vice President-Organization Development of the
Corporation (or any successor to that officer's responsibilities),
with the concurrence of the Senior Vice President and General Counsel
of the Corporation (or any successor to that officer's
responsibilities), shall be authorized to make minor or
administrative changes to the Plan, as well as changes dictated by
the requirements of federal or state statutes applicable to any
Participating Company or authorized or made desirable by such
statutes. Such changes shall not affect the rights of any Executive,
Surviving Spouse or parent, without the Executive's consent, to any
benefit under the Plan to which such person may have previously
become entitled as a result of a disability, death, termination of
employment or a Change in Control which occurred prior to the
effective date of such change.
44
ARTICLE C. SNET MID-CAREER PENSION PLAN PROGRAM
SECTION 1. PURPOSE OF ARTICLE C OF THIS PLAN
The purpose of this Article C of the Plan is to provide eligible
management and highly compensated employees of the Corporation and
its subsidiaries which have determined, with the consent of the
Committee, to participate in this Plan, employer-provided benefits
for certain unfunded single life pension payments, as set forth more
fully herein, to eligible employees of the Corporation. The benefits
provided under this Article C were formerly provided under the SNET
Mid-Career Pension Plan effective with amendments through November 1,
1991 ("Predecessor Plan"), which is incorporated by reference into
this Article C except as otherwise provided in this Article C.
45
SECTION 2. DEFINITIONS APPLICABLE UNDER ARTICLE C OF THIS PLAN
The terms in this Article C shall have the same meaning as
defined in the Predecessor Plan, except for the definition of
Participant which shall be as follows.
1. The word "Participant" shall mean an individual hired or
rehired prior to December 8, 1993 at age 35 or older at Fourth Level
or above and terminated employment at Fifth Level or above, who, if
hired or rehired prior to November 18, 1991, has completed five years
of service at Fifth Level or above prior to the last day of the month
in which he reaches age 65, or who, if hired or rehired on or after
November 18, 1991 and prior to December 8, 1993, has completed at
least five years of full-time service at Fifth Level or above prior
to the last day of the month in which he reaches age 65, and whose
entire term of employment after November 18, 1991 was classified as
full-time.
46
SECTION 3. ADMINISTRATION OF THIS ARTICLE C
The administration of this Article C shall be in accordance with
the restated provisions set forth in this Section 3 of Article C.
1. The Corporation shall be the Sponsor of the Plan and the
Plan Administrator of the Plan as those terms are defined in the
Pension Act. The Committee shall have the administrative
responsibilities set forth below.
2. (a) The Committee shall have the specific powers elsewhere
herein granted to it and shall have such other powers as may be
necessary in order to enable it to administer the Plan, except for
powers herein granted or provided to be granted to others.
(b) The procedures for adoption of by-laws, and rules of
procedure, for the employment of a Secretary and assistants, with
authority with respect to claims of Executives shall be the same as
are set forth in the SNETMPP.
(c) In accordance with the terms of the Plan, the
Secretary of the Committee shall grant or deny claims for benefits
under the Plan with respect to Executives and Participants and
authorize disbursements according to the terms of this Plan.
Adequate notice, pursuant to applicable law, shall be provided in
writing to any Executive or beneficiary whose claim has been denied,
setting forth the specific reasons for such denial and any other
information required to be furnished under the Pension Act.
3. The review and appeal procedures for Executives whose
claims have been denied shall be the same as those procedures set
forth in the SNETMPP.
4. The Committee shall serve as the final review committee
under the Plan, with the authority to determine conclusively for all
parties any and all questions arising from administration of the
Plan, and shall have sole and complete discretionary authority and
control to manage the operation and administration of the Plan,
including, but not limited to, the determination of all questions
relating to eligibility for participation and benefits,
interpretation of all Plan provisions, determination of the amount
and kind of benefits payable to any Executive or Surviving Spouse,
and the construction of disputed and doubtful terms. Such decisions
by the Committee shall be conclusive and binding on all parties and
not subject to further review.
5. The expenses of the Committee in administering the Plan
shall be borne by the Participating Companies.
6. The Corporation, the Company and the Committee are each a
named fiduciary as that term is used in the Pension Act with respect
to the particular duties and responsibilities herein provided to be
allocated to each of them.
7. The Corporation may allocate responsibilities for the
operation and administration of the Plan consistent with the Plan's
terms. The Corporation and other named fiduciaries may designate
in writing other persons to carry out their respective
47
responsibilities under the Plan, and may employ persons to advise
them with regard to any such responsibilities.
8. Any person or group of persons may serve in more than one
fiduciary capacity with respect to the Plan.
48
SECTION 4. MID-CAREER PENSION BENEFITS
The benefits determined in this Section 4 shall be in accordance
with the provisions of the Predecessor Plan, except as modified by
the following provisions of this Section 4 of Article C.
1. Participation
All persons who were eligible Participants on or before December
8, 1993 are deemed Participants in Section 4 of this Article C and
the Predecessor Plan.
2. Mid-Career Pension Benefit
Effective December 13, 1995, for all eligible Participants
on the active payroll on such date, the monthly benefit provided
under this Article C and the Predecessor Plan shall be determined as
of December 13, 1995 and shall not, in any year subsequent to 1995,
be increased or decreased. Such frozen benefit determined under this
Section 4, Paragraph 2 of this Article C shall not be included with
the accrued benefits calculated for each such Eligible Executive
effective January 1, 1996 under the initial cash balance plan
provisions of Section 4 of the SNETMPP; provided, however, that in
the event that a comparison of pension benefit amounts calculated in
accordance with the pension formula provisions, as in effect as of
December 13, 1995, under Article V of the SNETMPP, Section 4,
Paragraph 3(I) of Article B of this Plan, and the "Frozen Mid-career
Pension Benefit calculated under this Section 4, Paragraph 2 of
Article C (collectively referred to herein as the "12/13/95 Total
Frozen SNET Pension Benefit Amount"), is higher than the monthly
pension benefit determined under the initial opening cash balance
plan provisions and the ongoing cash balance plan provisions
effective on and after January 1, 1996 as set forth in Article V of
the SNETMPP (referred to herein as the "1/1/96 SNETMPP Benefit"),
each eligible Participant shall continue to be eligible to receive
all or a portion of such Frozen Mid-career Pension Benefit calculated
under this Section 4, Paragraph 2 of Article C to the extent such
12/13/95 Total Frozen SNET Pension Benefit Amount exceeds the 1/1/96
SNETMPP Benefit, until such time that the monthly benefit amount
determined solely in accordance with the provisions of Article V of
the SNETMPP as in effect on or after January 1, 1996 exceeds the
12/13/95 Total Frozen SNET Pension Benefit Amount described herein,
at which time all eligibility for benefits payable under this Article
C to such Participants shall cease.
3. Termination of Non-Qualified Pension Benefit
The provisions of this Section 4 will no longer be effective on
the date that the last benefit payment is made pursuant to this
Section 4.
49
SECTION 5. GENERAL PROVISIONS
The general provisions of benefits of this Article C shall be in
accordance with the restated provisions set forth in this Section 5
of Article C.
1. Effective Date
This Plan is effective with amendments through January 1, 1998.
2. Rights to Benefits
Neither the action of the Board of Directors in establishing
this Plan nor any action hereafter taken by the Board or the
Committee shall be construed as giving to any employee a right to be
retained in the service of any Participating Company or any right or
claim to any benefit after discharge from the service of any
Participating Company, unless the right to such benefit has accrued
prior to such discharge. No employee shall have any right to a
service or deferred benefit unless he meets the conditions specified
in Section 4 of this Article C and the Predecessor Plan,
respectively, nor any right against any Participating Company to any
benefit under the Plan other than the amount to which the employee
has theretofore become entitled and which the Committee has directed
be distributed to that employee under the Plan. Benefits previously
awarded may be discontinued at any time at the sole discretion of the
Corporation or any Participating Company in accordance with the terms
of the Plan. In addition to the prerequisites for a service benefit,
a deferred benefit, a disability benefit, and/or a death benefit set
forth herein, an individual shall only be eligible for a benefit if
the individual is an Executive with respect to the respective
benefits at the time of retirement, termination of employment or
death. There shall be no eligibility for benefits in the case of an
individual who was an Executive for any period during his Term of
Employment, but who is not an Executive at the time of his
retirement, termination of employment or death.
3. Assignment or Alienation
Assignment or alienation of pensions or other benefits under
this Plan will not be permitted or recognized except as otherwise
required by law.
4. Plan Termination
The Board retains the right to terminate the Plan in whole or in
part, and each Participating Company retains the right to withdraw
from this Plan, at any time, for any reason, with or without notice.
Unless the Executive provides prior written consent, however, said
withdrawal or termination, as applicable, shall not affect the rights
of any Executive to any benefit under this Article C to which such
person may have previously become entitled as a result of the
Executive's disability, death, termination of employment or Change in
Control which occurred prior to the effective date of the withdrawal
or termination.
50
5. Source of Payments
Benefits arising under this Plan and all costs, charges, and
expenses relating thereto will be payable from SNET's general assets.
SNET may, however, establish a trust to pay such benefits and related
expenses, provided such trust does not cause the Plan to be "funded"
within the meaning of ERISA. To the extent trust assets are
available, they may be used to pay benefits arising under this Plan
and all costs, charges, and expenses relating thereto. To the extent
that the funds held in the trust, if any, are insufficient to pay
such benefits, costs, charges and expenses, SNET shall pay such
benefits, costs, charges, and expenses from its general assets.
6. Unfunded Status
The Plan at all times shall be entirely unfunded for purposes of
the Code and ERISA and no provision shall at any time be made with
respect to segregating any assets of a Participating Company for
payment of any benefits hereunder. Funds that may be invested
through a trust described in Section 6 of this Article C continue for
all purposes to be part of the general assets of the Participating
Company which invested the funds. The Plan constitutes a mere
promise by SNET and the Participating Companies to make payments, if
any, in the future. No Participant, Surviving Spouse or any other
person shall have any interest in any particular assets of a
Participating Company by reason of the right to receive a benefit
under the Plan and to the extent the Participant, Surviving Spouse or
any other person acquires a right to receive benefits under this
Plan, such right shall be no greater than the right of any unsecured
general creditor of a Participating Company.
51
SECTION 6. CHANGE OF CONTROL
The provisions of this Article C in the event of a Change of
Control shall be in accordance with the restated provisions set forth
in this Section 6 of Article C.
Any provision of the Plan to the contrary notwithstanding, in
the event of a Change of Control (as defined below), any benefit
accrued as of and through the Change of Control, including, without
limitation, by current Executives, retired Executives or their
annuitants or beneficiaries, including those currently receiving
payments under the Plan, shall not be subject to forfeiture or
suspension and shall be distributed in a single lump sum on the last
day of the month following the month in which the Change of Control
occurred, for those individuals currently receiving payments under
Article C of the Plan, and on the last day of the month following the
month in which occurs the event (e.g., termination of employment,
disability or death) giving rise to the obligations of the Company or
Participating Company to pay such benefit, for those individuals not
currently receiving payments under Article C of the Plan. For this
purpose, the accrued benefit shall be calculated based upon the
provisions of the Plan in effect immediately prior to the Change of
Control as if the event giving rise to the obligation of the
Corporation or Participating Company to pay such benefit pursuant to
the preceding sentence had occurred on the date of the Change of
Control and shall not be adversely affected because of any subsequent
events, including, without limitation, termination or amendment of
the Plan or the SNETMPP, or lack of continued status; provided,
however, that any early retirement discount pursuant to Paragraph
2(c) of Section 4 of this Article C as in effect immediately prior to
the Change of Control shall be taken into account, if applicable, to
reduce such accrued benefit only based on actual date of retirement.
For purposes of this Section 6 of Article C, a Change of Control
shall mean:
(A) an acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more
of either (i) the then outstanding shares of common stock of the
Corporation (the Outstanding Corporation Common Stock") or (ii)
the combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in the
election of directors (the "Outstanding Corporation Voting
Securities"); excluding, however, the following: (1) any
acquisition directly from the Corporation, other than an
acquisition by virtue of the exercise of a conversion privilege
unless the security being so converted was itself acquired
directly from the Corporation, (2) any acquisition by the
Corporation, (3) any acquisition by any employee benefit plan
(or related trust) participated in by the Corporation or any
corporation controlled by the Corporation or (4) any acquisition
by any corporation pursuant to a reorganization, merger,
consolidation or similar corporate transaction (in each case, a
"Corporate Transaction"), if, pursuant to such Corporate
Transaction, the conditions described in clauses (i), (ii) and
(iii) of Paragraph (C) of this Section 6 of this Article C are
satisfied; or
52
(B) a change in the composition of the Board of Directors
of the Corporation (the "Board") such that the individuals who,
as of December 12, 1990, constitute the Board (the Board as of
the above date shall be hereinafter referred to as the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes of this
Section 6 of Article C, that any individual who becomes a member
of the Board subsequent to the above date whose election, or
nomination for election by the shareholders of the Corporation,
was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also
members of the Incumbent Board (or deemed to be such pursuant to
this provision) shall be considered as though such individual
were a member of the Incumbent Board; but, provided further,
that any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board shall not be so considered as a
member of the Incumbent Board; or
(C) the approval by the shareholders of the Corporation of
a Corporate Transaction or, if consummation of such Corporate
Transaction is subject, at the time of such approval by
shareholders, to the consent of any government or governmental
agency, the obtaining of such consent (either explicitly or
implicitly by consummation); excluding, however, such a
Corporate Transaction pursuant to which (i) all or substantially
all of the individuals and entities who are the beneficial
owners, respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately
prior to such Corporate Transaction will beneficially own,
directly or indirectly, more than 60% of, respectively, the
outstanding shares of common stock of the corporation resulting
from such Corporate Transaction and the combined voting power of
the outstanding voting securities of such corporation entitled
to vote generally in the election of directors, in substantially
the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities, as
the case may be, (ii) no Person (other than the Corporation, any
employee benefit plan (or related trust) participated in by the
Corporation or such Corporation resulting form such Corporate
Transaction and any Person beneficially owning, immediately
prior to such Corporate Transaction and any person beneficially
owning, immediately prior to such Corporate Transaction,
directly or indirectly, 20% or more of the Outstanding
Corporation Common Stock or Outstanding Voting Securities, as
the case may be) will beneficially own, directly or indirectly,
20% or more of, respectively, the outstanding shares of common
stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally
in the election of directors and (iii) individuals who were
members of the Incumbent Board will constitute at least a
majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or
53
(D) the approval by the shareholders of the Corporation of
(i) a complete liquidation or dissolution of the Corporation or
(ii) the sale or other disposition of all or substantially all
of the assets of the Corporation; excluding, however, such a
sale or other disposition to a corporation, with respect to
which following such sale or other disposition, (l) more than
60% of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled
to vote generally in the election of directors will be then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities
immediately prior to such sale of other disposition in
substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the
Outstanding Corporation Common Stock and Outstanding corporation
Voting Securities, as the case may be, (2) no Person (other than
the Corporation and any employee benefit plan (or related trust)
participated in by the Corporation or such corporation and any
Person beneficially owning, immediately prior to such sale or
other disposition, directly or indirectly, 20% or more of the
Outstanding Corporation Common Stock or Outstanding corporation
Voting Securities, as the case may be) will beneficially own,
directly or indirectly, 20% or more for, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the election
of directors and (3) individuals who were members of the
Incumbent Board will constitute at least a majority of the
members of the board of directors of such corporation.
54
SECTION 7. PLAN MODIFICATION APPLICABLE TO ARTICLE C
The provisions for modification of this Article C shall be in
accordance with the restated provisions set forth in this Section 7
of Article C.
The Board may from time to time make changes in the Plan. In
addition, the Senior Vice President-Organization Development of the
Corporation (or any successor to that officer's responsibilities),
with the concurrence of the Senior Vice President and General Counsel
of the Corporation (or any successor to that officer's
responsibilities), shall be authorized to make minor or
administrative changes to the Plan, as well as changes dictated by
the requirements of federal or state statutes applicable to any
Participating Company or authorized or made desirable by such
statutes. Such changes shall not affect the rights of any Executive,
without the Executive's consent, to any benefit under the Plan to
which such person may have previously become entitled as a result of
a disability, death, termination of employment or a Change in Control
which occurred prior to the effective date of such change.
SNET MANAGEMENT PENSION PLAN
A summary of amendments to the SNET Management Pension Plan
("Plan") is as follows:
Effective July 9, 1997:
Springwich Cellular Limited Partnership shall be a
Participating Company.
Effective August 27, 1997:
Southern New England Telecommunications Corporation is
designated as the Plan Administrator as defined by ERISA
Effective September 15, 1997:
Removal of unnecessary or extraneous language, such as Trust
provisions which are already in the Trust Agreement.
Simplification of Plan Language to facilitate ease of
participant understanding.
Effective January 1, 1998:
Reinstated Uraguay Round Agreements Act (GATT) provisions
applicable to the determination of minimum and maximum
pension distributions.
Eliminated mortality rate assumptions applicable to the
determination of maximum pension distributions.
SNET 1986 STOCK OPTION PLAN
The Plan is amended as follows:
(1) Adding the following sentence to the end of the
first paragraph of Section 9(c):
Notwithstanding the foregoing, no optionee shall
be eligible to make an Election (or otherwise
elect to surrender his Stock Compensation in
exchange for a cash payment as contemplated by
this Section 9(c)) with respect to any Change of
Control transaction involving SBC Communications
Inc. that is accounted for as a pooling of
interests transaction.
SNET EXECUTIVE RETIREMENT SAVINGS PLAN
With amendments through January 1, 1998
January 1998
TABLE OF CONTENTS
SECTION 1. PURPOSE 1
SECTION 2. DEFINITIONS 1
SECTION 3. FUNDING 2
SECTION 4. ADMINISTRATION 3
SECTION 5. CLAIMS PROCEDURE 3
SECTION 6. MISCELLANEOUS 4
SECTION 7. PLAN TERMINATION 4
SECTION 8. SOURCE OF PAYMENTS 4
SECTION 9. UNFUNDED STATUS 5
SECTION 10. CHANGE OF CONTROL 5
SECTION 11. PLAN MODIFICATION 8
ARTICLE A. EXECUTIVE RETIREMENT SAVINGS PROGRAM
SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN 9
SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER
ARTICLE A 9
SECTION 3. PARTICIPATION UNDER ARTICLE A 10
SECTION 4. RESTORATION ALLOCATION &
INCENTIVE AWARD ALLOCATION 10
SECTION 5. PAYMENT OF EXECUTIVE RETIREMENT SAVINGS
PLAN ACCOUNT 12
ARTICLE B. EMPLOYEE RETIREMENT SAVINGS PROGRAM
SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN 13
SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER
ARTICLE B 13
ARTICLE B. EMPLOYEE RETIREMENT SAVINGS PROGRAM (CONTINUED)
SECTION 3. PARTICIPATION UNDER ARTICLE B 14
SECTION 4. RESTORATION ALLOCATION 14
SECTION 5. PAYMENT OF EMPLOYEE RETIREMENT SAVINGS
PLAN ACCOUNT 15
SNET EXECUTIVE RETIREMENT SAVINGS PLAN
SECTION 1. PURPOSE
The purpose of the SNET Executive Retirement Savings
Plan (the "Plan") is to provide certain management and
highly compensated employees of Southern New England
Telecommunications Corporation (the "Corporation") (and its
subsidiaries which have determined, with the consent of the
Committee, to participate in this Plan), with certain
contributions that would have been provided to them under
the SNET Management Retirement Savings Plan (the "Savings
Plan") if pensionable compensation were not subject to the
limitation imposed by Section 401(a)(17) of the Code and,
certain executives with an additional contribution based on
the amount of Short Term Incentive Award deferred by them.
The Plan is intended to constitute an "unfunded plan
for deferred compensation for a select group of management
or highly compensated employees for purposes of Title 1 of
ERISA.
The Plan shall consist of two components: (1) Article A
which contains the program available for executive-level
employees; and (2) Article B which contains the program
available for management employees below the executive-
level.
SECTION 2. DEFINITIONS
When used herein with initial capital letters, each of
the following terms shall have the corresponding meaning set
forth below unless a different meaning is plainly required
by the context in which the term is used:
"Beneficiary" shall have the meaning provided under
Article A or Article B of this Plan, as applicable.
1
"Board" shall mean the Board of Directors of the
Company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Committee" shall mean the Employees' Benefit Committee
under the SNET Management Retirement Savings Plan.
"Company" shall mean The Southern New England Telephone
Company and, where applicable, the Board, a committee
thereof, or its authorized representatives.
"Corporation" shall mean Southern New England
Telecommunications Corporation.
"Deferral Plan" shall mean the SNET Incentive Award
Deferral Plan.
"Employer" shall mean the Corporation and any other
company (or portion thereof) which is a Participating
Company in the Savings Plan.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974 as it may be amended from time to time.
"Participant" shall mean an employee of an Employer who
is eligible to participate in the Plan pursuant to Article A
or Article B, as applicable.
"Plan Year" shall mean the calendar year.
"Salary" shall have the same meaning as provided in the
Savings Plan but shall also include amounts disregarded
pursuant to Section 401(a)(17) of the Code.
"Savings Plan" shall mean the SNET Management
Retirement Savings Plan.
SECTION 3. FUNDING
Amounts payable under this Plan shall be "unfunded," as
that term is used in Sections 201(2), 301(a)(3), 401(a)(1)
and 4021(a)(6) of ERISA with respect to unfunded plans
maintained primarily for the purpose of providing
deferred compensation to a select group of management
or highly compensated employees, and the Plan shall be
administered in a manner that will ensure that amounts
payable hereunder are unfunded and that Participants
2
will not be considered to have received a taxable economic
benefit prior to the time at which amounts are actually
payable hereunder. Accordingly, a Participant's Plan account
shall be only a bookkeeping account, and no Employer shall
be required to segregate or earmark any of its assets for
the benefit of Participants or their spouses or other
beneficiaries, with each such person having only a contractual
right against the Employer for amounts payable hereunder. The
rights and interest of a Participant under this Plan shall not be
subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge or encumbrance by a Participant
or any person claiming under or through a Participant, nor
shall they be subject to the debts, contracts, liabilities
or torts of a Participant or anyone else prior to payment.
SECTION 4. ADMINISTRATION
The Plan Administrator as that term is defined under
ERISA is the Corporation and the Plan shall be operated
under the direction of the Corporation or its agents. The
calculation of all amounts payable under the Plan shall be
performed by the Corporation or its agents, and such
calculations and the Corporation's or its agent's decisions
in all other matters involving the interpretation or
application of the Plan shall be final and binding on all
persons.
SECTION 5. CLAIMS PROCEDURE
All claims by a Participant, spouse or beneficiary for
amounts payable under this Plan shall be determined under
the claims procedure in effect under the Savings Plan
applicable to such person on the date that such claims are
submitted. The person or entity authorized to determine
final claims appeals under the Savings Plan shall act for
the Corporation for the purpose of such claims
determination.
3
SECTION 6. MISCELLANEOUS
6.1 Plan Not an Employment Contract. Neither the
adoption of the Plan by the Employer, nor any action of the
Employer or the Committee under the Plan, nor participation
in the Plan or failure to participate in the Plan by any
person, shall be held or construed to confer upon any person
any legal right to be continued as an employee of any
Employer. All employees, regardless of whether they
participate in the Plan, shall be subject to discharge to
the same extent as they would have been if the Plan had
never been adopted.
6.2 Headings. Headings are included in the Plan for
convenience only and are not substantive provisions of the
Plan.
6.3 Applicable Law. The interpretation of the
provisions and the administration of the Plan shall be
governed by the laws of the State of Connecticut without
regard to principles of conflicts of laws, to the extent not
preempted by federal law.
SECTION 7. PLAN TERMINATION
The Board retains the right to terminate the Plan in
whole or in part, and each Participating Company retains the
right to withdraw from this Plan, at any time, for any
reason, with or without notice. Unless the Participant
provides prior written consent, however, said withdrawal or
termination, as applicable, shall not affect the rights of
any Participant or Beneficiary to any benefit under the Plan
to which such person may have previously become entitled
prior to the effective date of the withdrawal or
termination.
SECTION 8. SOURCE OF PAYMENTS
Benefits arising under this Plan and all costs,
charges, and expenses relating thereto will be payable
from SNET's general assets. SNET may, however, establish
a trust to pay such benefits and related expenses,
provided such trust does not cause the Plan to be
4
"funded" within the meaning of ERISA. To the extent trust
assets are available, they may be used to pay benefits arising
under this Plan and
all costs, charges, and expenses relating thereto. To the
extent that the funds held in the trust, if any, are
insufficient to pay such benefits, costs, charges and
expenses, SNET shall pay such benefits, costs, charges and
expenses from its general assets.
SECTION 9. UNFUNDED STATUS
The Plan at all times shall be entirely unfunded for
purposes of the Code and ERISA and no provision shall at any
time be made with respect to segregating any assets of a
Participating Company for payment of any benefits hereunder.
Funds that may be invested through a trust described in
Section VIII of the Plan shall continue for all purposes to
be part of the general assets of the Participating Company
which invested the funds. The Plan constitutes a mere
promise by SNET and the Participating Companies to make
benefit payments, if any, in the future. No Participant,
Beneficiary or any other person shall have any interest in
any particular assets of a Participating Company by reason
of the right to receive a benefit under the Plan and to the
extent the Participant, Beneficiary or any other person
acquires a right to receive benefits under this Plan, such
right shall be no greater than the right of any unsecured
general creditor of a Participating Company.
SECTION 10. CHANGE OF CONTROL
Any provision of the Plan to the contrary
notwithstanding, in the event of a Change of Control (as
defined below), any benefit accrued as of the date of the
Change of Control, shall not be subject to forfeiture and
shall be paid in a single lump sum on the last day of the
month following the month in which the Change of Control
occurred for those Participants currently eligible to
receive a distribution, other than a hardship distribution,
under the Plan, and on the last day of the month following
the month in which the event occurs (e.g., termination of
5
employment, disability or death) giving rise to the
obligations of SNET or Participating Company to pay such
benefit for those Participants not currently eligible to
receive a distribution, other than a hardship distribution,
under the Plan. For this purpose, the accrued benefit shall
be calculated based upon the provisions of the Plan in
effect immediately prior to the Change of Control and shall
not be adversely affected because of any subsequent events,
including, without limitation, termination or amendment of
the Plan or the Savings Plan or the Deferral Plan, or lack
of continued status.
For purposes of this Section X, a Change of Control
shall mean:
(A) an acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Corporation
(the Outstanding Corporation Common Stock") or (ii) the
combined voting power of the then outstanding voting
securities of the Corporation entitled to vote
generally in the election of directors (the
"Outstanding Corporation Voting Securities");
excluding, however, the following: (1) any acquisition
directly from the Corporation, other than an
acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was
itself acquired directly from the Corporation, (2) any
acquisition by the Corporation, (3) any acquisition by
any employee benefit plan (or related trust)
participated in by the Corporation or any corporation
controlled by the Corporation or (4) any acquisition by
any corporation pursuant to a reorganization, merger,
consolidation or similar corporate transaction (in each
case, a "Corporate Transaction"), if, pursuant to such
Corporate Transaction, the conditions described in
clauses (i), (ii), and (iii) of Paragraph (C) of this
Section X are satisfied; or
(B) a change in the composition of the Board of
Directors of the Corporation (the "Board") such that
the individuals who, as of December 12, 1990,
constitute the Board (the Board as of the above date
shall be hereinafter referred to as the "Incumbent
Board") cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes
of this Section X, that any individual who becomes a
member of the Board subsequent to the above date whose
election, or nomination for election by the
shareholders of the Corporation, was approved by a vote
of at least a majority of those individuals who are
member of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this
provision) shall be considered as though such
individual were a member of the Incumbent Board, but,
provided further, that any such individual whose
initial assumption of office occurs as a result of
either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened
6
solicitation of proxies or consents by or on
behalf of a Person other than the Board shall not be so
considered as a member of the Incumbent Board; or
(C) the approval by the shareholders of the
Corporation of a Corporate Transaction or, if
consummation of such Corporate Transaction is subject,
at the time of such approval by shareholders, to the
consent of any government or governmental agency, the
obtaining of such consent (either explicitly or
implicitly by consummation); excluding, however, such a
Corporate Transaction pursuant to which (i) all or
substantially all of the individuals and entities who
are the beneficial owners, respectively, of the
Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities immediately prior to such
Corporate Transaction will beneficially own, directly
or indirectly, more than 60% of, respectively, the
outstanding shares of common stock of the corporation
resulting from such Corporate Transaction and the
combined voting power of the outstanding voting
securities of such corporation entitled to vote
generally in the election of directors, in
substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the
Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be, (ii)
no Person (other than the Corporation, any employee
benefit plan (or related trust) participated in by the
Corporation or such Corporation resulting form such
Corporate Transaction and any Person beneficially
owning, immediately prior to such Corporate
Transaction, directly or indirectly, 20% or more of the
outstanding shares of common stock of the corporation
resulting from such Corporate Transaction or the
combined voting power of the then outstanding voting
securities of such corporation entitled to vote
generally in the election of directors and (iii)
individuals who were members of the Incumbent Board
will constitute at least a majority of the members of
the board of directors of the corporation resulting
from such Corporate Transaction; or
(D) the approval by the shareholders of the
Corporation of (i) a complete liquidation or
dissolution of the Corporation or (ii) the sale or
other disposition of all or substantially all of the
assets of the Corporation; excluding, however, such a
sale or other disposition to a corporation, with
respect to which following such sale or other
disposition, (1) more than 60% of, respectively, the
then outstanding shares of common stock of such
corporation and the combined voting power of the then
outstanding voting securities of such corporation
entitled to vote generally in the election of directors
will be then beneficially owned, directly or
indirectly, by all or substantially all of the
individuals and entities who were the beneficial
owners, respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting
Securities immediately prior to such sale of other
disposition in substantially the same proportion as
their ownership, immediately prior to such sale or
other disposition, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting
Securities, as the case may be, (2) no Person (other
than the Corporation and any employee benefit plan (or
related trust) participated in by the Corporation or
such corporation and any Person beneficially owning,
immediately prior to such sale or other disposition,
directly or indirectly, 20% or more of the Outstanding
Corporation Common Stock or Outstanding Corporation
Voting Securities, as the case may be) will
beneficially own, directly or indirectly, 20% or more
for, respectively, the then outstanding shares of
common stock of such corporation and the combined
voting power of the then outstanding voting securities of
7
such corporation entitle to vote generally in the
election of directors and (3) individuals who were
members of the Incumbent Board will constitute at least
a majority of the members of the board of directors of
such corporation.
SECTION 11. PLAN MODIFICATION
The Board may from time to time make changes in the
Plan. In addition, the Senior Vice President-Organization
Development of the Corporation (or any successor to that
officer's responsibilities), with the concurrence of the
Senior Vice President and General Counsel of the Corporation
(or any successor to that officer's responsibilities), shall
be authorized to make minor or administrative changes to the
Plan, as well as changes dictated by the requirements of
federal or state statutes applicable to any Participating
Company or authorized or made desirable by such statutes.
Such changes shall not affect the rights of any Participant,
or Beneficiary, without the Participant's consent, to any
benefit under the Plan to which such person may have
previously become entitled under the terms of the Plan.
8
ARTICLE A. EXECUTIVE RETIREMENT SAVINGS PROGRAM
SECTION 1. PURPOSE OF ARTICLE A OF THIS PLAN
The purpose of this Article A, the Executive Retirement
Savings Program, is to provide certain highly compensated
employees with certain contributions that would have been
provided to them under the SNET Management Retirement
Savings Plan (the "Savings Plan") if pensionable
compensation were not subject to the limitation imposed by
Section 401(a)(17) of the Code and with an additional
contribution based on the amount of Short Term Incentive
Award deferred by them.
SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER ARTICLE A
When used in this Article A with initial capital
letters, each of the following terms shall have the
corresponding meaning set forth below unless a different
meaning is plainly required by the context in which the term
is used:
"Beneficiary" shall mean the person or persons entitled
to receive distributions under the Deferral Plan, or if the
Participant did not elect to participate in the Deferral
Plan, the Savings Plan, upon or after the death of a
Participant.
"Executive Retirement Savings Plan Account" shall mean
the account provided for in Section 4 of this Article A.
"Hardship" shall mean an unanticipated emergency that
is caused by an event beyond the control of the Participant
that would result in financial hardship for such Participant
if a distribution under the Plan were not permitted, as
determined by the person or entity designated under the Deferral
Plan to make such determination in their sole discretion. The
9
person or entity so designated may require the
Participant to submit whatever documentation the person
or entity deems appropriate to make such determination of
Hardship.
"Incentive Award Allocation" shall mean allocations to
a Participant's Executive Retirement Savings Plan Account,
based on the amount of Short Term Incentive Award that is
deferred, as described in Section 3 of this Article A.
"Savings Plan Restoration Allocation" shall mean
allocations to a Participant's Executive Retirement Savings
Plan Account, based on potential matching contributions to
the Savings Plan, as described in Section 4 of this Article A.
SECTION 3. PARTICIPATION UNDER ARTICLE A
Effective January 1, 1994, each employee of an Employer
who is eligible to participate in the Deferral Plan and
whose compensation from the Employer exceeds the limitations
of Section 401(a)(17) of the Code and whose matching
contributions by an Employer under the Savings Plan are
limited on account of such limitations shall be a
Participant in the Plan as of April 1 of the Plan Year
following a Plan Year in which such limitations occur,
provided such executive is on the active payroll or an
approved leave of absence as of that date. Each executive
participating in the SNET Incentive Award Deferral Plan
shall be a Participant in the Plan upon the granting of an
award payment and the election of such Participant to defer
receipt of such award under such Plan, provided such
executive is on the active payroll or an approved leave of
absence as of the date any such award is granted.
SECTION 4. RESTORATION ALLOCATION AND INCENTIVE AWARD ALLOCATION
4.1 Benefits under this Plan shall consist of two
components, one based on potential matching contributions
and the other on deferred Short Term Incentive Awards. For
each Participant who, for a Plan Year, has made pre-tax
contributions to the Savings Plan in an amount equal to the
limitation under Section 402(g) of the Code or the maximum pre-tax
10
contributions permitted under the terms of the Savings Plan,
a Savings Plan Restoration Allocation shall be credited
to the Participant's Executive Retirement Savings
Plan Account for each Plan Year, as of the end of the Plan
Year. The Savings Plan Restoration Allocation shall be the
amount of additional matching contributions that would have
been made by the Employer to the Savings Plan on behalf of
the Participant had the limitations of Section 401(a)(17) of
the Code not been applicable in calculating such matching
contributions. In determining this amount, the amount of
the Participant's deferral of their Short Term Incentive
Award under the Deferral Plan shall be added to the amount
contributed by the Participant to the Savings Plan to the
extent that the Participant was foreclosed from contributing
6% of their salary to the Savings Plan due to the limits
imposed under Section 402(g) of the Code. Such allocation
shall be credited as of the first day of April of the Plan
Year following the Plan Year for which such matching
contributions would have been made to the Savings Plan but
for the limitations of Sections 401(a)(17) and 402(g) of the
Code.
The second component shall consist of an Incentive
Award Allocation to be made to the Participant's Executive
Retirement Savings Plan Account equal to the amount that
would have been made as a matching contribution to the
Savings Plan had (i) the executive's deferred Short Term
Incentive Award been contributed to the Savings Plan, (ii)
the limitations of Section 401(a)(17) of the Code not been
applicable, (iii) the definition of Salary under the Savings
Plan been limited to the Participant's Short Term Incentive
Award, and (iv) matching contributions pursuant to the ESOP
portion of the Savings Plan not been made. Such allocation
shall be credited when the Short Term Incentive Award is
granted.
In addition, the Secretary of the Committee with the
advice of legal counsel, may provide for an additional
amount to be credited to a Participant's Savings Plan
Restoration Allocation account if the Secretary determines
that the additional credit is appropriate, due to
11
the impact of administrative actions undertaken to insure
compliance with applicable law, provided that the total of the
amount credited by the Secretary hereunder shall not exceed 4%
of the Participant's Salary for the Plan Year for which the
credit is given.
4.2 Interest shall be credited on each Participant's
Executive Retirement Savings Plan Account, in accordance
with the interest crediting provisions of the Deferral Plan.
SECTION 5. PAYMENT OF EXECUTIVE RETIREMENT SAVINGS PLAN ACCOUNT
The amount credited to a Participant's Executive
Retirement Savings Plan Account, to the extent vested, shall
be paid to the Participant, or to the Participant's
Beneficiary in the event of death, in accordance with the
distribution provisions of the Deferral Plan when the
Participant ceases to be employed by any Employer due to the
Participant's retirement, termination of employment, death
or a Change in Control. A Participant may also receive a
distribution of his benefits under the Plan, while still
employed by any Employer, in the case of a Hardship, to the
extent of the amount necessary to meet such Hardship. A
Participant shall be vested in the amounts credited to an
Executive Retirement Savings Plan Account to the same extent
as the Participant is vested in amounts attributable to
Employer matching contributions to the Savings Plan.
12
ARTICLE B. EMPLOYEE RETIREMENT SAVINGS PROGRAM
SECTION 1. PURPOSE OF ARTICLE B OF THIS PLAN
The purpose of this Article B, the Employee Retirement
Savings Program, is to provide certain highly compensated
employees with certain contributions that would have been
provided to them under the SNET Management Retirement
Savings Plan (the "Savings Plan") if pensionable
compensation were not subject to the limitation imposed by
Section 401(a)(17) of the Code.
SECTION 2. ADDITIONAL DEFINITIONS APPLICABLE UNDER ARTICLE B
When used in this Article B with initial capital
letters, each of the following terms shall have the
corresponding meaning set forth below unless a different
meaning is plainly required by the context in which the term
is used:
"Beneficiary" shall mean the person or persons entitled
to receive distributions under the Savings Plan upon or
after the death of a Participant.
"Employee Retirement Savings Plan Account" shall mean
the account provided for in Section 4 of this Article B.
"Hardship" shall mean an unanticipated emergency that
is caused by an event beyond the control of the Participant
that would result in financial hardship for such Participant
if a distribution under the Plan were not permitted, as
determined by the person or entity designated under the
Savings Plan to make such determination in their sole
discretion. The person or entity so designated may require
the Participant to submit whatever documentation the person
or entity deems appropriate to make such determination of
Hardship.
13
"Savings Plan Restoration Allocation" shall mean
allocations to a Participant's Employee Retirement Savings
Plan Account, based on potential matching contributions to
the Savings Plan, as described in Section 4 of this Article B.
SECTION 3. PARTICIPATION UNDER ARTICLE B
Effective March 13, 1996, each employee of an Employer
who is not eligible to participate in the Deferral Plan and
whose compensation from the Employer exceeds the limitations
of Section 401(a)(17) of the Code and whose matching
contributions by an Employer under the Savings Plan are
limited on account of such limitations shall be a
participant in the Plan as of April 1 of the Plan Year
following a Plan Year in which such limitations occur,
provided such employee is on the active payroll or on an
approved leave of absence as of that date.
SECTION 4. RESTORATION ALLOCATION
4.1 For each Participant who, for a Plan Year, has
made pre-tax contributions to the Savings Plan in an amount
equal to the limitation under Section 402(g) of the Code or
the maximum pre-tax contributions permitted under the terms
of the Savings Plan, a Savings Plan Restoration Allocation
shall be credited to the Participant's Employee Retirement
Savings Plan Account for each Plan Year, as of the end of
the Plan Year. The Savings Plan Restoration Allocation
shall be the amount of additional matching contributions
that would have been made by the Employer to the Savings
Plan on behalf of the Participant had the limitations of
Section 401(a)(17) of the Code not been applicable in
calculating such matching contributions. Such allocation
shall be credited as of the first day of April of the Plan
Year following the Plan Year for which such matching
contributions would have been made to the Savings Plan but
for the limitations of Sections 401(a)(17) and 402(g) of the
Code.
14
In addition, the Secretary of the Committee with the
advice of legal counsel, may provide for an additional
amount to be credited to a Participant's Savings Plan
Restoration Allocation account if the Secretary determines
that the additional credit is appropriate due to the impact
of administrative actions undertaken to insure compliance
with applicable law, provided that the total of the amount
credited by the Secretary hereunder shall not exceed 4% of
the Participant's Salary for the Plan Year for which the
credit is given.
4.2 Interest shall be credited on each Participant's
Employee Retirement Savings Plan Account, in accordance with
the interest crediting provisions of the Deferral Plan.
SECTION 5. PAYMENT OF EMPLOYEE RETIREMENT SAVINGS PLAN ACCOUNT
The amount credited to a Participant's Employee
Retirement Savings Plan Account, to the extent vested, shall
be paid to the Participant, or to the Participant's
Beneficiary in the event of death, as soon as
administratively practicable following the month in which
the Participant ceases to be employed by any Employer due to
the Participant's retirement, termination of employment,
death or a Change in Control. A Participant may also
receive a distribution of his benefits under the Plan, while
still employed by any Employer, in the case of a Hardship,
to the extent of the amount necessary to meet such Hardship.
A Participant shall be vested in the amounts credited to an
Employee Retirement Savings Plan Account to the same extent
as the Participant is vested in amounts attributable to
Employer matching contributions to the Savings Plan.
15
SNET 1995 STOCK INCENTIVE PLAN
The Plan is amended as follows:
(1) Adding the following sentence to the end of the
first paragraph of Section 12:
Notwithstanding the foregoing, no participant
shall be eligible to make an Election (or
otherwise elect to surrender his Stock
Compensation in exchange for a cash payment as
contemplated by this Section 12) with respect to
any Change of Control transaction involving SBC
Communications Inc. that is accounted for as a
pooling of interests transaction.
SNET Stay Bonus Program
1. Purpose. It is essential that Southern New England
Telecommunications Corporation ("SNET") be managed and
operated efficiently and effectively during the transition
period relating to SNET's acquisition by SBC Communications
Inc. ("SBC"). It is natural for persons to be concerned
about their careers and consider changes during times of
uncertainty. To assure that SNET is able to retain
employees needed to discharge its commitments to customers
during the extended transition process, SNET has implemented
the SNET Stay Bonus (the "Program").
2. Effective Date. The Program shall be effective as of
January 5, 1998 (the "Effective Date").
3. Definitions. The following terms as used herein have
the meanings set forth below:
(a) "Base Salary" means an Eligible Employee's annual basic
wage rate (or its full time equivalent for part time
employees) in effect on the Payment Date.
(b) "Bonus" means an Eligible Employee's target bonus
opportunity in effect on the Payment Date or such higher
bonus amount actually earned by an Eligible Employee as of
the Payment Date.
(c) "Eligible Employee" means each Salary Band 4 and Above
Executive of SNET who is on the active payroll or on a leave
of absence with a re-employment guarantee. "Eligible
Employee" shall not include individuals who are at the
Payment Date classified by SNET as independent contractors
or "leased employees" as defined in Section 414(n) of the
Internal Revenue Code of 1986, as amended.
(d) "Merger Agreement" means the Agreement and Plan of
Merger dated as of January 4, 1998 by and among Patriot,
Silver and Silver Ventures, Inc.
(e) "Payment Date" means the earlier of the Effective Time
as defined in the Merger Agreement or the date of
termination of the Merger Agreement.
(f) "Stay Bonus" means the sum of an eligible employee's
Base Salary and Bonus.
4. Benefits. The Company shall pay, in a cash lump sum
net of any applicable withholding or employment taxes, the
applicable Stay Bonus to each Eligible Employee who is
employed by the Company on the Payment Date. An Eligible
Employee who is not employed by the Company on the Payment
Date shall not be entitled to receive the Stay Bonus that
otherwise would be due.
5. Rights of Employees. The Program is for the benefit of
each Eligible Employee and his or her heirs and
representatives and shall be enforceable by them in
accordance with its terms. The Program is not a contract of
employment between the Company and the Eligible Employee and
shall not be construed to create a right of an Eligible
Employee to continued employment with the Company.
6. Amendment and Termination. SNET, through action of its
Board of Directors, may amend, modify or terminate the
Program for any or no reason.
EXHIBIT 12
1997 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, 1997
Income before income taxes $316.0
Add:
Interest on indebtedness 89.0
Portion of rents representative of the interest factor 6.6
Earnings before fixed charges and income taxes (1) $411.6
Fixed charges
Interest charges $ 93.6
Portion of rents representative of the interest factor 6.6
Fixed charges (2) $100.2
Ratio of earnings to fixed charges [(1) divided by (2)] 4.11
[SNET LOGO]
SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION
227 CHURCH STREET
NEW HAVEN, CONNECTICUT 06510
--------------------
1997 ANNUAL REPORT
--------------------
WIRELINE
WIRELESS
INFORMATION AND
ENTERTAINMENT
<PAGE>
TABLE OF CONTENTS
FINANCIAL INFORMATION
Financial Highlights 1
Business Highlights 2
Letter to Shareowners 3
Financial Commentary 6
Report of Management 15
Report of Independent Accountants 15
Consolidated Statements of Income (Loss) 16
Consolidated Balance Sheets 17
Consolidated Statements of Changes in Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Financial Data (Unaudited) 32
Statistical Data (Unaudited) 33
Investor Information 34
Other Information 35
NOTICE OF ANNUAL MEETING 37
PROXY STATEMENT
Proxy Information 38
Beneficial Ownership of Common Stock 38
Election of Directors (Proposal 1) 39
Nominees for Election as Directors 39
Directors Continuing in Office 40
Compensation and Other Information Regarding Directors 41
Committees of the Board 41
Ratification of Appointment of Auditors (Proposal 2) 42
Shareholder Proposals 42
Other Matters to Come Before the Meeting 42
Report of Personnel and Board Affairs Committee
of the Board of Directors on Executive
Compensation 42
1997 Executive Compensation 43
CEO Compensation 43
Summary Compensation Table 44
Option/SAR Grants in the Last Fiscal Year 45
Aggregated Option/SAR Exercises in Last Fiscal
Year and Fiscal Year End Option/SAR Values 46
Pension Plan 46
Change-in-Control Agreements 47
Certain Transactions 47
Performance Graph 47
Financial Statements 47
WHO WE ARE
SNET is a Connecticut-based company reaching beyond its traditional borders to
offer wireline, wireless and information and entertainment services, including
local, national and international calling; mobile communications; and
publishing, information and advertising. The company is building I-SNET(SM), a
statewide, information superhighway that brings to customers a full array of
information, communications and entertainment services. In the latest J.D. Power
national customer satisfaction survey, SNET was ranked the number-one,
long-distance company in America among mainstream users.
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL HIGHLIGHTS
Dollars in Millions, Except as Noted 1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING RESULTS
Revenues and Sales $2,022.3 $1,941.9 $1,816.4
Annual Growth 4.1% 6.9% 5.7%
Costs and Expenses(1) $1,245.7 $1,203.6 $1,121.6
Net Income (Loss)(2) $ 193.8 $ 192.8 $ (518.3)
- --------------------------------------------------------------------------------
PER SHARE INFORMATION (DOLLARS)
Basic Earnings Per Share
Income Before Extraordinary Charge $ 2.99 $ 2.95 $ 2.60
Net Income (Loss)(2) $ 2.93 $ 2.95 $ (7.99)
Diluted Earnings Per Share
Income Before Extraordinary Charge $ 2.98 $ 2.94 $ 2.60
Net Income (Loss)(2) $ 2.92 $ 2.94 $ (7.99)
Dividends Declared $ 1.76 $ 1.76 $ 1.76
Market Price (year-end) $ 50.313 $ 38.875 $ 39.750
- --------------------------------------------------------------------------------
AT YEAR-END
Total Assets $2,770.9 $2,671.0 $2,724.2
Debt Ratio 69.2% 74.9% 80.0%
Total Employees 9,743 9,441 9,070
- --------------------------------------------------------------------------------
STATISTICAL DATA
Network Access Lines in Service
thousands)(3) 2,286 2,163 2,073
Annual Growth(3) 5.7% 4.3% 3.2%
Second Residential Network
Access Lines in Service (thousands) 127 97 75
Annual Growth 30.9% 29.3% 25.0%
Network Interstate Access
Minutes of Use (millions) 8,291 7,906 7,298
Annual Growth 4.9% 8.3% 5.5%
Interstate and International
Toll Access Line Subscribers (thousands) 941 758 266
Annual Growth 24.1% 185.0% 127.4%
Cellular Subscribers (thousands)(4) 457 392 323
Annual Growth(4) 16.6% 21.4% 94.6%
- --------------------------------------------------------------------------------
OTHER DATA
Operating Cash Flow(5) $ 776.6 $ 738.3 $ 694.8
Telephone Company Wireline Cost
Per Access Line (dollars)(6) $ 312 $ 332 $ 320
Net Cash Provided by Operating
Activities $ 616.0 $ 477.4 $ 442.6
Cash Expended for Capital Additions $ 472.4 $ 373.8 $ 357.4
Cash Dividends Paid $ 102.4 $ 100.2 $ 98.0
- --------------------------------------------------------------------------------
(1) Excludes depreciation and amortization.
(2) 1997 includes a $6.4 before-tax extraordinary charge for the early
extinguishment of debt that reduced net income by $3.7 and both basic and
diluted earnings per share by $.06. 1995 includes a $1,202.6 before-tax
extraordinary charge for the discontinuance of SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation," that reduced net income by
$687.1 and basic and diluted earnings per share by $10.59.
(3) Excluding the purchase of Woodbury Telephone Company ("Woodbury"), network
access lines in service would have increased 4.7% to 2,265,000 in 1997.
(4) Excluding the subscribers from the acquired cellular properties, cellular
subscribers would have increased 51.1% to 251,000 subscribers in 1995.
(5) Represents operating income before depreciation and amortization. Operating
cash flow is not a generally accepted accounting principle measurement.
Management provides this measurement for informational purposes only.
(6) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses. Also, excludes costs and access lines
resulting from the purchase of Woodbury.
SNET Annual Report 1
<PAGE>
BUSINESS HIGHLIGHTS
* On January 5, 1998, we announced a definitive agreement to merge with SBC
Communications Inc. This $4.4 billion transaction will combine companies
with complementary wireless businesses and strong local telephone company
operations.
* We earned $2.99 per share before an extraordinary charge, up 1.4% despite
rising competition, added costs resulting from regulatory decisions and
implementation expenses for the Year 2000.
* J.D. Power and Associates rated SNET the number one long-distance company
in America among mainstream users in a national survey. By year-end, we
served 41% of the lines in the long-distance market in Connecticut.
* Access lines company-wide rose 5.7%, an historical high, as people added
second lines for fax machines and internet use, combined with strong
business demand for centrex lines.
* We received DPUC approval to formally split the company into separate
wholesale and retail operations. In January 1998, our competitive local
exchange carrier ("CLEC") opened for business.
* Our historic launch of SNET americast, the company's cable-TV business,
occurred on March 11 in Farmington, Connecticut. We have achieved very
strong market share in a short period of time. SNET internet access market
share also registered solid gains to become the second-largest provider in
Connecticut.
* We began converting to Time Division Multiple Access ("TDMA") digital
wireless technology while continuing to improve financial performance. Our
wireless operating margin was 28%, up from 15% in 1996.
* We acquired Woodbury Telephone Company ("Woodbury") in July. The new
relationship with SNET will enable Woodbury to build on its sophisticated
fiber-optic and digital network capabilities to offer an expanded array of
new products and services.
2 SNET Annual Report
<PAGE>
LETTER TO SHAREOWNERS
To Our Shareowners:
This was an extraordinary year at SNET with stellar market-share growth in key
market segments, prestigious national and international recognition, wireless
margins almost doubling from 15 percent to 28 percent, and the launch of an
unprecedented restructure of the business. And we capped all this off with the
announcement on January 5, 1998 of a planned merger with the world's most
admired global telecommunications company, SBC Communications Inc. The merger
will begin a new chapter in SNET's history.
I am very enthusiastic about this merger. SBC is an ideal match that will
maximize our significant local strengths and assure our future. That makes the
merger good news for you as well as our customers and employees. It will put us
in the best possible position to serve Connecticut's communications and
information needs for the next century, enhancing our ability to deliver
excellent customer service and an increasing array of exciting new products. The
merger will give our company the scale and scope needed to compete successfully
in a rapidly changing and consolidating industry.
This tax-free stock merger will give you 1.7568 shares of SBC stock for
every SNET share you own. That exchange ratio is adjusted for SBC's recently
announced 2 for 1 stock split. Although the price will fluctuate until the
merger is closed, this represented a 33 percent premium over the price of SNET
stock on the Friday before we announced the agreement. This premium is already
being reflected in our current stock price. When the merger is completed, you
will hold stock in SBC, a company that has produced one of the best rates of
total shareholder return in the industry, with a record of double-digit earnings
growth and annual dividend increases.
The first regulatory hurdle for the merger was cleared on February 21 when
the Department of Justice allowed the deadline for seeking additional
information about the merger to expire. In addition, we will need a green light
from you, our shareholders, as well as the Federal Communications Commission
(FCC), the Connecticut Department of Public Utility Control (DPUC), and other
state PUCs. With these approvals, we anticipate completing the merger by year's
end.
[Picture of Chairman]
Daniel J. Miglio
Chairman and Chief Executive Officer
SOLID FINANCIAL PERFORMANCE
The events that highlighted 1997 are reflected in our performance. Earnings were
very solid, considering increased competition and the impacts of some $47
million we had to absorb from new regulatory requirements and for expensive Year
2000 computer reprogramming.
In 1997, we had an extraordinary after-tax charge in the first quarter of
$0.06 per share to redeem debt. Income before the extraordinary charge was $198
million and basic earnings per share were $2.99, compared with last year's net
income of $193 million or basic earnings per share of $2.95.
Consolidated 1997 revenues and sales were up 4 percent to over $2 billion.
Wireline revenues were boosted by a 40 percent increase in our
interstate/international long-distance business and by a robust 5.7 percent
increase in access lines. The Woodbury acquisition contributed about 21,000
lines or 1 percent of the increase. We also had higher revenues from vertical
services like Caller ID, call blocking and missed-call dialing, as well as an
increase in network-access revenues. In-state toll revenues declined 15 percent,
reflecting the full annual impact of equal-access competition and competitive
discounting. Wireless revenues were up 4 percent on a 17 percent increase in
customers, largely offset by a decline in roaming rates. Information and
entertainment revenues grew 3
SNET Annual Report 3
<PAGE>
percent, reflecting our thriving internet access business and our introduction
of cable-TV service.
Consolidated operating and maintenance expenses for 1997 were up nearly 4
percent to $1,193 million. Wireline expenses rose nearly 6 percent to support
the strong growth in our interstate/international long-distance business.
Wireless expenses dropped 12 percent or $22 million as a result of our
successful initiatives to reduce fraud and bad debt as well as to lower
customer-acquisition costs. Information and entertainment expenses rose 34
percent or $25 million largely to support the rollout of SNET americast and also
to help expand our internet access service. Depreciation and amortization
expenses were up 7 percent for the year because of higher levels of property,
plant and equipment. Interest expense was up slightly.
MAJOR ACHIEVEMENTS
Although the merger announcement created the biggest headlines, we scored big on
many fronts.
Superb market-share growth in the interstate/ international long-distance
business against formidable national competitors led the way. We now serve 41
percent of the lines in the Connecticut market. Not surprisingly, in a J.D.
Power national customer-satisfaction survey, we were rated the number-one
long-distance company among mainstream users. And the bundling of internet
access service with long-distance has proven to be a winning strategy. Internet
revenues tripled and we closed 1997 with more than 85,000 customers.
Nationwide, the growth of internet traffic has created bottlenecks for
frustrated users. One reason for the success of our internet service has been
SNET's ability to stay ahead of the explosive demand. We have done this by
deploying a new overlay network to enhance reliability and service for our
customers.
This was also the year of our historic entry into the cable-TV business
with SNET americast. We've been winning raves for our superior picture quality,
top-notch customer service, creative programming and unique on-screen navigator.
In the few months we've been in business, we've achieved excellent market share
in the towns we serve.
We've made major strides in our wireless business, significantly improving
profit margins. We will continue on this road, by aggressively reducing costs
and improving revenue per customer as we strive to reach and surpass industry
norms. We have also begun deploying digital technology, which opens the door to
truly advanced wireless communication. We plan to market our digital
capabilities aggressively in 1998.
Our wireline network organization won a major kudos in 1997 by gaining ISO
9002 certification for the provisioning and maintenance of digital special
services and ISDN. The International Organization for Standardization, based in
Geneva, Switzerland, publishes a set of operating standards that define
excellence. Achieving the standard gives us a competitive edge because it means
higher product quality, better customer service, faster response time and lower
costs. We are now expanding this standard to other key areas of our wholesale
business.
We modernized and retrofitted our network statewide so we could offer
broadly our popular new services like Caller ID with name. We're also expanding
our asynchronous transfer mode (ATM) and frame-relay network to meet the
increasing data demands of Connecticut customers.
Part of our network reliability program includes having one of the most
aggressive SONET ring deployment schedules in the country. SONET ring technology
improves network reliability dramatically by providing an alternate route for
calls if there is a problem. Today, we have 47 rings in place. In 1997, 99
percent of our central offices were connected with SONET rings and all will be
connected this year.
We are also expanding beyond traditional markets. Our new nationwide
Teleservices group is a small but fast-growing segment of our business. It
leverages our operators' unique people skills and SNET's call-handling
technology to provide customer-service functions that we are marketing to other
companies. I believe that Teleservices offer us significant new growth
potential.
In addition, we acquired Woodbury Telephone last year. Both SNET and
Woodbury have served Connecticut customers since the 1870s, and we have both
benefited from our cooperative working relationships during that time. The
acquisition has formalized that relationship.
REGULATORY DEVELOPMENTS
Our corporate restructure into wholesale and retail will enable each unit to
focus on its unique customers. It will allow our retail arm to compete on a
level playing field and enable our wholesale business to maximize resale
opportunities.
We were able to move ahead with the approval of the DPUC. A Federal court
has just ruled in our favor
4 SNET Annual Report
<PAGE>
over challenges to this restructure by two competitors. There could be appeals
of this ruling and there are also court challenges on the state level.
Meanwhile, our own CLEC is ramping up. It just opened for business, serving
a small segment of our market, and it will lead our retail strategy. We will be
operating with the old and the new retail structure until the DPUC determines
that our wholesale operating support systems are available on a comparable basis
to all CLECs, which is a requirement of the Federal Telecommunications Act. We
are among those on the leading edge in fostering local competition through
access to comparable systems. Achieving this is a significant undertaking
involving millions of dollars and hundreds of people.
New regulations regarding our restructure allow large business customers to
take a "fresh look" at contracts for services like private line and
frame-relay data transmission. And, beginning in January 1999, Connecticut
consumers will undergo a balloting period where, if they have not already done
so, they will have the opportunity to choose a CLEC for their local service.
In a series of actions, the Eighth Circuit Court of Appeals (Eighth
Circuit) agreed with SNET and others, overturning the pricing rules and certain
provisions related to unbundled network elements that had been set by the FCC.
The Supreme Court decided recently that it would review the Eighth Circuit's
rulings, which still remain in effect. We don't anticipate a Supreme Court
decision until 1999.
SNET BRINGS A GREAT DEAL TO THE MERGER
It was 120 years ago that SNET took the concept of a telephone exchange and
created the very first one in the nation. Founding father, George Coy, put it
together with hoop-skirt wire and brainpower. The thread linking the innovation
of each of SNET's many "firsts" has been the hard work and commitment that
employees have dedicated to this company throughout its proud history. That
heritage has resulted in a very strong brand name and the broadest product line
in the industry. We will bring a great deal to the merger.
By joining the SBC family, SNET's future will be even brighter because the
constraints of scale and scope will no longer exist. As part of SBC, we will
gain a larger wireless footprint, more resources for marketing, product and
technology development, greater purchasing power and global reach.
As we begin to write a new chapter in our history, we are seizing the
opportunities that change offers; but we intend to preserve the core values that
have brought us so far: respect for employees, our most important assets; and
honesty and integrity in all of our relationships. SNET's merger with SBC will
only serve to bolster our commitment to support and enhance the quality of life
in Connecticut and contribute to its economic development. Even as we grow and
expand, our roots are firmly planted and our values are solidly in place.
/s/ DAN MIGLIO
- ------------------------------------
Daniel J. Miglio
Chairman and Chief Executive Officer
February 27, 1998
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 and paging
services and cellular equipment sales; and information and entertainment
includes publishing, internet and cable television services. Other activities,
such as real estate and holding company operations, are included with
eliminations and other sales.
PLANNED MERGER
On January 4, 1998, the Corporation's Board of Directors approved a definitive
merger agreement with SBC Communications Inc. ("SBC"). The Board's deliberations
focused on the complementary strengths and the possible advantages of a
combination.
The process leading to the Board's adoption of the merger began in late
1996 with a review of strategic goals in the context of rising costs (including
non-recurring items such as Year 2000 costs) and a rapidly changing regulatory
environment. As a result of this review, the Board concluded that the
Corporation would need to substantially increase the scale and scope of its
operations in order to continue to compete successfully and in a cost-effective
manner in the increasingly competitive telecommunications industry, and to
provide customers with the broad range of telecommunications products and
services they would demand and to meet the goals of its shareholders.
During 1997, management explored possibilities for various joint ventures
and business alliances in specific product areas with a view toward increasing
the scale and scope of operations. In the fall of 1997, management ultimately
concluded that a combination with a major telecommunications company was the
best alternative in order to achieve the Corporation's strategic and financial
objectives.
Management believes that the merger with SBC is in the best interest of
shareholders because it offers them the opportunity of becoming investors in a
company with global presence and a track record of success in growing long-term
value for shareholders. In addition, the merger will likely strengthen the
Corporation's ability to compete in the increasingly competitive
telecommunications industry [see Note 2].
OPERATING RESULTS
Income before extraordinary charge was $197.5, $192.8 and $168.8 in 1997, 1996
and 1995, respectively. The corresponding basic earnings per share for those
years were $2.99, $2.95 and $2.60 while the corresponding diluted earnings per
share amounts were $2.98, $2.94 and $2.60. The financial results are summarized
as follows:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Income before extraordinary
charge $197.5 $192.8 $ 168.8
Extraordinary charge, net of tax (3.7) -- (687.1)
- --------------------------------------------------------------------------------
Net Income (Loss) $193.8 $192.8 $(518.3)
- --------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
Income before extraordinary
charge $ 2.99 $ 2.95 $ 2.60
Extraordinary charge (.06) -- (10.59)
- --------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ 2.93 $ 2.95 $ (7.99)
- --------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
Income before extraordinary
charge $ 2.98 $ 2.94 $ 2.60
Extraordinary charge (.06) -- (10.59)
- --------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ 2.92 $ 2.94 $ (7.99)
- --------------------------------------------------------------------------------
Income before extraordinary charge increased $4.7 in 1997 primarily as a
result of growth in revenues from interstate and international toll, network
access and local service. The wireless margin rose to approximately 28% in 1997
from approximately 15% in 1996 due primarily to cost controls in the wireless
area. Offsets include a decline in intrastate toll revenues, increases in
expenses for the cable television offering, the Year 2000 compliance costs and
revenue reductions and cost increases associated with the implementation of
regulatory mandates.
Income before extraordinary charge increased $24.0 in 1996 due primarily to
strong revenues in interstate and international toll and wireless, offset
partially by an increase in wireline expenses.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031 by issuing short-term debt. The early extinguishment of debt
resulted in an extraordinary charge of $3.7, net of related tax benefits of
$2.7, or $.06 per share, for both basic and diluted earnings per share. As a
result of this charge, net income for 1997 was $193.8, or $2.93 basic earnings
per share and $2.92 diluted earnings per share.
On February 4, 1997, the Corporation issued $100.0 of 6.50% medium-term
notes due 2002. The issuance replaced a portion of short-term debt related to
the cellular acquisitions in 1995.
In 1995, the Corporation recorded a non-cash extraordinary charge of
$1,202.6, $687.1 after-tax or
6 SNET Annual Report
<PAGE>
$10.59 per share, for both basic and diluted earnings per share, related to the
discontinuance of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation." This non-cash
extraordinary charge consisted of the elimination of net regulatory assets and
the recognition of depreciation reserve deficiencies. As a result of this
charge, net loss for 1995 was $518.3, or $7.99 per share for both basic and
diluted earnings per share.
REVENUES AND SALES
Revenues and sales increased $80.4, or 4.1%, in 1997 and $125.5, or 6.9%, in
1996. The components of revenues and sales by product group are summarized as
follows:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Wireline:
Local service $ 701.9 $ 673.7 $ 641.6
Network access 429.2 388.1 369.4
Intrastate toll 213.0 251.2 266.4
Interstate and international toll 142.1 101.2 42.1
Premium services and equipment
sales 126.7 107.6 104.9
Other revenues 52.8 50.1 57.0
- --------------------------------------------------------------------------------
Total Wireline 1,665.7 1,571.9 1,481.4
- --------------------------------------------------------------------------------
Wireless:
Cellular service 213.7 203.0 153.1
Cellular equipment sales 7.2 10.1 7.8
Paging 6.5 6.1 12.2
- --------------------------------------------------------------------------------
Total Wireless 227.4 219.2 173.1
- --------------------------------------------------------------------------------
Information And Entertainment 189.4 184.2 180.9
Eliminations And Other Sales (60.2) (33.4) (19.0)
- --------------------------------------------------------------------------------
Total Revenues and Sales $ 2,022.3 $ 1,941.9 $ 1,816.4
- --------------------------------------------------------------------------------
Revenues increased due primarily to growth in interstate and international
toll, local service and network access, offset partially by declines in
intrastate toll due primarily to competition.
WIRELINE Local service revenues, derived from providing local exchange,
advanced calling features and local private line services, increased $28.2, or
4.2%, in 1997 and $32.1, or 5.0%, in 1996. Growth in 1997 and 1996 was primarily
attributable to increases of 5.7% and 4.3%, respectively, in the number of
access lines in service. Excluding the purchase of Woodbury Telephone Company
("Woodbury") [see Note 2], access lines would have increased 4.7%. The increases
in access lines for both years included significant growth in Centrex business
lines and second residential lines. Additionally, in 1997, local service
revenues increased due to compensation received as part of the pay telephone
reclassification and compensation provisions of the Federal Telecommunications
Act of 1996 ("Act") [see Regulatory Matters--Federal]. Local service
revenues also increased due to growth in vertical services. The increase in
local service revenues for 1997 was tempered by a decrease in revenues
recognized from wireless carriers (due to a decrease in the generic wireless
tariff in accordance with the Act) and customer migration from flat-rate
services to lower priced Centrex services. Management expects increased
competition to negatively impact local service revenues as other
telecommunications providers offer local service and as the Connecticut
Department of Public Utility Control ("DPUC")-mandated balloting process
commences, scheduled for early 1999 [see Competition].
Network access revenues represent charges assessed on interexchange
carriers and end users for access to the local exchange network. 1997 network
access revenues increased $41.1, or 10.6%, compared with an increase of $18.7,
or 5.1%, in 1996. Interstate access revenues increased $24.6, or 6.8%, in 1997
due primarily to the effects of the reversal of proposed 1996 tariff changes and
interconnection discount plans, and to growth in interstate minutes of use of
4.9% and an increase in access lines in service. Offsetting the impact of these
items was a decrease in annual tariff rates in accordance with the Corporation's
July 1997 Federal Communications Commission ("FCC") filing under price cap
regulation [see Regulatory Matters--Federal]. Interstate access revenues in 1996
increased $10.2, or 2.9%, due primarily to an 8.3% growth in interstate minutes
of use and an increase in access lines in service. Partially offsetting the
impact of the increase in minutes of use was a decrease in rates due to proposed
tariff changes and interconnection discount plans and reduced access tariff
rates. In 1997 and 1996, intrastate access revenues increased $15.4 and $8.5,
respectively, due primarily to an increase in intrastate minutes of use by
competitive providers of intrastate long-distance service. Management expects
continued increases in minutes of use as more competitors enter Connecticut's
fully competitive marketplace.
In 1997, intrastate toll revenues, which include primarily revenues from
toll and WATS "800" services, decreased $38.2, or 15.2%, compared with a
decrease of $15.2, or 5.7%, in 1996. The decrease in 1997 was due primarily to a
12.2% reduction in toll message volume, as well as reduced intrastate toll
rates. Lower toll volume was due primarily to the highly competitive toll market
as a result of a full year of intrastate equal access. The decrease in
intrastate toll revenues in 1996 was due primarily to a decline in intrastate
toll rates attributable to customer migration to several discount calling plans.
Also contributing to the decrease was a reduction in toll message volume of
approximately 1%. Competition and the offering of competitive discount calling
plans will continue to place downward pressure on intrastate toll revenues.
Interstate and international toll revenues increased $40.9 in 1997 and
$59.1 in 1996. In both 1997 and 1996, the increase was a result of significant
growth in the customer base. Long-distance access lines in service increased to
941,000 at the end of 1997 from 758,000 at the end of 1996. The growth was
primarily a result of customer migration to the SNET All Distance(R) product
SNET Annual Report 7
<PAGE>
line which allows Connecticut customers to package and discount their entire
long-distance calling in one plan.
Premium services and equipment revenues increased $19.1, or 17.8%, in 1997
and $2.7, or 2.6%, in 1996. The 1997 increase was due primarily to revenues from
special one-time projects with other competitive local exchange carriers
("CLECs") and an increase in revenues from the Corporation's Gateway and Prime
Axxess product lines. These increases were partially offset by a decline in
leased telephone set revenue.
WIRELESS Cellular service revenues increased $10.7, or 5.3%, in 1997 and $49.9,
or 32.6%, in 1996. The increases in 1997 and 1996 were due primarily to growth
of 16.6% and 21.4%, respectively, in the subscriber base in response to
competitive marketing and pricing strategies. The Corporation's focus in 1997
was on customer retention and increased bundled packages. Also contributing to
the increase in 1996 was the impact from the first full year of revenues from
the cellular acquisitions completed in July 1995 [see Note 2].
Paging revenues were relatively flat in 1997, compared with a decrease of
$6.1 in 1996. The impact of the sale of paging network assets in June 1995
contributed to the 1996 reduction in sales. Wireless continues, as a reseller,
to market paging services under the Page 2000r brand name.
INFORMATION AND ENTERTAINMENT Information and entertainment revenues
increased $5.2 in 1997 and $3.3 in 1996. The increase in 1997 was due primarily
to growth in internet sales related to an increase in the customer base, from
approximately 35,000 in 1996 to over 85,000 in 1997. Additionally, SNET
americast, the Corporation's cable television offering, began operations in
1997.
COSTS AND EXPENSES
Total costs and expenses increased $65.1, or 4.2%, in 1997 and $92.1, or 6.3%,
in 1996. Total costs and expenses are summarized as follows:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Operating costs $ 1,192.6 $ 1,149.0 $ 1,065.1
Depreciation and amortization 379.1 356.1 346.0
Taxes other than income 53.1 54.6 56.5
- --------------------------------------------------------------------------------
Total Costs and Expenses $ 1,624.8 $ 1,559.7 $ 1,467.6
- --------------------------------------------------------------------------------
Operating costs consist primarily of employee-related expenses, including
wages and benefits. Cost of goods sold and general and administrative expenses,
including marketing, represent the remaining portion of these expenses. Total
operating costs increased $43.6, or 3.8%, in 1997, compared with an increase of
$83.9, or 7.9%, in 1996. Operating costs increased to support growth in
interstate and international toll and internet, and to deploy the cable
television offering. Also contributing to the increase in operating costs were
expenses to comply with regulatory mandates and to address Year 2000 compliance.
These increases were offset by decreases in wireless expenses due to improved
cost controls.
The Year 2000 costs increased from approximately $2 in 1996 to
approximately $14 in 1997. These costs will continue to be incurred over the
next two to three years, with related expenses to be approximately $23 to $26 in
1998, with overall costs estimated to be $50 to $70. The Corporation has
established a plan which addresses the business risks and systems exposures of
Year 2000 compliance across business, communications, and technology systems and
processes. The plan covers Year 2000 compliance related to systems, telephone
equipment and infrastructure, vendors and suppliers, and internal company
operations. The Corporation anticipates all business-critical systems will be
converted and tested prior to the end of 1999, however, some work on other
systems is anticipated to continue into 2000.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued on March 4, 1998.
This SOP requires the capitalization of certain costs of computer software
developed or obtained for internal use and is effective for financial statements
for fiscal years beginning after December 15, 1998. Management currently
estimates that based on historical information, $20 to $40 of 1998 expenses
would be capitalized and amortized over lives ranging from 3 to 15 years.
WIRELINE Wireline operating costs increased $53.8, or 5.6%, in 1997 and
$99.9, or 11.6%, in 1996. The increase in both years was due primarily to an
increase in the direct costs of providing interstate and international toll
services. Also contributing to the increase in 1997 were the costs incurred in
connection with special one-time projects with other CLECs, costs related
to compliance with regulatory mandates [see Regulatory Matters] and Year 2000
compliance.
In addition to the increase in direct costs previously discussed, 1996
costs increased as a result of higher contract services, bad debts and marketing
expenses.
WIRELESS Wireless operating costs decreased $22.3, or 12.1%, in 1997 due
primarily to reduced fraud levels as a result of improved preventive control
measures. Also contributing to the decrease were lower customer acquisition
costs due to the mix of internal sales channels and third party distributor
payments and reduced bad debt expense.
1996 costs were relatively flat when compared to 1995. Costs from the first
full year of the expanded
8 SNET Annual Report
<PAGE>
cellular area in 1996 were offset by lower customer acquisition costs and
roaming fraud due to preventive control programs.
INFORMATION AND ENTERTAINMENT Information and entertainment operating costs
increased $24.8, or 33.6%, in 1997 compared with a decrease of $4.4, or 5.6%, in
1996. The 1997 increase was due primarily to costs associated with deploying
SNET americast. Also contributing to the increase in expenses was the cost of
providing internet services to a larger customer base.
The decrease in 1996 expenses was due primarily to the discontinuance of a
multimedia trial, offset partially by costs of providing internet service and
development costs associated with the commercial deployment of the Corporation's
cable television offering.
Management expects information and entertainment operating costs to
continue to increase in 1998 as the Corporation further deploys its cable
television service and supports growth in internet service.
DEPRECIATION AND AMORTIZATION In 1997, depreciation and amortization expense
increased $23.0, or 6.5%, compared with an increase of $10.1, or 2.9%, in 1996.
The increase for both years was due primarily to an increase in the average
depreciable telecommunications property, plant and equipment. The amortization
of assets acquired in the cellular acquisitions, primarily cellular licenses,
also contributed to the 1996 increase.
INTEREST EXPENSE
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Interest Expense $89.8 $88.7 $85.9
- -------------------------------------------------------------------------------
Interest expense increased $1.1, or 1.2%, in 1997 and $2.8, or 3.3%, in 1996.
The 1997 increase was due primarily to a reduction in the amount of capitalized
interest and the issuance of $100.0 of 6.50% medium-term notes in February 1997.
Partially offsetting these increases were savings from the redemption of $80.0
of 8.70% medium-term notes, in February 1997 and the maturity of $20.0 of 7.61%
notes, during the fourth quarter of 1996.
The issuance of commercial paper and medium-term notes in connection with
the cellular acquisitions was the primary contributor to the increase in 1996
[see Note 2]. The increase was partially offset by lower average interest rates
and capitalized interest of $7.2 due to a change in the reporting of capitalized
interest as a reduction of interest expense.
OTHER INCOME, NET
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Other Income, net $8.3 $6.9 $15.5
- -------------------------------------------------------------------------------
Other income, net is comprised primarily of interest income, income from
investments and gains or losses on the disposition of non-telephone property.
The 1997 increase was due primarily to the absence of a loss recognized in 1996
associated with certain leasing transactions.
The 1996 decrease was due primarily to the absence of income from the
disposition of a real estate partnership in 1995, lower interest income and the
change in the classification of capitalized interest from other income, net to
interest expense.
INCOME TAXES
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Income Taxes $118.5 $107.6 $109.6
- -------------------------------------------------------------------------------
The combined federal and state effective tax rate in 1997 was 37.5% compared
with 35.8% in 1996 and 39.4% in 1995. The higher 1997 effective tax rate was due
primarily to a lower level of state tax credits, which increased the effective
tax rate, when compared to 1996.
The recognition of a higher level of state tax credits lowered the
effective tax rate in 1996 when compared with 1995.
COMPETITION
As a result of legislative and regulatory reform, the Corporation continues to
experience an increasingly competitive environment. Competitors include
companies that construct and operate their own communications systems and
networks and/or companies that resell the telecommunications systems and
networks of underlying carriers.
In 1997, major interexchange carriers continued to intensify their
marketing efforts to sell intrastate long-distance services since The Southern
New England Telephone Company's ("Telephone Company's") full implementation of
intrastate equal access. Since the introduction of intrastate long-distance toll
competition, in excess of 230 telecommunications providers have received
approval from the DPUC to offer intrastate long-distance services with an
additional 70 filed and awaiting DPUC approval. The reduction in intrastate toll
rates and the increasingly competitive intrastate toll market continue to place
significant downward pressure on the Telephone Company's intrastate toll
revenues.
Thirty-five telecommunications providers have been granted approvals for
local service and twelve additional applications are pending before the DPUC.
These providers began offering local exchange service to business and
residential customers throughout the state. There has been growth in local
service competition in 1997 and continued growth is expected, particularly upon
commencement of the DPUC-mandated balloting process [see Regulatory
Matters--State], however, the financial impact cannot be predicted at this time.
Based on existing state and federal regulations,
SNET Annual Report 9
<PAGE>
the Corporation expects that many competitors will resell the Telephone
Company's network and that increased network access revenues will offset a
significant portion of local service revenues lost to competition. Management
supports bringing customers the benefits of competition and affording all
competitors the opportunity to compete fairly under reduced regulation.
The competitive environment also allows opportunities for the Corporation
to continue to increase its provision of interstate, international long-distance
and cable television services.
To provide competitive toll products, the Corporation's wireline business
led the industry in 1996 by introducing the option of one-second rating for all
toll calls so customers only pay for the time they use. The Corporation also
successfully promoted the one bill feature of SNET All Distance(R), a seamless
toll service which provides discount calling plans that include intrastate,
interstate and international calling. In 1998, the Corporation plans to add
wireless service to its one bill. The migration of Connecticut customers to
wireline's bundled calling plans resulted in significant growth for interstate
and international long-distance services.
In September 1996, the DPUC granted SNET Personal Vision, Inc. ("Personal
Vision") an 11-year license to operate a cable television system that will serve
the entire state of Connecticut. Personal Vision also became a partner in the
americast joint venture, along with The Walt Disney Company and several large
local exchange carriers. The partnership provides a full range of americast(TM)
programming and marketing services. Personal Vision began deploying its cable
service during the first quarter of 1997. The DPUC's decision granting the
statewide franchise was appealed to state Superior Court by members of the cable
industry. The Superior Court upheld the DPUC's decision and the cable industry
has now appealed to the state Appellate Court. A decision is anticipated in
1998.
The Corporation's ability to compete is dependent upon regulatory reform
that will allow pricing flexibility to meet competition and provide a level
playing field with similar regulation for similar services. In addition, the
Corporation's restructure into wholesale and retail affiliates will provide
additional flexibility to compete at the retail level (see Regulatory
Matters--State).
REGULATORY MATTERS
The Telephone Company is regulated by the FCC and the DPUC. Historically, the
FCC has regulated the Corporation's provision of interstate services, both at
the wholesale (access service provided by the Telephone Company) and retail
(long-distance toll charges provided by SNET America, Inc. ("SAI") as a
non-dominant carrier) levels. Since the passage of the Federal
Telecommunications Act ("Act") in 1996, the FCC has also been charged, by
Congress, with the implementation of many of the provisions of the Act designed
to foster local competition.
The DPUC regulates the Telephone Company's provision of services within the
state of Connecticut including local and in-state long-distance services. Since
the passage of state legislation in 1994, regarding local competition, as well
as the Act, the DPUC also regulates the provision of wholesale services within
the state that are required for interconnection to the Telephone Company's
network. A synopsis of key Federal and State regulatory decisions follows.
Federal
On February 8, 1996, Congress passed the Act which was designed to overhaul U.S.
telecommunications policy by removing barriers to local competition. The FCC's
First and Second Report and Order ("Order") implements the Act and contains
numerous provisions regarding the interconnection of the Telephone Company's
network with those of its competitors. The Order requires significant changes in
the way business is conducted, how the network is designed and the systems that
support it (including repair and service ordering). In addition, the Order
requires fundamental changes in the development of the prices that the Telephone
Company would charge competitors for purchasing regulated network products and
services. This order, as well as the orders discussed below, could have a
material adverse financial impact on the Telephone Company.
Certain provisions in the Order have been appealed by various local
telephone companies, including the Telephone Company, the National Association
of Regulatory Utility Commissioners and individual state regulatory commissions.
The Eighth Circuit Court of Appeals ("Eighth Circuit") issued a partial stay of
the Order, delaying the effectiveness of the pricing provisions and the rule
allowing competitors to "pick and choose" isolated terms out of negotiated
interconnection agreements and struck down those key provisions and other terms
under which potential competitors can lease pieces of the Telephone Company's
network. The Eighth Circuit declared that the FCC had overstepped its authority
and concluded that "the Act plainly grants the state commissions, not the FCC,
the authority to determine the rates involved in the implementation of the local
competition provisions of the Act." The Eighth Circuit's decision is a strong
endorsement of Congress' intention that the states play a primary role in
implementing local telecommunications competition. This decision should allow
the Corporation to implement local competition on the course mapped out by the
DPUC and the Connecticut state legislature.
The Eighth Circuit also vacated a portion of the FCC's rules which required
incumbent local exchange carriers ("ILECs") to provide combinations of network
10 SNET Annual Report
<PAGE>
elements that effectively recreated the end-to-end service at a significant
discount to CLECs. The Eighth Circuit indicated that the Act requires ILECs to
provide access to unbundled network elements, not access to platforms used by
ILECs in which network elements are combined. The Eighth Circuit's decisions
have now been appealed to the Supreme Court which has agreed to review the case
in the fall 1998 session. A decision is expected in 1999.
The FCC also released its Third Report and Order requiring ILECs, including
the Telephone Company, to provide shared transport to new entrants as an
unbundled network element at cost-based prices. Several companies, including the
Telephone Company, have filed Petitions for Review, which will be heard by the
Eighth Circuit. A decision in this matter is expected in 1998.
In 1997, the FCC issued an order regarding Universal Service. The order
revises the current universal service programs for low income customers and high
cost areas and establishes new federal support for telecommunications services
provided to schools, libraries and rural health care facilities. The federal
universal service mechanisms are funded, beginning January 1, 1998, by an
assessment on the end user revenues of all telecommunications service providers.
Funding for the new federally supported services provided to schools, libraries
and rural healthcare facilities will come from both interstate and intrastate
end user revenues, while funding for the revised high cost support and low
income support programs will be from interstate end user revenues. ILECs can
recover their contributions to the federal universal service mechanisms through
their interstate access charges. The Universal Service Order is on appeal in the
Fifth Circuit Court. The Telephone Company has intervened in the appeal. The FCC
has no timeline currently to resolve this issue and the Corporation cannot
determine when it will be resolved.
The FCC also issued an order regarding access charge reform which changes
the way the Telephone Company recovers interstate access charges from interstate
toll providers, including SAI. Specifically, the order establishes flat-rated
per-call carrier access charges, rather than usage-based charges. This order
establishes a prescriptive mechanism to ensure that interstate access charges
will be driven toward the levels that competition would be expected to produce.
Management expects this order to pressure earnings but is currently unable to
quantify any such impact. The Access Reform Order is being appealed and is
pending in the Eighth Circuit. The Telephone Company has intervened in the
appeal. The FCC is also expected to release a Pricing Flexibility Order in 1998.
This order will establish a market-based approach to pricing.
Another major FCC order was its Price Cap Order revising its price cap plan
for regulating ILECs. This order establishes a single productivity factor of
6.5% and eliminates the sharing requirements of the prior rules. This order is
being appealed in the District of Columbia Circuit Court. On August 13, 1997,
the Telephone Company filed a Petition for Waiver from the 6.5% productivity
factor, requesting that the FCC establish a productivity factor of 5.3% for the
Telephone Company. A decision is still pending.
The Telephone Company filed its 1997 annual interstate access price cap
revisions, in which the Telephone Company elected to use a 6.5% productivity
factor, which took effect July 1, 1997. The FCC required all price cap ILECs,
including the Telephone Company, to adjust their Price Cap Indices, effective
July 1, 1997, to reflect the 6.5% productivity factor for both the 1996-1997 and
1997-1998 tariff years. The filing would decrease interstate network access
rates by approximately $28 for the period July 1, 1997 to June 30, 1998. The
Telephone Company expects that this decrease will be partially offset by
increased demand.
In addition, the FCC has released Reports and Orders on the Implementation
of the Pay Telephone Reclassification and Compensation Provisions of the Act.
The orders, among other things, mandate that all ILECs, including the Telephone
Company, unbundle payphone instruments, file tariffs on payphone service lines
and make them available on a non-discriminatory basis to Payphone Service
Providers ("PSPs"). Additionally, the orders establish mechanisms for the full
and fair compensation to PSPs, including per-call compensation for subscriber
"800" and access code calls from payphones. The Telephone Company has filed the
necessary revisions to its interstate access charges with the FCC and has filed
with the DPUC new retail and wholesale Pay Telephone Access Line Service
offerings in accordance with the FCC's order.
In December 1996, the FCC acted on an outstanding petition by the New
England Public Communications Council, Inc. and preempted a prior DPUC decision
which only authorized ILECs and CLECs to provide payphone service in
Connecticut. On July 1, 1997, the District of Columbia Circuit Court rendered
its decision in Illinois Public Telecommunications Association v. FCC remanding
back to the FCC its decision setting the per-call compensation rate for
subscriber "800" and access code calls. The FCC on August 5, 1997, established a
pleading and comment cycle on these remanded issues. The FCC released a
subsequent order setting the per-call compensation rate at $.284.
Noting the need to revise its jurisdictional separations rules as a result
of the increasingly competitive nature of the telecommunications industry, the
FCC initiated on October 7, 1997, a rulemaking proceeding to begin separations
reform. Jurisdictional separations
SNET Annual Report 11
<PAGE>
assigns telecommunications property costs, revenues, expenses, taxes and
reserves to specific categories that are then allocated between the interstate
and intrastate jurisdictions. Comprehensive reform in this area could result in
changes to the structure of ILEC pricing. Management is currently unable to
determine the impact any change would have on the Telephone Company.
In accordance with the Act, the FCC requires ILECs, including the Telephone
Company, to implement a long-term solution for portability of local telephone
numbers. The Telephone Company is required to construct and operate a system
that will permit end user customers to retain their telephone numbers when they
elect a different carrier for local service. The system is to be operational by
mid-1998 for a large percentage of the Telephone Company's access lines. The
FCC, however, has not yet decided on a method to recover the substantial
investment and operating costs relating to the number portability system. Local
number portability expenditures were approximately $4 in 1997 and are estimated
to be $19 in 1998.
State
Effective April 1, 1996, the DPUC replaced traditional rate of return regulation
with alternative (price-based) regulation during the transition to full
competition. Alternative regulation includes a five-year monitoring period on
financial results and a price cap formula based on certain services categorized
as non-competitive. In addition, basic local service rates for residence,
business and coin may not be raised above current levels until January 1, 1998,
at which time the price cap plan becomes effective for these services, unless
they have been reclassified into the emerging-competitive or competitive
categories. The impact of these changes on the Telephone Company's operating
results will depend on the timing of classifying the various products and
services from non-competitive into the emerging-competitive and competitive
categories for pricing changes.
On June 25, 1997, the DPUC issued a final decision allowing the Corporation
to establish separate wholesale and retail affiliates. Under the decision, the
new retail organization, a CLEC, will compete under the same regulations as all
other retail telecommunications providers in the state. As such, the CLEC will
not be subject to price cap regulations. The wholesale organization, an ILEC,
will provide network services and functionality to retail providers, including
the Corporation's new CLEC, on comparable terms. The ILEC will be treated as a
public service company and will continue to be subject to alternative
regulation. The directory publishing operations were incorporated into a
separate subsidiary of the Corporation on January 1, 1998. As part of the
decision, however, the DPUC mandated that Connecticut customers must choose
their local exchange provider via a balloting process. Customers who do not
choose a carrier will be assigned a CLEC based on the proportion of votes in a
local service area. The specific details of the balloting process will be
addressed in further technical discussions among the participants and the DPUC.
The balloting process is scheduled to begin on January 4, 1999 and to be
completed by May 1999.
In order for the balloting process to commence, the ILEC must demonstrate
that the systems offered to CLECs provide full technical and operational support
as required by the Act. The DPUC will examine and critically evaluate the
respective Operations Support System ("OSS") platforms offered to the CLECs. The
DPUC's evaluation will establish a set of tests and standards that can be used
to determine the suitability of the ILEC's OSS to support a competitive local
exchange market and will determine if the interfaces proposed by the ILEC offer
the comparability required under the provisions of the Act. A final decision is
due on June 24, 1998. The DPUC's decision to allow the Corporation to establish
separate wholesale and retail affiliates has been challenged by other parties in
both state court and federal court. In an oral decision, the federal court has
denied the other parties' motion for summary judgment and granted the
Corporation's motion for summary judgment. A written decision is expected in the
first quarter of 1998. A decision is also expected from the state court in 1998.
On March 18, 1997, SAI filed an application with the DPUC to provide local
and intrastate toll services throughout Connecticut. The DPUC issued a final
decision granting approval on June 25, 1997. This grants SAI the authority to
operate as a CLEC in the state of Connecticut and to provide competitive retail
services to end user customers with the same regulatory and pricing flexibility
as all other CLECs in the state.
In compliance with the Act, the ILEC has filed with the DPUC numerous cost
studies supporting its proposed wholesale (i.e., resale) and unbundled rates for
interconnection services. On March 24, 1997, the DPUC issued a final decision
setting a uniform 17.8% discount rate off the Telephone Company's current retail
prices for telecommunications services sold to CLECs.
On April 23, 1997, the DPUC issued a final decision addressing the proposal
for allocation of Hybrid Fiber Coax ("HFC") network joint costs between
broadband and telephony and the Telephone Company's costs and rates associated
with unbundled loops, ports, multiplexing and inter-wire center transport. In
this decision, the DPUC approved the Telephone Company's proposed 50/50
allocation of HFC network joint costs between broadband and telephony. In
addition, the DPUC approved the cost studies based on Total Service Long Run
Incremental Cost ("TSLRIC"). Subsequently, the
12 SNET Annual Report
<PAGE>
DPUC opened a new docket to determine appropriate TSLRIC-based rates for the
remaining unbundled elements (non-loop) defined by the FCC. The cost allocation
decision has been appealed by the cable television industry to state Superior
Court. A decision is expected in 1998.
On July 23, 1997, the DPUC approved the acquisition of Woodbury by the
Corporation. The Corporation completed its purchase of Woodbury on July 30,
1997.
EMPLOYEE RELATIONS
In January 1998, under the current union contract, bargaining-unit employees
received a general wage increase totaling 3.0%; made up of various forms and
combinations of basic wage increases, one-time cash payments and/or Cash Balance
Plan Account credits. The current labor agreement will expire on August 8, 1998.
Management and the union expect to begin negotiations on a new labor agreement
early in 1998.
In 1995, a U.S. District Court decision was issued in favor of the
Department of Labor against the Corporation and the Telephone Company. The
decision held that the Corporation and the Telephone Company violated certain
sections of the Fair Labor Standards Act and were liable for back wages and
liquidating damages. The Corporation and the Telephone Company appealed the
decision and on July 31, 1997, the Second Circuit Court of Appeals affirmed the
U.S. District Court's decision. As required by the Court's decision, in October
1997, the Corporation and the Telephone Company paid back wages, liquidating
damages and interest (from the date of the District Court's judgment) to the
employees involved in this action. In 1995, the Telephone Company recorded a
liability of $11.0 which was adequate to cover the cost of total damages for
this matter.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES The Corporation generated cash flows from operations
of $616.0 during 1997 compared with $477.4 during 1996 and $442.6 during 1995.
Cash flows from operations increased in 1997 compared with 1996 due primarily to
lower restructuring payments.
In 1997, the consolidated balance sheet changed as a result of operating
activities. The current portion of deferred taxes decreased due primarily to
costs incurred in 1997 under the restructuring program. The decrease in other
current assets is due primarily to a decrease in income taxes receivable
resulting from certain state income tax credits being reflected in estimated
income tax payments. In prior years, state tax law only allowed this credit upon
the filing of the final annual income tax return. Accounts payable and accrued
expenses increased due primarily to timing of cash payments.
Cash outlays relating to the Corporation's restructuring charge, originally
recorded in December 1993, totaled $15.0, $110.6 and $89.1 in 1997, 1996 and
1995, respectively. Costs incurred for employee separations of $5.0 in 1997,
$20.0 in 1996 and $9.0 in 1995 included primarily payments for severance and
related unemployment taxes and unused vacation. Incremental costs of $2.8 in
1997, $83.1 in 1996 and $74.2 in 1995 were incurred for executing numerous
reengineering programs. In addition, exit and other costs were $7.2 in 1997,
$7.5 in 1996 and $5.9 in 1995 and included expenses relating to the reduction of
overall corporate space requirements. All cash expenditures were funded with
cash flows from operations. In 1998, the Corporation expects to conclude its
restructuring program with approximately $7 of costs related to its space
consolidation program.
INVESTING ACTIVITIES The primary use of corporate funds continued to be
capital expenditures. Cash expended for capital additions was $472.4, $373.8 and
$357.4 in 1997, 1996 and 1995, respectively. Capital additions for all years
were funded entirely from cash flows from operations. The majority of these
additions were for construction of the wireline network.
Management anticipates that total capital expenditures for consolidated
telecommunications plant will approximate $475 in 1998 and will be funded from
cash flows from operations. Included in total capital expenditures in 1998 are
estimated additions of $290 to the wireline network as compared with actual 1997
expenditures of approximately $307. These additions include expenditures
primarily related to the modernization, growth and upgrading of wireline's
central office switching and circuit equipment, to meet customer demand for new
services. Additionally, to reduce maintenance costs and to meet access line
growth, increased focus is being placed on replacing and supplementing the
existing core network of twisted copper wire and fiber-optic and coaxial cable.
On July 30, 1997, the Corporation completed its acquisition of Woodbury by
issuing approximately 528,000 shares of the Corporation's treasury stock for the
remaining 63.5% of Woodbury's common stock not formerly held by the Corporation.
The total cost of completing the acquisition was $30.1, which includes the
assumption of $9.0 in long-term debt.
FINANCING ACTIVITIES In February 1997, the Corporation issued $100.0 of
6.50% medium-term notes due 2002. The issuance replaced a portion of
short-term debt related to the cellular acquisitions discussed previously.
With this issuance, the Corporation's unissued, unsecured debt securities
registered with the Securities and Exchange Commission ("SEC") decreased to
$125.0.
SNET Annual Report 13
<PAGE>
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031 by issuing short-term debt.
The Corporation sponsors a Dividend Reinvestment and Stock Purchase Plan
("DRISPP"). Effective July 1, 1997, the Corporation's policy of issuing new
shares was modified to have its agent begin purchasing shares on the open market
(when market conditions merit) to meet the needs of the DRISPP. Beginning with
the January 15, 1998 dividend, the Corporation resumed issuance of new shares to
meet the needs of the DRISPP.
In September 1996, a total of $20.0 of 7.61% medium-term notes matured and
were satisfied with the issuance of short-term debt.
Dividends paid totaled $102.4, $100.2 and $98.0 in 1997, 1996 and 1995,
respectively. The quarterly dividend rate of $.44 per share has remained
unchanged for the past eight years, consistent with the corporate plan to
reinvest in the business.
ESOP In connection with the establishment of the Employee Stock Ownership Plan
("ESOP") in 1990, the Corporation loaned the ESOP $10.0 and guaranteed a $110.0
loan to the ESOP by a third party. The Corporation has committed to make cash
contributions to the ESOP that, together with dividends received on shares held
by the ESOP, will enable the ESOP to make its principal and interest payments on
both loans. Both loans mature in the year 2000. Debt service payments to the
ESOP totaled $13.7, $13.5 and $13.3 in 1997, 1996 and 1995, respectively. The
Corporation anticipates making equivalent cash payments during 1998.
DEBT RATIO The Corporation's ratio of debt to total capitalization at year-end
1997 was 69.2% compared with 74.9% at year-end 1996 and 80.0% at year-end 1995.
The ESOP represented 2.0% of the debt ratio at December 31, 1997 compared with
2.7% and 3.4% at December 31, 1996 and 1995, respectively.
CAPITAL RESOURCES The Corporation maintains bank lines of credit to facilitate
the issuance of commercial paper. As part of this credit facility, the
Corporation has obtained contractual commitments to $170.0 in lines of credit
provided by a syndicate of banks. The annual commitment fee is currently .045%
on the lines of credit. As of December 31, 1997, the entire $170.0 was
available.
As of December 31, 1997, the Corporation and the Telephone Company had
$125.0 and $95.0, respectively, of unissued, unsecured debt securities
registered with the SEC. Additional notes may be sold in one or more issues from
time to time as market conditions warrant.
Management believes that the Corporation has sufficient internal and
external resources to finance the anticipated requirements of business
development. Capital additions and dividends are expected to be funded with cash
from operations during 1998. The Corporation also has access to external
resources including lines of credit and long-term shelf registration
commitments.
14 SNET Annual Report
<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 six
non-employee directors, meets periodically with the Corporation's financial
management, Audit Services and independent accountants (Coopers & Lybrand
L.L.P.) to review their work and the relationships between them in whatever
depth considered necessary to fulfill the Audit Committee's responsibilities.
Both Audit Services and the independent accountants meet privately with and have
unrestricted access to the Audit Committee.
/s/ DONALD R. SHASSIAN
- ------------------------------
Donald R. Shassian
Senior Vice President and Chief Financial Officer
January 27, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Southern New England
Telecommunications Corporation:
We have audited the consolidated balance sheets of Southern New England
Telecommunications Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southern New
England Telecommunications Corporation as of December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Corporation discontinued accounting for the operations of its telephone
subsidiary in accordance with Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation," effective
January 1, 1996.
/s/ COOPERS & LYBRAND L.L.P.
- ------------------------------------
Coopers & Lybrand L.L.P.
Hartford, Connecticut
January 27, 1998
SNET Annual Report 15
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Dollars in Millions, Except Per Share Amounts,
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
REVENUES AND SALES $ 2,022.3 $ 1,941.9 $ 1,816.4
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating and maintenance 1,192.6 1,149.0 1,065.1
Depreciation and amortization 379.1 356.1 346.0
Taxes other than income 53.1 54.6 56.5
- --------------------------------------------------------------------------------
Total Costs and Expenses 1,624.8 1,559.7 1,467.6
- --------------------------------------------------------------------------------
OPERATING INCOME 397.5 382.2 348.8
Interest expense 89.8 88.7 85.9
Other income, net 8.3 6.9 15.5
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 316.0 300.4 278.4
Income taxes 118.5 107.6 109.6
- --------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGE 197.5 192.8 168.8
Extraordinary charge, net of tax (3.7) -- (687.1)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ 193.8 $ 192.8 $ (518.3)
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS)
Basic 66,156 65,437 64,871
Assuming Dilution 66,322 65,604 64,903
- --------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share
Income before extraordinary charge $ 2.99 $ 2.95 $ 2.60
Extraordinary charge, net of tax (.06) -- (10.59)
- --------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ 2.93 $ 2.95 $ (7.99)
- --------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share
Income before extraordinary charge $ 2.98 $ 2.94 $ 2.60
Extraordinary charge, net of tax (.06) -- (10.59)
- --------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE $ 2.92 $ 2.94 $ (7.99)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16 SNET Annual Report
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
Dollars in Millions, At December 31, 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Cash and temporary cash investments $ 12.3 $ 9.0
Accounts receivable, net of allowance for
uncollectibles of $32.5 and $27.4,
respectively 327.9 323.3
Materials, supplies and inventories 29.8 27.4
Prepaid publishing 35.9 35.2
Deferred income taxes 37.7 45.4
Other current assets 11.0 27.7
- --------------------------------------------------------------------------------
Total Current Assets 454.6 468.0
Property, plant and equipment, net 1,716.8 1,597.0
Intangible assets, net 394.7 400.3
Deferred income taxes 89.7 91.2
Leases and other assets 115.1 114.5
- --------------------------------------------------------------------------------
Total Assets $ 2,770.9 $ 2,671.0
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 266.8 $ 252.0
Short-term debt 186.3 215.2
Advance billings and customer deposits 64.4 60.9
Accrued compensated absences 33.3 31.9
Other current liabilities 106.8 107.0
- --------------------------------------------------------------------------------
Total Current Liabilities 657.6 667.0
Long-term debt 1,156.9 1,169.7
Accrued postretirement benefit obligation 267.0 288.9
Unamortized investment tax credits 14.0 15.5
Other liabilities and deferred credits 78.2 66.9
- --------------------------------------------------------------------------------
Total Liabilities 2,173.7 2,208.0
- --------------------------------------------------------------------------------
Common stock; $1.00 par value; 300,000,000
shares authorized; 68,896,854 and
68,407,669 issued, respectively 68.9 68.4
Proceeds in excess of par value 622.1 602.8
Retained earnings (deficit) 26.8 (55.7)
Treasury stock; at cost, 2,230,586
and 2,758,512 shares, respectively (84.7) (104.7)
Unearned compensation related to ESOP (35.9) (47.8)
- --------------------------------------------------------------------------------
Total Shareholders' Equity 597.2 463.0
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 2,770.9 $ 2,671.0
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 17
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<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, 1995 67,264,435 $ 67.3 $ 677.8 $ 381.8 $(104.7) $(69.3) $ 952.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (518.3) (518.3)
Common stock issued, at market:
Dividend reinvestment plan 466,498 .5 15.4 15.9
Savings and incentive plans 150,226 .1 4.7 4.8
Dividends declared ($1.76 per share) (114.2) (114.2)
Reduction of ESOP debt 11.0 11.0
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.2 1.2
ESOP earned compensation
accrual (.4) (.4)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 67,881,159 67.9 697.9 (249.5) (104.7) (58.7) 352.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 192.8 192.8
Common stock issued, at market:
Dividend reinvestment plan 367,183 .4 14.3 14.7
Savings and incentive plans 159,327 .1 5.8 5.9
Dividends declared ($1.76 per share) (115.2) (115.2)
Reduction of ESOP debt 12.1 12.1
Tax benefit of dividends declared
on unallocated shares held
in ESOP 1.0 1.0
ESOP earned compensation
accrual (1.2) (1.2)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 68,407,669 68.4 602.8 (55.7) (104.7) (47.8) 463.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 193.8 193.8
Common stock issued, at market:
Dividend reinvestment plan 190,928 .2 6.9 7.1
Savings and incentive plans 298,257 .3 10.9 11.2
Dividends declared ($1.76 per share) (116.5) (116.5)
Reduction of ESOP debt 13.2 13.2
Acquisition of Woodbury Telephone 1.0 4.5 20.0 25.5
Tax benefit of dividends declared
on unallocated shares held
in ESOP .7 .7
ESOP earned compensation
accrual (1.3) (1.3)
Other .5 .5
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 68,896,854 $ 68.9 $ 622.1 $ 26.8 $(84.7) $(35.9) $597.2
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18 SNET Annual Report
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions, For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 193.8 $ 192.8 $ (518.3)
Tax benefit of dividends on shares
held in ESOP .7 1.0 1.2
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 379.1 356.1 346.0
Extraordinary charge, net of tax 3.7 -- 687.1
Provision for uncollectible accounts 43.4 44.4 25.9
Restructuring payments (15.0) (110.6) (89.1)
Decrease in deferred income taxes 9.2 22.2 30.7
Decrease in investment tax credits (1.5) (2.1) (6.9)
Changes in operating assets and
liabilities, net (8.1) (30.3) (34.0)
Other, net 10.7 3.9 --
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 616.0 477.4 442.6
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash expended for capital additions (472.4) (373.8) (357.4)
Purchase of cellular properties -- -- (455.6)
Proceeds from asset sales 19.9 10.8 74.0
Other, net 7.6 16.6 16.5
- --------------------------------------------------------------------------------
Net Cash Used by Investing Activities (444.9) (346.4) (722.5)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt 100.0 -- 300.0
Repayments of long-term debt (94.8) (34.9) (108.3)
Cash dividends paid (102.4) (100.2) (98.0)
Net (payments) proceeds of commercial
paper (57.3) 2.0 192.9
Other, net (13.3) -- (2.3)
- --------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing
Activities (167.8) (133.1) 284.3
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and
Temporary Cash Investments 3.3 (2.1) 4.4
Cash and temporary cash investments
at beginning of year 9.0 11.1 6.7
- --------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Year $ 12.3 $ 9.0 $ 11.1
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
SNET Annual Report 19
<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") have been prepared in
conformity with generally accepted accounting principles ("GAAP"). Effective
January 1, 1996, the Corporation's telephone operating subsidiary, The Southern
New England Telephone Company ("Telephone Company"), discontinued using
Statement of Financial Accounting Standard ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation" [see Note 3].
The consolidated financial statements include the accounts of the
Corporation, all wholly-owned subsidiaries and partnerships in which the
Corporation effectively has control. All significant intercompany transactions
and accounts have been eliminated.
The Corporation derives substantially all of its revenues from the
telecommunications service industry by providing wireline, wireless and
information and entertainment services, including local, national and
international communications; network services; mobile communications; cable
television and internet; and advertising. The Corporation's operations and
customers are located primarily in Connecticut. In addition, its wireless
operations cover Rhode Island and portions of Massachusetts.
As appropriate, all periods presented have been reclassified to conform to
the current year presentation.
USE OF ESTIMATES The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for depreciation, taxes, employee benefits, allowance
for uncollectible accounts receivable, restructuring reserves and contingencies,
among others.
CASH AND TEMPORARY CASH INVESTMENTS Cash and temporary cash investments include
all highly liquid investments, with original maturities of three months or less.
The Corporation records payments made by draft as accounts payable until the
banks honoring the drafts have presented them for payment. At December 31, 1997
and 1996, accounts payable included drafts outstanding of $28.8 and $41.4,
respectively.
MATERIALS, SUPPLIES AND INVENTORIES Materials and supplies, which are carried at
original cost, are primarily for the construction and maintenance of telephone
plant. Inventories, principally telephone sets, wireless equipment and telephone
systems, are carried at the lower of weighted average cost or market value.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost.
Depreciation is calculated on telephone plant using either the equal life group
straight-line depreciation method or the composite vintage group method.
Property and equipment other than telephone plant is depreciated primarily using
the straight-line method.
Effective January 1, 1996, as a result of the discontinuance of SFAS No.
71, the Corporation is using estimated useful lives that are shorter than the
economic lives historically prescribed by regulators. A comparison of average
asset lives before and after the discontinuance of SFAS No. 71, for the most
significantly affected categories of telephone plant, is as follows:
Asset Category Before After
- --------------------------------------------------------------------------------
Digital Switch 17 10.5
Digital Circuit 11.5 8.2
Conduit 55 55
Copper 22-26 10.5-16
Fiber 32-40 25
- --------------------------------------------------------------------------------
Under the composite group method, the cost of depreciable telephone plant
sold or retired, net of removal costs and salvage (i.e., gains or losses), is
charged to accumulated depreciation. When depreciable property and equipment
other than telephone plant are sold or retired, the resulting gain or loss is
recognized currently as an element of income. All long-lived assets are reviewed
for impairment whenever events or changes in circumstance indicate that the
carrying amount may not be recoverable, and any necessary adjustment is made.
Replacements, renewals and betterments that materially increase an asset's
useful or remaining life are capitalized. Minor replacements and all repairs and
maintenance are charged to expense.
INTANGIBLE ASSETS Intangible assets consist primarily of cellular licenses,
customer lists and goodwill resulting from the cellular acquisitions completed
in 1995 and goodwill resulting from the Woodbury Telephone Company ("Woodbury")
acquisition completed in 1997. The intangible assets are stated at cost and are
being amortized using the straight-line method over periods ranging from 5 to 40
years. Accumulated amortization
20 SNET Annual Report
<PAGE>
was $44.8 and $27.6 as of December 31, 1997 and 1996, respectively. Intangible
assets are reviewed for impairment whenever events or changes in circumstance
indicate that the carrying amount may not be recoverable, and any necessary
adjustment is made.
LEASE NOTES RECEIVABLE Direct-financing and leveraged lease contracts are
accounted for by recording the total minimum lease payments receivable, plus the
estimated residual value, less the unearned lease income and, for leveraged
leases, less the associated aggregate non-recourse debt obligation. The unearned
lease income for direct-financing leases represents the excess of total minimum
lease payments, plus estimated residual value expected to be realized, over the
cost of the related equipment. For leveraged leases, the unearned income
reflects the net positive cash flow to be generated from the lease.
EMPLOYEE STOCK OWNERSHIP PLAN The Corporation accounts for its Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position ("SOP") 76-3,
as amended. Accordingly, compensation expense is measured as the cost of shares
allocated from the trust, plus the amount required to purchase any additional
shares allocated to employee accounts, less a percentage of dividends received
by the plan. Dividends on stock held by the ESOP are recorded as a reduction of
retained earnings, and all ESOP shares are treated as outstanding for earnings
per share calculations. Debt of the ESOP that has been guaranteed by the
Corporation is recorded as long-term debt and as a reduction of shareholders'
equity. As the ESOP repays the debt, a corresponding reduction in long-term debt
and an increase in shareholders' equity is recorded.
REVENUE RECOGNITION Revenues are recognized when earned regardless of the period
in which billed. Revenues for directory advertising are recognized over the life
of the related directory, normally one year.
CAPITALIZED INTEREST COST The Corporation accounts for capitalized interest in
accordance with SFAS No. 34, "Capitalization of Interest Cost." Upon the
discontinuance of SFAS No. 71, effective January 1, 1996, the Telephone Company
reports capitalized interest as a cost of telephone plant and a reduction in
interest expense, in accordance with SFAS No. 34. Prior to the discontinuance of
SFAS No. 71, the Telephone Company included in its telephone plant accounts an
imputed cost of debt and equity for funds used during the construction of
telephone plant.
ADVERTISING COSTS Costs for advertising products and services or corporate image
are expensed as incurred.
COMPUTER SOFTWARE COSTS The Corporation capitalizes initial operating systems
for central office switching equipment. Right-to-use fees, additions, upgrades
and modifications to operating software programs, all applications and computer
software acquired or developed for internal use are expensed. SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," was issued on March 4, 1998. This SOP requires the capitalization
of certain costs of computer software developed or obtained for internal use and
is effective for financial statements for fiscal years beginning after December
15, 1998.
INCOME TAXES The Corporation files a consolidated federal income tax return and,
where allowable, combined state income tax returns.
The Corporation records income taxes under SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are determined based on all
temporary differences between the financial statement and tax bases of assets
and liabilities using the currently enacted rates. Additionally, the Corporation
will recognize deferred tax assets if it is more likely than not that the
related benefit will be realized.
Investment tax credits realized in prior years by the Telephone Company are
being amortized as a reduction to the provision for income taxes over the life
of the related plant.
EARNINGS PER SHARE Effective December 31, 1997, the Corporation adopted SFAS No.
128, "Earnings per Share." Under SFAS No. 128, "basic" earnings per share is
computed by dividing income by the weighted average number of actual common
shares outstanding during the period. In order to compute "diluted" earnings per
share, the weighted average number of common shares is increased by the effect
of all potential common shares outstanding during the period. As required by
SFAS No. 128, all periods presented have been restated to conform to the
provisions of the new standard.
For the computation of diluted earnings per share, the weighted average
number of common shares outstanding has been adjusted for the effects of the
Corporation's stock options as follows:
In Thousands,
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Weighted average shares
outstanding 66,156 65,437 64,871
Stock options, net 166 167 32
- --------------------------------------------------------------------------------
Weighted average shares
outstanding assuming dilution 66,322 65,604 64,903
- --------------------------------------------------------------------------------
Stock options of 218 in 1997, 156 in 1996 and 391 in 1995, were not assumed
exercised because they were antidilutive in the periods presented.
NOTE 2: MERGER, ACQUISITION AND SALE OF ASSETS
On January 4, 1998, the Corporation and SBC Communications Inc. ("SBC") approved
a definitive merger
SNET Annual Report 21
<PAGE>
agreement ("Agreement") whereby the Corporation will become a wholly-owned
subsidiary of SBC. Under the original terms of the Agreement, each share of the
Corporation's common stock was to be exchanged for 0.8784 shares of SBC common
stock. On January 30, 1998, SBC announced a two-for-one stock split, which
modified the exchange ratio to 1.7568. In addition, the Agreement does not
require any changes to the Corporation's quarterly dividend prior to closing.
The transaction is intended to be accounted for as a pooling-of-interests
and as a tax-free reorganization under the applicable provisions of the Internal
Revenue Code. The merger has been reviewed by the U.S. Department of Justice and
must still be approved by the Corporation's shareholders, the Department of
Public Utility Control ("DPUC") and the Federal Communications Commission
("FCC"). The Corporation is currently authorized to provide interexchange
services in 46 states. For the majority of these states these authorizations
have been utilized solely to provide calling card services to Connecticut-based
customers traveling in the respective states. The Corporation does, however,
provide long-distance service to a small number of customers in states where SBC
is an Incumbent Local Exchange Carrier ("ILEC"). The Corporation may be required
to modify or withdraw its interexchange authorizations in the states where SBC
is an ILEC. In addition, authorizations may be required from a number of other
states to allow the Corporation to transfer its existing long-distance
authorizations to SBC. Once the necessary approvals are obtained, the merger is
expected to close by December 31, 1998.
On July 30, 1997, the Corporation completed its acquisition of Woodbury by
issuing approximately 528,000 shares of the Corporation's treasury stock for the
remaining 63.5% of Woodbury's common stock not formerly held by the Corporation.
The total cost of completing the acquisition was $30.1, which includes the
assumption of $9.0 in long-term debt. Woodbury provides local exchange telephone
services, intrastate toll services and access to long-distance telephone
services in a number of central Connecticut towns. The acquisition was accounted
for under the purchase method and, accordingly, resulted in goodwill of $11.5
which is being amortized on a straight-line method over 15 years. Woodbury's
results have been included in the consolidated financial statements since the
date of acquisition. Had the acquisition taken place at the beginning of 1996,
consolidated revenues and sales, income before extraordinary charge, net income
and earnings per share would not have been materially different from the amounts
reported for 1997 and 1996.
In July 1995, the Corporation purchased from Bell Atlantic Corporation and
Richmond Telephone Company, for approximately $456, certain cellular properties
in Rhode Island and Massachusetts and an increased interest in Springwich
Cellular Limited Partnership ("Springwich"). The acquisitions were accounted for
under the purchase method and, accordingly, the operating results of the
cellular properties and the increased interest in Springwich were included in
the consolidated financial statements subsequent to the acquisition date. The
excess of the purchase price over the estimated fair value of the net assets
acquired, approximately $24, was assigned to goodwill and is being amortized on
a straight-line method over 15 years. The cellular acquisitions were financed
with approximately $456 of short-term debt. Short-term debt of approximately
$300 was replaced with medium-term notes in the third quarter of 1995.
NOTE 3: DISCONTINUANCE OF SFAS NO. 71
In the fourth quarter of 1995, the Telephone Company determined it was no longer
eligible for application of SFAS No. 71, which specifies accounting standards
required for public utilities and certain other regulated companies. Effective
January 1, 1996, the Telephone Company began following accounting principles
which are more appropriate for a competitive environment. This determination was
made based on the significant changes in technology and the increase in
telecommunications competition in Connecticut brought about by legislative and
regulatory policy changes. This accounting change is for financial reporting
purposes only and does not affect the Telephone Company's accounting and
reporting for regulatory purposes. As a result of the discontinued use of SFAS
No. 71, in accordance with the provisions of SFAS No. 101, "Accounting for the
Discontinuance of Application of FASB Statement No. 71," the Corporation
recorded a non-cash, extraordinary charge of $687.1, or $10.59 per share, for
both basic and diluted earnings per share, net of applicable tax benefits of
$515.5, in the fourth quarter of 1995.
The following table is a summary of the extraordinary charge for 1995:
Before-tax After-tax
- --------------------------------------------------------------------------------
Adjustment to net telephone plant $ (1,178.0) $ (703.9)
Elimination of net regulatory assets (24.6) (14.3)
Tax-related net regulatory liabilities -- 20.1
Accelerated amortization of
investment tax credits -- 11.0
- --------------------------------------------------------------------------------
Total Non-cash, Extraordinary Charge $ (1,202.6) $ (687.1)
- --------------------------------------------------------------------------------
The adjustment of $1,178.0 to net telephone plant was necessary since
estimated useful lives and depreciation methods historically prescribed by
regulators did not reflect the rapid pace of technological development and
differed significantly from those economic useful lives used by unregulated
companies. Plant balances were adjusted by increasing the accumulated
depreciation reserve. The increase to the accumulated depreciation reserve was
determined by a discounted cash flow analysis which considered technological
replacement and the estimated impact of
22 SNET Annual Report
<PAGE>
future competition. To support this analysis, a depreciation reserve study was
also performed that identified, by asset categories, inadequate accumulated
depreciation levels (i.e., deficiencies) that had developed over time.
The discontinuance of SFAS No. 71 also required the Corporation to
eliminate from its consolidated balance sheet the effects of any actions of
regulators that had been recognized as assets and liabilities pursuant to SFAS
No. 71, but would not have been recognized as assets and liabilities by
unregulated companies. The elimination of net regulatory assets relates
principally to vacation pay costs and gross earnings tax which were being
amortized as they were recognized in the ratemaking process.
Additionally, upon the discontinuance of SFAS No. 71, the tax-related
regulatory assets and liabilities were eliminated and the related deferred tax
balances were adjusted to reflect application of SFAS No. 109, consistent with
other unregulated companies.
As asset lives were shortened, the related investment tax credits
associated with those assets were also adjusted for the shortened lives and the
result ($11.0) was included in the extraordinary charge as a credit to income,
net of associated deferred income taxes.
NOTE 4: EMPLOYEE BENEFITS
PENSION PLANS The Corporation sponsors several non-contributory, defined benefit
pension plans: one for management employees and one for bargaining-unit
employees; and one supplementary non-qualified, unfunded plan for all employees.
The supplementary non-qualified plan provides a benefit equal to any pension
amount above which would otherwise be payable under the defined benefit pension
plans in the absence of Internal Revenue Code limitations. Prior to July 1,
1995, benefits for bargaining-unit employees were based on years of service and
pay during 1987 to 1991 as well as a cash balance component. Prior to 1996,
benefits for management employees were based on an adjusted career average pay
plan. The bargaining-unit and management pension plans were converted to cash
balance plans effective July 1, 1995 and January 1, 1996, respectively.
Accordingly, pension benefits are determined as a single account balance and
grow each year with pay and interest credits. Prior to the conversion to the
cash balance plans, the benefits for the employees' supplementary plans were
based on years of service and average eligible pay. Effective with the
conversion to the cash balance plans, the benefits are based on pay and interest
credits. A supplementary non-qualified, unfunded plan for non-employee directors
was terminated in 1996 with pension benefits payable only to current and retired
directors and with the amount of accrued pension benefits being frozen.
Funding of the management and bargaining-unit plans is achieved through
irrevocable contributions made to a trust fund. Plan assets consist primarily of
listed stocks, corporate and governmental debt and real estate. The
Corporation's policy is to fund the pension cost for these plans in conformity
with the Employee Retirement Income Security Act of 1974 using the aggregate
cost method. For purposes of determining contributions, the assumed investment
earnings rate on plan assets was 9.5% in 1997 and declines to 7.5% in 1999.
Pension cost (income) for all plans, computed using the projected unit
credit actuarial method, includes the following components:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 21.9 $ 20.2 $ 22.1
Interest cost on projected
benefit obligation 91.8 96.3 113.5
Amortizations and deferrals, net 225.9 65.8 249.6
Actual return on plan assets (338.7) (177.6) (393.3)
- --------------------------------------------------------------------------------
Net Pension Cost (Income)
Recorded to Expense .9 4.7 (8.1)
- --------------------------------------------------------------------------------
Settlement gain -- (76.1) (76.0)
Costs relating to special
termination benefits -- -- 137.5
Curtailment loss -- 10.8 16.8
- --------------------------------------------------------------------------------
Net (Settlement Gain)
Curtailment Loss -- (65.3) 78.3
- --------------------------------------------------------------------------------
Net Pension Cost (Income) $ .9 $ (60.6) $ 70.2
- --------------------------------------------------------------------------------
The 1997 decrease in net pension cost (income) recorded to expense was due
to strong investment performance and a change in the discount rate. The 1996 net
settlement gain and the 1995 net curtailment loss were associated with the
severance programs and were recorded to the restructuring reserve in the
respective years [see Note 6]. The 1996 increase was due primarily to lower
returns on plan assets, reflecting a combination of a lower asset base and a
generally weaker capital market return when compared with 1995.
The following table sets forth the plans' funded status:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Actuarial Present Value of Accumulated
Benefit Obligation, including vested
benefits of $1,336.9 and $1,253.3,
respectively $ 1,348.6 $ 1,289.3
- --------------------------------------------------------------------------------
Plan assets at fair value $ 1,905.9 $ 1,690.3
Actuarial present value of projected
benefit obligation (1,385.2) (1,337.3)
- --------------------------------------------------------------------------------
Assets in Excess of Projected
Benefit Obligation 520.7 353.0
Unrecognized prior service costs 116.2 129.2
Unrecognized transition asset (84.0) (98.4)
Unrecognized net gain (570.0) (401.3)
Adjustment required to recognize
minimum liability (4.7) (3.2)
- --------------------------------------------------------------------------------
Accrued Pension Cost $ (21.8) $ (20.7)
- --------------------------------------------------------------------------------
SNET Annual Report 23
<PAGE>
Assumptions used to calculate the plans' funded status:
At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate for projected
benefit obligation 7.0% 7.5% 7.0%
Expected rate of increase in future
management compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets 8.0% 8.0% 8.0%
- --------------------------------------------------------------------------------
The Corporation periodically amends the benefit formulas under its pension
plans. Accordingly, pension cost has been determined in such a manner as to
anticipate that modifications to the pension plans would continue in the future.
POSTRETIREMENT HEALTH CARE BENEFITS The Corporation provides health care and
life insurance benefits for retired employees. Substantially all of the
Corporation's employees may become eligible for these benefits if they meet
certain age and service requirements. In addition, an employee's spouse and
dependents may be eligible for health care benefits. Effective July 1, 1996, all
bargaining-unit employees who retire after December 31, 1989 and all management
employees who retire after December 31, 1991 may have to share with the
Corporation the premium costs of postretirement health care benefits if these
costs exceed certain limits.
The Corporation funds trusts for postretirement health insurance benefits
using Voluntary Employee Beneficiary Association. Plan assets consist primarily
of investments in domestic corporate equity and government and corporate debt
securities.
The Corporation's postretirement benefit cost includes the following
components:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 4.1 $ 4.4 $ 4.4
Interest cost of accumulated
benefit obligation 36.1 37.6 33.4
Amortizations and deferrals, net 41.2 19.8 21.0
Actual return on plan assets (56.4) (30.9) (31.5)
- --------------------------------------------------------------------------------
Net Postretirement Benefit Cost
Recorded to Expense 25.0 30.9 27.3
- --------------------------------------------------------------------------------
Costs relating to special
termination benefits -- -- 11.0
Curtailment loss -- .2 12.9
- --------------------------------------------------------------------------------
Net Curtailment Loss -- .2 23.9
- --------------------------------------------------------------------------------
Net Postretirement Benefit Cost $ 25.0 $ 31.1 $ 51.2
- --------------------------------------------------------------------------------
The 1996 and 1995 net curtailment losses were associated with the severance
programs and were recorded to the restructuring reserve in the respective years
[see Note 6].
The following table sets forth the plans' funded status:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(423.9) $(458.6)
Fully eligible active plan participants (27.4) (15.5)
Other active plan participants (74.1) (66.3)
- --------------------------------------------------------------------------------
Total Accumulated Postretirement
Benefit Obligation (525.4) (540.4)
Plan assets at fair value 292.8 229.4
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets (232.6) (311.0)
Unrecognized net gain (65.6) (11.9)
Unrecognized prior service cost 10.8 13.6
- --------------------------------------------------------------------------------
Accrued Postretirement
Benefit Obligation $(287.4) $(309.3)
- --------------------------------------------------------------------------------
Assumptions used to calculate the plans' funded status:
At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate for projected
benefit obligation 7.0% 7.5% 7.0%
Expected rate of increase in future
compensation levels 4.5% 4.5% 4.5%
Expected long-term rate of
return on plan assets:
Management health trust 7.0% 7.0% 7.0%
Bargaining-unit health trust 7.5% 7.5% 7.5%
Retiree life insurance trust 7.5% 7.5% 7.5%
- --------------------------------------------------------------------------------
The assumed health care cost trend rate used to measure the expected cost
of these benefits for 1997 was 5.5% and declines to 4.5% by 2001. A one
percentage point increase in the assumed health care cost trend rate would have
increased the estimated aggregate service and interest cost components of the
1997 net postretirement benefit cost by approximately $2 and the accrued
postretirement benefit obligation by approximately $21 as of December 31, 1997.
SAVINGS AND STOCK OWNERSHIP PLANS The Corporation sponsors employee savings
plans under section 401(k) of the Internal Revenue Code. The plans cover
substantially all employees. As part of the savings plans, the Corporation has
established an Employee Stock Ownership Plan ("ESOP"). The Corporation provides
matching contributions based on qualified employee contributions through its
ESOP plan. Under the ESOP, the Corporation's matching contributions are invested
entirely in common stock of the Corporation and are held by the ESOP.
In January 1990, the Corporation loaned the ESOP $10.0 and in February
1990, the ESOP borrowed an additional $110.0, which the Corporation guaranteed,
through a third party. The proceeds of the $10.0 loan were used to acquire
shares of the Corporation's common stock through open market purchases. The
proceeds of the $110.0 loan were used to purchase shares of both unissued common
stock and treasury stock from the Corporation. All shares purchased by the ESOP
were originally pledged as collateral for its debt. The Corporation periodically
makes cash payments to
24 SNET Annual Report
<PAGE>
the ESOP that, together with dividends received on shares held by the ESOP, are
used to make interest and principal payments on both loans. As these payments
are made, shares are released from collateral and made available for
distribution to employees' accounts, based on the proportion of debt service
paid in the year.
ESOP expense and ESOP trust activity are as follows:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Compensation expense(1) $ 12.7 $ 11.0 $ 14.7
Interest expense incurred(1) 3.4 4.4 5.1
Interest income earned (.4) (.5) (.6)
- --------------------------------------------------------------------------------
Total Expense $ 15.7 $ 14.9 $ 19.2
- --------------------------------------------------------------------------------
Dividends Used for Debt Service $ 4.6 $ 5.1 $ 5.3
Cash Contributions Used for
Debt Service $ 13.7 $ 13.5 $ 13.3
- --------------------------------------------------------------------------------
(1) Net of applicable dividends used for debt service.
ESOP shares outstanding are as follows:
In Thousands, At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Allocated shares 1,602.1 1,389.1 1,508.0
Unreleased shares 904.8 1,206.4 1,301.5
- --------------------------------------------------------------------------------
Total ESOP Shares 2,506.9 2,595.5 2,809.5
- --------------------------------------------------------------------------------
SEPARATION OFFERS In April 1995, the Corporation ratified a contract with the
Connecticut Union of Telephone Workers, Inc. which included a voluntary
early-out offer ("EOO"). The EOO provided enhanced pension benefits by adding
six years to the age and to the length of service of employees for purposes of
determining pension and postretirement health care benefits eligibility. The
employees also had the option to select a pension distribution method (i.e.,
lump-sum, monthly pension or a combination of both) at the time of separation.
The EOO was available to the bargaining-unit work force during July 1995 and
approximately 2,700 employees, or 40.7% of the total bargaining-unit work force,
accepted the offer and left the Corporation through June 1996. In addition,
approximately 500 management employees accepted a severance plan with enhanced
benefits during 1996. The 1996 net settlement gains and the 1995 net curtailment
losses related to these separation offers were recorded to the restructuring
reserve in the respective years [see Note 6].
NOTE 5: INCOME TAXES
Income tax expense includes the following components:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
FEDERAL
Current $ 84.1 $ 79.4 $ 62.4
Deferred 15.8 16.1 27.4
Investment tax credits, net (1.5) (2.1) (6.9)
- --------------------------------------------------------------------------------
Total Federal 98.4 93.4 82.9
- --------------------------------------------------------------------------------
STATE
Current 16.0 9.8 17.3
Deferred 4.1 4.4 9.4
- --------------------------------------------------------------------------------
Total State 20.1 14.2 26.7
- --------------------------------------------------------------------------------
Total Income Taxes $ 118.5 $ 107.6 $ 109.6
- --------------------------------------------------------------------------------
In April 1995, new Connecticut state income tax rates were enacted to
accelerate the reduction of current rates. The 1997 Connecticut state income tax
rate of 10.5% will gradually decrease to 7.5% in 2000.
A reconciliation between income taxes and taxes computed by applying the
statutory federal income tax rate to pre-tax income is as follows:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
- --------------------------------------------------------------------------------
Federal income taxes at
statutory rate $ 110.6 $ 105.1 $ 97.4
State income taxes, net of federal
income tax effect 13.0 9.2 17.4
Depreciation of telephone plant
construction cost previously
deducted for tax purposes(1) -- -- 5.1
Amortization of investment
tax credits(1) (1.5) (2.1) (6.9)
Other differences, net (3.6) (4.6) (3.4)
- --------------------------------------------------------------------------------
Income Taxes $ 118.5 $ 107.6 $ 109.6
- --------------------------------------------------------------------------------
Effective Tax Rate 37.5% 35.8% 39.4%
- --------------------------------------------------------------------------------
(1) Telephone Company only.
Consolidated deferred income tax assets (liabilities) are comprised of the
following:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Postretirement benefits other
than pensions $ 120.1 $ 124.8
Software 24.7 13.9
Allowance for uncollectibles 15.0 11.9
Other 11.1 10.6
Compensated absences 9.3 13.1
Pension 7.8 9.2
Restructuring charge 2.8 12.8
Depreciation and amortization (31.1) (29.3)
Leveraged leases (30.4) (28.3)
Valuation allowance (1.9) (2.1)
- --------------------------------------------------------------------------------
Deferred Income Taxes $ 127.4 $ 136.6
- --------------------------------------------------------------------------------
SNET Annual Report 25
<PAGE>
VALUATION ALLOWANCE The 1997 decrease in the valuation allowance was due
primarily to the reduction in state loss carryovers. The allowance will continue
to be evaluated based on evidence of realization of all deferred tax assets.
NOTE 6: RESTRUCTURING CHARGE
In December 1993, the Corporation recorded a restructuring charge of $355.0,
$204.2 after-tax or $3.21 for both basic and diluted earnings per share, to
provide for a comprehensive restructuring program. The charge included: $170.0
for employee separation costs; $145.0 for process and systems reengineering; and
$40.0 for exit and other costs.
Costs incurred for employee separations included payments for severance,
unused vacation and health care continuation, as well as non-cash net pension
and postretirement settlement gains of $65.1 in 1996 and curtailment losses of
$102.2 in 1995. Process and systems reengineering costs included incremental
costs incurred in connection with the execution of numerous reengineering
programs. Exit and other costs included expenses related to the reduction of
overall corporate space requirements.
A summary of costs incurred under the restructuring program is as follows:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Employee separation costs (gains) $ 5.0 $(45.1) $ 111.2
Process and systems reengineering 2.8 83.1 74.2
Exit and other costs 7.2 7.5 2.5
- --------------------------------------------------------------------------------
Total Costs Incurred $ 15.0 $ 45.5 $ 187.9
- --------------------------------------------------------------------------------
Total employee separations under the restructuring program approximated
4,300 employees utilizing the EOO and severance plans: 970 employees through the
end of 1994; 2,195 employees in 1995; and 1,135 employees in 1996. Total
employee separations were substantially offset by an increase in provisional
employees to support greater demand for services and expanding businesses. The
hiring of provisional employees also provides flexible work force levels as
business needs change in the future.
The Telephone Company has implemented network operations, customer service,
repair and support programs and developed new processes to reduce the costs of
business while improving quality and customer service. These new integrated
processes have enabled the Telephone Company to increase its responsiveness to
customer-specific needs and to eliminate certain labor-intensive interfaces
between the existing systems.
As of December 31, 1997, the restructuring reserve balance of $6.5 is
adequate for the future residual costs, primarily 1998's exit costs relating to
the delayed reduction of overall corporate space requirements.
NOTE 7: SHORT-TERM DEBT
Short-term debt, which includes commercial paper used to meet temporary cash
needs and long-term debt maturing within one year, consists of the following:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Commercial paper $ 144.6 $ 201.9
Current maturities of long-term debt 41.7 13.3
- --------------------------------------------------------------------------------
Total Short-term Debt $ 186.3 $ 215.2
- --------------------------------------------------------------------------------
Weighted Average Interest Rate
on Commercial Paper at Year-End 5.9% 5.8%
- --------------------------------------------------------------------------------
The Corporation maintained bank lines of credit to facilitate the issuance
of commercial paper. As part of these credit facilities, the Corporation has
obtained a contractual commitment to $170.0 in lines of credit provided by a
syndicate of banks. At December 31, 1997, the entire line remained available.
The annual commitment fee is currently .045% of the total lines of credit.
NOTE 8: LONG-TERM DEBT
The components of long-term debt are as follows:
At December 31, Maturing 1997 1996
- --------------------------------------------------------------------------------
Unsecured notes:
6.13%-8.00% 1998-2007 $ 820.0 $ 720.0
7.25%-8.70% 2031-2033 245.0 325.0
Guaranteed ESOP:
9.35% 1997-2000 44.2 56.4
Debentures:
4.38% 2001 45.0 45.0
Mortgage notes:
9.00%-9.90% 1997-2007 25.5 17.2
Bank notes:
10.50% 1997-2009 23.9 24.4
- --------------------------------------------------------------------------------
Total Long-term Debt 1,203.6 1,188.0
Unamortized discount
and premium, net (5.1) (5.1)
Capital lease obligations .1 .1
Current maturities (41.7) (13.3)
- --------------------------------------------------------------------------------
Long-term Debt $1,156.9 $1,169.7
- --------------------------------------------------------------------------------
Scheduled maturities of total long-term debt include $41.7 in 1998, $17.4
in 1999, $125.6 in 2000, $66.7 in 2001, $101.9 in 2002 and $850.3 thereafter.
On February 4, 1997, the Corporation issued $100.0 of 6.50% medium-term
notes due 2002. The issuance replaced a portion of short-term debt related to
the cellular acquisitions in 1995.
On February 18, 1997, the Corporation redeemed $80.0 of 8.70% medium-term
notes due 2031, by issuing short-term debt. The early extinguishment of debt
resulted in an extraordinary charge of $3.7, net of tax benefits of $2.7, or
$.06 per share, for both basic and diluted earnings per share.
At December 31, 1997, the Corporation and the Telephone Company had
remaining securities, registered with the Securities and Exchange Commission, to
issue up to $125.0 and $95.0, respectively, of medium-term unsecured notes
through shelf registrations.
26 SNET Annual Report
<PAGE>
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Corporation has entered into both operating and capital leases for
facilities and equipment used in its operations. Rental expense under operating
leases was $19.8, $21.0 and $23.7 for 1997, 1996 and 1995, respectively. Future
minimum rental commitments under third-party, noncancelable operating leases
include $14.2 in 1998, $13.1 in 1999, $11.7 in 2000, $5.7 in 2001, $4.5 in 2002
and $10.5 thereafter, for a total of $59.7. Capital leases were not significant.
The Corporation expects total capital expenditures of approximately $475
for additions to property, plant and equipment during 1998. In connection with
the capital program, the Corporation has made certain commitments for the
purchase of material and equipment.
In 1995, a U.S. District Court decision was issued in favor of the
Department of Labor against the Corporation and the Telephone Company. The
decision held that the Corporation and the Telephone Company violated certain
sections of the Fair Labor Standards Act and was liable for back wages and
liquidating damages. The Corporation and the Telephone Company appealed the
decision and on July 31, 1997, the Second Circuit Court of Appeals affirmed the
U.S. District Court's decision. As required by the Court's decision, in October
1997, the Corporation and the Telephone Company paid back wages, liquidating
damages and interest (from the date of the District Court's judgment) to the
employees involved in this action. In 1995, the Telephone Company recorded a
liability of $11.0 which was adequate to cover the cost of total damages for
this matter.
NOTE 10: FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which
it was practicable to estimate that value:
Cash and temporary cash investments The carrying amount approximates fair value
because of the short maturity of those instruments.
Long-term investments The fair value of equity investments was estimated based
on quoted market prices for those or similar investments.
Debt The carrying amount of the Corporation's short-term debt approximates fair
value because of the short maturity of those instruments. The fair value of
long-term debt (excluding capital leases) was estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Corporation for debt of the same remaining maturities.
The carrying amount and estimated fair value of the Corporation's financial
instruments are as follows:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Cash and Temporary
Cash Investments $ 12.3 $ 12.3 $ 9.0 $ 9.0
Long-term
Investments $ 2.9 $ 2.1 $ 4.1 $ 13.2
Debt $(1,343.1) $(1,371.5) $(1,384.8) $(1,381.0)
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Corporation to concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. The Corporation places its temporary cash
investments in short-term, high quality commercial paper which is rated at least
A-1 by Standard and Poor's and P-1 by Moody's Investors Services, Inc.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers in the Corporation's customer base.
NOTE 11: LEASE NOTES RECEIVABLE
Lease notes receivable include, on an investment basis, a portfolio of leveraged
and direct-financing leases. The gross investment in these leases has been
recorded on the consolidated balance sheet in leases and other assets.
Investments in leveraged leases are in a coal-fired, electric generating
facility and other equipment. The investment in direct-financing leases are in a
commercial aircraft and other equipment.
The components of the lease notes receivable are as follows:
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Direct- Direct-
Financing Leveraged Financing Leveraged
Leases Leases Leases Leases
- --------------------------------------------------------------------------------
Minimum rentals
receivable $ 58.9 $ 24.5 $ 61.7 $ 25.4
Unearned income (24.1) (12.9) (26.9) (14.0)
Estimated,
unguaranteed
residual value of
leased assets 10.3 30.6 10.3 30.6
Initial direct costs .2 -- .2 --
Allowance for losses (11.0) -- (11.0) --
- --------------------------------------------------------------------------------
Lease Notes
Receivable $ 34.3 42.2 $ 34.3 42.0
Deferred taxes arising
from leveraged leases (30.4) (28.3)
- --------------------------------------------------------------------------------
Net Investment in
Leveraged Leases $ 11.8 $ 13.7
- --------------------------------------------------------------------------------
Future minimum receipts under third-party direct-financing leases include
$5.4 in 1998, $4.8 in 1999, $3.1 in 2000, $3.8 in 2001, $3.8 in 2002 and $38.0
thereafter.
SNET Annual Report 27
<PAGE>
NOTE 12: SHAREHOLDERS' EQUITY
COMMON, PREFERRED AND PREFERENCE SHARES The Corporation is authorized to issue
up to 300,000,000 shares of common stock at a par value of $1.00 per share
("Common Stock") as well as 2,000,000 preferred shares at a par value of $50.00
per share and 50,000,000 preference shares at a par value of $1.00 per share. No
preferred or preference shares have been issued pursuant to these
authorizations.
DIVIDENDS DECLARED The dividends for 1997 and 1995 were declared out of retained
earnings, while the dividends for 1996 were declared out of proceeds in excess
of par value.
SHAREHOLDERS' RIGHTS PLAN On December 11, 1996, the Board of Directors approved
the 1997 shareholders' rights plan ("Rights Plan") which became effective
February 11, 1997 upon the expiration of the previous plan. Under the 1997
Rights Plan, each share of Common Stock has a purchase right that entitles the
holder to purchase 1/100 of a preference share (equivalent of one share of
Common Stock) at an exercise price of $180.00. The rights are not exercisable or
transferable apart from the Common Stock until a person or group has acquired,
or has made an offer for, 20% or more of the outstanding Common Stock. In the
event that a person or group acquires 20% or more of the outstanding Common
Stock, each outstanding right, other than those held by the 20% acquirer, is
entitled to purchase, at the exercise price of the rights, a number of shares of
Common Stock having a market value of two times the exercise price of the right.
The Board also may exchange the rights generally at an exchange ratio of one
share of Common Stock per right. The Rights Plan may be amended by the Board of
Directors to reduce the threshold at which the rights are triggered to not less
than 10% of the then outstanding Common Stock. Additionally, if the person or
group acquires the Corporation in a merger or other business combination
transaction, each right will entitle the owner to purchase common stock of the
acquirer having a market value of two times the exercise price of the right. The
rights are redeemable at one cent each prior to public announcement that a
person or group has acquired beneficial ownership of 20% or more of the
outstanding Common Stock. The rights expire on February 11, 2007. On January 4,
1998, the Board of Directors amended the Rights Plan to provide that the pending
merger with SBC would not invoke the provisions of the plan.
The Corporation sponsors a Dividend Reinvestment and Stock Purchase Plan
("DRISPP"). Effective July 1, 1997, the Corporation's policy of issuing new
shares was modified to have its agent begin purchasing shares on the open market
(when market conditions merit) to meet the needs of the DRISPP. Beginning with
the January 15, 1998 dividend, the Corporation resumed issuance of new shares to
meet the needs of the DRISPP.
NOTE 13: STOCK-BASED COMPENSATION PLANS
During 1997, the Corporation sponsored an employee stock option plan and a
restricted stock plan for non-employee directors. In prior years, the
Corporation also sponsored the SNET 1986 Stock Option Plan ("1986 Plan"). The
1986 Plan, which expired on June 30, 1996, provided stock options to certain key
employees at the discretion of a committee of the Board of Directors
("Committee").
The SNET 1995 Stock Incentive Plan ("1995 Plan") is a stock-based
compensation plan which enables the awarding of incentive compensation,
including stock options, to all employees at the discretion of the Board of
Directors or the Committee. Under both the 1986 Plan and the 1995 Plan, the
exercise price of each option may not be less than 100% of the fair market value
of the shares on the date of grant. All options are exercisable no earlier than
one year after the date of grant, with most options vesting ratably over two or
four years, and have a maximum life of ten years. Both the 1986 Plan and the
1995 Plan allow stock appreciation rights ("SARs") to be granted in tandem with
the related stock option. No SARs have been granted since 1992 and the
Corporation presently does not intend to grant additional SARs in the future.
The Corporation has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock-based compensation plans.
Accordingly, no compensation cost has been recognized for the plans. Had the
Corporation adopted the cost recognition method provided under SFAS No. 123,
"Accounting for Stock-Based Compensation," net income (loss) and earnings (loss)
per share would approximate the pro forma amounts below:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Net Income (Loss) $190.7 $189.4 $(518.9)
Basic Earnings (Loss)
Per Share $2.88 $2.90 $(8.00)
Diluted Earnings (Loss)
Per Share $2.87 $2.89 $(7.99)
- --------------------------------------------------------------------------------
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995.
The Black-Scholes option pricing model was used to estimate the options'
grant date fair value with the following assumptions: 20% volatility; risk free
interest rate ranging from 5.8% to 6.7%; dividends of $1.76 per share per year;
and an estimated period to exercise of three or five years. The weighted average
fair value of options granted during the year was $6.79, $7.85 and $6.13 in
1997, 1996 and 1995, respectively.
28 SNET Annual Report
<PAGE>
Information with respect to plan activity is as follows:
- --------------------------------------------------------------------------------
Options Shares
Available Under Average
for Grant Option SARs Price
- --------------------------------------------------------------------------------
Balance at 1/1/95 785,300 861,725 162,700 $33.25
Approved for grant 4,600,000 -- -- --
Granted (2,535,950) 2,535,950 -- $37.59
SARs exercised -- (41,475) (41,475) $28.44
Options exercised -- (15,775) -- $30.86
Canceled 34,500 (34,500) -- $33.15
- ---------------------------------------------------------------------
Balance at 12/31/95 2,883,850 3,305,925 121,225 $36.65
- ---------------------------------------------------------------------
1986 Plan unused (65,525) -- -- --
Granted (223,500) 223,500 -- $42.48
SARs exercised -- (66,975) (66,975) $32.60
Options exercised -- (53,625) -- $33.37
Canceled 364,725 (364,725) -- $38.04
- ---------------------------------------------------------------------
Balance at 12/31/96 2,959,550 3,044,100 54,250 $37.05
- ---------------------------------------------------------------------
1986 Plan unused (64,950) -- -- --
Granted (868,500) 868,500 -- $36.98
SARs exercised -- (22,400) (22,400) $31.33
Options exercised -- (222,149) -- $35.64
Canceled 214,150 (214,150) -- $37.39
- ---------------------------------------------------------------------
Balance at 12/31/97 2,240,250 3,453,901 31,850 $36.93
- --------------------------------------------------------------------------------
Options exercisable were 2,114,777, 1,334,388 and 403,850 at December 31,
1997, 1996 and 1995, respectively. The respective weighted average exercise
prices were $37.37, $36.72 and $33.67. All outstanding SARs were exercisable at
each year-end. All outstanding SARs as of January 4, 1998 were canceled.
The following table summarizes information with regard to stock options
outstanding and exercisable by ranges of exercise prices:
Weighted
Weighted Average
Average Remaining
Exercise Contractual
At December 31, 1997 Shares Price Life
- --------------------------------------------------------------------------------
Stock Options Outstanding:
$24.69 to $36.94 1,737,901 $34.71 7.5 years
$37.06 to $44.94 1,716,000 $39.19 8.2 years
- --------------------------------------------------------
$24.69 to $44.94 3,453,901 $36.93 7.8 years
- --------------------------------------------------------------------------------
Stock Options Exercisable:
$24.69 to $36.94 730,151 $34.09 --
$37.06 to $44.94 1,384,626 $39.11 --
- --------------------------------------------------------
$24.69 to $44.94 2,114,777 $37.37 --
- --------------------------------------------------------------------------------
The 1994 SNET Non-Employee Director Stock Plan ("1994 Plan"), which was
terminated upon ratification of the 1996 Non-Employee Director Stock Plan ("1996
Plan"), allowed each director to receive between 25% and 100% of their annual
retainer in shares of Common Stock. The 1996 Plan, approved on May 8, 1996,
provides each non-employee director with 300 shares of Common Stock in lieu of
cash compensation. A director may also elect to receive up to 100% of his or her
cash retainer in shares. All shares distributed have voting and dividend rights,
and are subject to restrictions on transferability. Upon granting of the shares,
compensation expense is recorded in the amount of the market value of the
shares.
A summary of restricted stock activity is as follows:
At December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Shares available for grant,
beginning of period 196,400 143,852 147,152
New shares approved
for issuance -- 200,000 --
1994 Plan unused -- (141,619) --
Shares granted (2,489) (5,833) (3,300)
- --------------------------------------------------------------------------------
Shares Available for Grant,
End of Period 193,911 196,400 143,852
- --------------------------------------------------------------------------------
Weighted Average Market
Value of Stock on Grant Date $ 37.41 $ 41.21 $ 35.02
Compensation Expense
Recorded for Restricted
Stock Grants $ .1 $ .2 $ .1
- --------------------------------------------------------------------------------
SNET Annual Report 29
<PAGE>
NOTE 14: SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL INCOME STATEMENT INFORMATION
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Advertising Expense $ 38.8 $ 42.1 $ 38.8
- --------------------------------------------------------------------------------
Depreciation and amortization:
Depreciation $351.7 $331.1 $328.1
Amortization 27.4 25.0 17.9
- --------------------------------------------------------------------------------
Total Depreciation and Amortization $379.1 $356.1 $346.0
- --------------------------------------------------------------------------------
Taxes other than income:
Property $ 48.1 $ 48.0 $ 43.7
Other 5.0 6.6 12.8
- --------------------------------------------------------------------------------
Total Taxes Other Than Income $ 53.1 $ 54.6 $ 56.5
- --------------------------------------------------------------------------------
Interest expense:
Long-term debt $ 80.9 $ 83.0 $ 74.7
Short-term debt 10.1 10.0 8.5
Capitalized interest (4.6) (7.2) --
Other 3.4 2.9 2.7
- --------------------------------------------------------------------------------
Total Interest Expense $ 89.8 $ 88.7 $ 85.9
- --------------------------------------------------------------------------------
SUPPLEMENTAL BALANCE SHEET INFORMATION
At December 31, 1997 1996
- --------------------------------------------------------------------------------
Materials, supplies and inventories:
Materials and supplies $ 14.7 $ 14.3
Inventories 15.1 13.1
- --------------------------------------------------------------------------------
Total Materials, Supplies and Inventories $ 29.8 $ 27.4
- --------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Telephone plant:
Land $ 16.5 $ 16.8
Buildings 398.4 386.4
Central office equipment 1,850.8 1,743.0
Outside plant facilities and equipment 1,798.4 1,732.4
Furniture and office equipment 255.5 310.0
Station equipment and connections 24.9 22.5
Plant under construction 85.5 98.0
Telecommunications property and
equipment 487.0 398.2
- --------------------------------------------------------------------------------
Total Property, Plant and Equipment,
at cost 4,917.0 4,707.3
Accumulated Depreciation (3,200.2) (3,110.3)
- --------------------------------------------------------------------------------
Total Property, Plant and Equipment, net $ 1,716.8 $ 1,597.0
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Interest Paid, net of amounts
capitalized $ 88.3 $ 89.2 $ 79.7
- --------------------------------------------------------------------------------
Income Taxes Paid $ 78.8 $ 84.0 $ 87.8
- --------------------------------------------------------------------------------
Changes in operating assets
and liabilities, net:(1)
Increase in accounts
receivable, net $(44.7) $(18.5) $(78.3)
Increase in materials, supplies
and inventories (1.8) (1.2) (.1)
Increase (decrease) in accounts
payable, accrued expenses
and compensated absences 16.6 (18.2) 65.0
Changes in other assets and
liabilities, net 21.8 7.6 (20.6)
- --------------------------------------------------------------------------------
Changes in Operating Assets and
Liabilities, net $ (8.1) $(30.3) $(34.0)
- --------------------------------------------------------------------------------
(1) Reflects the Corporation's acquisition of Woodbury, on July 30, 1997, in a
non-cash transaction [see Note 2].
NOTE 15: OPERATING CASH FLOW(1) (UNAUDITED)
The following financial data on the Corporation's product groups is not required
by generally accepted accounting principles and is provided for informational
purposes only:
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Wireline(2) $ 607.2 $ 564.8 $ 569.0
Wireless(3) 61.1 31.3 (10.8)
Information and Entertainment(4) 90.2 110.2 102.6
Other(5) 18.1 32.0 34.0
- --------------------------------------------------------------------------------
Total Operating Cash Flow $ 776.6 $ 738.3 $ 694.8
- --------------------------------------------------------------------------------
(1) Represents operating income before depreciation and amortization. Operating
cash flow is not a generally accepted accounting principle measurement.
(2) Includes Telephone Company's telecommunications operations, SNET
Diversified Group, Inc., SNET America, Inc. and Woodbury Telephone Company.
(3) Includes the wholesale and retail cellular operations, SNET Cellular, Inc.
and SNET Mobility, Inc., net of cellular intercompany amounts and its
paging operations.
(4) Includes publishing, internet and cable television operations.
(5) Includes SNET Real Estate, Inc. and holding company operations.
30 SNET Annual Report
<PAGE>
NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1st QTR 2nd QTR 3rd QTR 4th QTR Full Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Revenues and Sales $482.7 $501.6 $509.7 $528.3 $2,022.3
Operating Income $ 96.4 $ 98.5 $ 99.2 $103.4 $ 397.5
Income before extraordinary charge $ 46.1 $ 50.0 $ 49.1 $ 52.3 $ 197.5
Extraordinary charge [see Note 8] (3.7) -- -- (3.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 42.4 $ 50.0 $ 49.1 $ 52.3 $ 193.8
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income before extraordinary charge $ .70 $ .76 $ .74 $ .79 $ 2.99
Extraordinary charge (.06) -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ .64 $ .76 $ .74 $ .79 $ 2.93
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Income before extraordinary charge $ .70 $ .76 $ .74 $ .78 $ 2.98
Extraordinary charge (.06) -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ .64 $ .76 $ .74 $ .78 $ 2.92
- ------------------------------------------------------------------------------------------------------------------------------------
1996
- ----
Revenues and Sales $474.0 $487.8 $488.2 $491.9 $1,941.9
Operating Income $102.1 $100.2 $ 90.5 $ 89.4 $ 382.2
Net Income $ 52.2 $ 50.5 $ 45.8 $ 44.3 $ 192.8
Basic Earnings Per Share $ .80 $ .77 $ .70 $ .68 $ 2.95
Diluted Earnings Per Share $ .80 $ .77 $ .70 $ .67 $ 2.94
- -----------------------------------------------------------------------------------------------------------------------------------
SNET Annual Report 31
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
FINANCIAL DATA (UNAUDITED)
</TABLE>
<TABLE>
<CAPTION>
Dollars in Millions, Except as Noted 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues and sales $ 2,022 $ 1,942 $ 1,816 $ 1,718 $ 1,655
Costs and expenses(1) $ 1,246 $ 1,204 $ 1,121 $ 1,015 $ 1,367
Interest expense $ 90 $ 89 $ 86 $ 75 $ 91
Income taxes $ 119 $ 108 $ 110 $ 122 $ (44)
Income (loss) from continuing operations(2) $ 198 $ 193 $ 169 $ 178 $ (44)
Net income (loss) $ 194 $ 193 $ (518) $ 178 $ (318)
Basic earnings (loss) per share (dollars):
From continuing operations(2) $ 2.99 $ 2.95 $ 2.60 $ 2.77 $ (.68)
Net income (loss) $ 2.93 $ 2.95 $ (7.99) $ 2.77 $ (4.99)
Diluted earnings (loss) per share (dollars):
From continuing operations(2) $ 2.98 $ 2.94 $ 2.60 $ 2.77 $ (.68)
Net income (loss) $ 2.92 $ 2.94 $ (7.99) $ 2.77 $ (4.99)
Dividends declared per share (dollars) $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76
Net cash provided by operating activities $ 616 $ 477 $ 443 $ 424 $ 481
Cash expended for capital additions $ 472 $ 374 $ 357 $ 283 $ 269
Depreciation and amortization $ 379 $ 356 $ 346 $ 329 $ 291
Property, plant and equipment, net $ 1,717 $ 1,597 $ 1,565 $ 2,712 $ 2,770
Total assets $ 2,771 $ 2,671 $ 2,724 $ 3,505 $ 3,762
Short-term debt $ 186 $ 215 $ 232 $ 40 $ 290
Long-term debt $ 1,157 $ 1,170 $ 1,182 $ 952 $ 984
Shareholders' equity $ 597 $ 463 $ 353 $ 953 $ 855
- ------------------------------------------------------------------------------------------------------------------------------------
</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 for both basic and diluted earnings per share,
for restructuring.
(2) 1997 excludes an extraordinary charge of $3.7 or $.06 for both basic and
diluted earnings per share resulting from the early extinguishment of debt.
1995 excludes an extraordinary charge of $687.1, or $10.59 for both basic
and diluted earnings per share, related to the discontinuance of SFAS No.
71. 1993 includes the after-tax restructuring charge and excludes
discontinued operations of $10.3, or $.16 per share (basic and diluted), an
extraordinary charge of $44.0, or $.69 per share (basic and diluted) and
the cumulative effect of accounting changes of $220.2, or $3.46 per share
(basic and diluted).
32 SNET Annual Report
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
STATISTICAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Dollars in Millions, Except as Noted 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Network access lines in service (thousands)(1) 2,286 2,163 2,073 2,009 1,964
Annual growth(1) 5.7% 4.3% 3.2% 2.3% 1.4%
Network interstate access minutes of use (millions) 8,291 7,906 7,298 6,917 6,522
Annual growth 4.9% 8.3% 5.5% 6.1% 4.7%
Interstate and international toll access line
subscribers (thousands) 941 758 266 117 10
Annual growth 24.1% 185.0% 127.4% -- --
Cellular subscribers (thousands)(2) 457 392 323 166 88
Annual growth 16.6% 21.4% 94.6% 88.6% 29.4%
Operating cash flow(3) $ 777 $ 738 $ 695 $ 703 $ 288
Telephone Company wireline cost per access
line (dollars)(4) $ 312 $ 332 $ 320 $ 340 $ 365
Return on average total capital 14.9% 15.9% --(5) 12.8% --(6)
Return on average equity 36.3% 45.6% --(5) 19.4% --(6)
Debt ratio(7) 69.2% 74.9% 80.0% 51.0% 59.9%
Pre-tax interest coverage (times) 4.3 4.1 4.2 5.0 .1
Average total debt cost 6.5% 6.6% 6.9% 6.8% 7.7%
Current ratio (times) .69 .70 .73 .88 .82
Average dividend yield 4.4% 4.4% 5.1% 5.4% 4.9%
Payout ratio 60.1% 59.9% --(5) 63.5% --(6)
Market price per share (dollars):
High $51.500 $45.500 $40.250 $36.250 $38.375
Low $34.750 $36.000 $31.750 $28.250 $33.625
Book value per share (dollars) $ 8.96 $ 7.05 $ 5.42 $ 14.77 $ 13.38
Average market price per share (dollars) 39.96 $ 40.07 $ 34.47 $ 32.63 $ 35.70
Average book value per share (dollars) $ 8.08 $ 6.44 $ 15.14 $ 14.26 $ 17.69
Average price/earnings ratio (times) 14 14 --(5) 12 --(6)
Average trading volume 153,200 105,028 91,797 59,437 79,086
Number of shareholders 48,720 50,917 53,332 55,693 57,352
Total employees 9,743 9,441 9,070 9,797 10,476
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain amounts have been restated to conform to the current year presentation.
(1) Excluding the purchase of Woodbury Telephone Company ("Woodbury"), network
access lines in service would have increased 4.7% to 2,265,000 in 1997.
(2) Excluding the subscribers from the acquired cellular properties, cellular
subscribers would have increased 51.1% to 251,000 subscribers in 1995.
(3) Represents operating income before depreciation and amortization. Operating
cash flow is not a generally accepted accounting principle measurement.
Management provides this measurement for informational purposes only.
Excluding the impact of the 1993 before-tax restructuring charge, operating
cash flow would have been $643 in 1993.
(4) Excludes depreciation and amortization, property and other taxes,
publishing and bad debt expenses. Also, excludes costs and access lines
acquired from the purchase of Woodbury. 1993 also excludes the before-tax
restructuring charge.
(5) Not presented for 1995 based upon a loss per share. A return on average
total capital of 11.6%, a return on average equity of 17.2%, a payout ratio
of 67.7% and an average price/earnings ratio of 13 were calculated
excluding the loss per share impact of the extraordinary charge of $10.59.
(6) Not presented for 1993 based upon a loss per share. A return on average
total capital of 10.4%, a return on average equity of 12.3%, a payout ratio
of 69.6% and an average price/earnings ratio of 14 were calculated
excluding the loss per share impact of the restructuring charge of $3.21,
discontinued operations of $.16, extraordinary charge of $.69 and the
cumulative effect of accounting changes of $3.46.
(7) Excluding the effect of the non-cash extraordinary charge related to the
discontinuance of SFAS No. 71, the 1995 debt ratio would have been 57.6%.
Excluding the combined effect of the charge related to SFAS No. 71 and the
debt issued to acquire the cellular properties, the 1995 debt ratio would
have been 48.0%.
SNET Annual Report 33
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
INVESTOR INFORMATION
Corporate Information
- --------------------------------------------------------------------------------
Executive Office: Stock Exchange Listings: Auditors:
SNET New York Stock Exchange Coopers & Lybrand L.L.P.
227 Church Street Pacific Stock Exchange Independent Accountants
New Haven, CT 06510 Symbol: SNG 100 Pearl Street
(203) 771-5200 Hartford, CT 06103
Shareholder Information
- --------------------------------------------------------------------------------
Annual Meeting of The Form 10-K may be For Shareholder
Shareholders: obtained Information
May 13, 1998, 11:30 a.m. by contacting the Transfer including quarterly
Italian Center of Agent and Registrar: results, latest
Stamford State Street Bank recorded news and
1620 Newfield Avenue and Trust Company information, call
Stamford, CT 06905 P.O. Box 8200 1-800-SNG-6220 or visit
Boston, MA 02266-8200 our Internet web site
From anywhere in the at www.snet.com
continental U.S.:
1-800-243-1110
Security Analysts and Dividend Reinvestment
Portfolio Managers and Stock Purchase Plan
- --------------------------------------------------------------------------------
Direct inquiries to: Mr. All owners of common Shareholders do not pay
James A. Magrone stock are eligible for any brokerage or
Director-Investor the plan, which allows administrative fees when
Relations 227 Church participants to apply purchasing additional
Street New Haven, CT dividends and/or optional shares through the plan.
06510 (203) 771-4662 cash payments toward You can obtain a
increased investment in prospectus and enrollment
the Corporation. forms by contacting State
Street Bank and Trust
Company, Plan
Administrator.
Market and Dividend Data
- --------------------------------------------------------------------------------
Market information was
obtained from the
composite tape, which
encompasses trading on
the principal U.S. stock
exchanges as well as
offboard trading. Cash
dividends of $.44 per
share were declared for
each quarter in 1997 and
1996. The number of
holders of SNET stock at
February 27, 1998 was
47,787.
<TABLE>
<CAPTION>
Market Price
- --------------------------------------------------------------------------------------------------------
1997 1996
Quarter High Low Close Quarter High Low Close
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First $ 39.125 $ 34.750 $ 35.875 First $ 43.750 $ 37.500 $ 40.250
Second $ 42.375 $ 35.625 $ 38.875 Second $ 45.500 $ 40.500 $ 42.000
Third $ 41.500 $ 38.250 $ 40.875 Third $ 42.750 $ 36.750 $ 36.875
Fourth $ 51.500 $ 41.000 $ 50.313 Fourth $ 41.125 $ 36.000 $ 38.875
</TABLE>
34 SNET Annual Report
<PAGE>
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
OTHER INFORMATION
Executive Officers of the Corporation
- --------------------------------------------------------------------------------
Daniel J. Miglio Chairman and Chief Executive Officer
Madelyn M. DeMatteo Senior Vice President--General Counsel and Secretary
Karin D. Mayhew Senior Vice President--Organization Development
Fred T. Page Senior Vice President--Network Services
Ronald M. Serrano Senior Vice President--Communication, Information and
Entertainment Group
Donald R. Shassian Senior Vice President and Chief Financial Officer
Representative Servicemarks and Trademarks
- --------------------------------------------------------------------------------
SNET(R) is a registered We Go Beyond The Call(R), americast(TM) is a
trademark and I-SNET is a SmartLink(R) and All trademark of the
servicemark of Southern Distance(R) are americast partnership.
New England registered trademarks of
Telecommunications The Southern New England
Corporation. Telephone Company. Page
2000r is a registered
trademark of SNET
Mobility, Inc.
SNET Annual Report 35
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
SNET Information Services, Inc. Connecticut
The Woodbury Telephone Company 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 27, 1998, 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, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997,
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. 333-45837 of SBC Comunications,
Inc. on Form S-4 and the related Proxy Statement/Prospectus of
Southern New England Telecommunications Corporation and SBC
Communications, Inc.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut Coopers & Lybrand L.L.P.
March 19, 1998
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.
- 2 -
IN WITNESS WHEREOF each of the undersigned has executed this Power of
Attorney this 11th day of March 1998.
/s/ William F. Andrews /s/ Claire L. Gaudiani
William F. Andrews, Director Claire L. Gaudiani, Director
/s/ Richard H. Ayers /s/ Ira D. Hall
Richard H. Ayers, Director Ira D. Hall, Director
/s/ Robert L. Bennett /s/ Burton G. Malkiel
Robert L. Bennett, Director Burton G. Malkiel, Director
/s/ Barry M. Bloom /s/ Frank R. O'Keefe, Jr.
Barry M. Bloom, Director Frank R. O'Keefe, Jr. Director
/s/ Frank J. Connor /s/ Daniel J. Miglio
Frank J. Connor, Director Daniel J. Miglio, Chairman,
President, Chief Executive
Officer and Director
/s/ William R. Fenoglio
William R. Fenoglio, Director /s/ Joyce M. Roche
Joyce M. Roche, Director
C E R T I F I C A T E
This is to certify that by unanimous consent of the Board of Directors
of Southern New England Telecommunications Corporation dated March 11, 1998,
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, 1997, in substantially
the form submitted, 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."
This Consent has the same force and effect as a vote in favor of such
action at a regular constituted meeting of the Board of Directors of
the Company called for such purpose.
Attest:
/s/ Paula M. Anderson
Paula M. Anderson
Assistant Secretary
New Haven, Connecticut
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,300
<SECURITIES> 0
<RECEIVABLES> 360,400
<ALLOWANCES> 32,500
<INVENTORY> 29,800
<CURRENT-ASSETS> 454,600
<PP&E> 4,917,000
<DEPRECIATION> 3,200,200
<TOTAL-ASSETS> 2,770,900
<CURRENT-LIABILITIES> 657,600
<BONDS> 1,156,900
0
0
<COMMON> 68,900
<OTHER-SE> 528,300
<TOTAL-LIABILITY-AND-EQUITY> 2,770,900
<SALES> 0
<TOTAL-REVENUES> 2,022,300
<CGS> 0
<TOTAL-COSTS> 1,624,800
<OTHER-EXPENSES> (8,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,800
<INCOME-PRETAX> 316,000
<INCOME-TAX> 118,500
<INCOME-CONTINUING> 197,500
<DISCONTINUED> 0
<EXTRAORDINARY> (3,700)
<CHANGES> 0
<NET-INCOME> 193,800
<EPS-PRIMARY> 2.93
<EPS-DILUTED> 2.92
</TABLE>
