UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-9157
SOUTHERN NEW ENGLAND TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-1157778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
At the settlement date of July 31, 1998, 68,322,715 Common shares
were outstanding.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
Dollars in Millions, Except Per 1998 1997 1998 1997
Share Amounts
Revenues and Sales $ 538.6 $ 501.6 $ 1,065.7 $ 984.3
Costs and Expenses
Operating and maintenance 322.4 295.3 627.8 576.9
Depreciation and amortization 95.8 94.4 190.8 186.0
Taxes other than income 13.5 13.4 26.4 26.5
Total Costs and Expenses 431.7 403.1 845.0 789.4
Operating Income 106.9 98.5 220.7 194.9
Interest expense 22.3 22.4 44.9 45.1
Other income, net .4 3.9 (.6) 4.0
Income Before Income Taxes 85.0 80.0 175.2 153.8
Income taxes 31.9 30.0 65.7 57.7
Income Before Extraordinary Charge and
Cumulative Effect of Accounting Change 53.1 50.0 109.5 96.1
Extraordinary charge, net of related
taxes of $2.7 - - - (3.7)
Cumulative effect of accounting change
to January 1, 1998, net of related taxes
of $10.8 - - 15.5 -
Net Income $ 53.1 $ 50.0 $ 125.0 $ 92.4
Weighted Average Common Shares
Outstanding (in thousands)
Basic 68,025 65,912 67,627 65,848
Assuming Dilution 68,636 66,016 68,317 65,930
Basic Earnings Per Share
Income before extraordinary charge
and cumulative effect of accounting
change $ .78 $ .76 $ 1.62 $ 1.46
Extraordinary charge, net of tax - - - (.06)
Cumulative effect of accounting
change to January 1, 1998, net
of related taxes - - .23 -
Basic Earnings Per Share $ .78 $ .76 $ 1.85 $ 1.40
Diluted Earnings Per Share
Income before extraordinary
charge and cumulative effect of
accounting change $ .77 $ .76 $ 1.60 $ 1.46
Extraordinary charge, net of tax - - - (.06)
Cumulative effect of accounting
change to January 1, 1998, net
of related taxes - - .23 -
Diluted Earnings Per Share $ .77 $ .76 $ 1.83 $ 1.40
Dividends Declared Per Share $ .44 $ .44 $ .88 $ .88
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED BALANCE SHEETS
Dollars in Millions, Except Per
Share Amounts June 30, 1998 December 31, 1997
(Unaudited)
Assets
Cash and temporary cash investments $ 11.5 $ 12.3
Accounts receivable, net of allowance
for uncollectibles of $44.2 and $32.5,
respectively 378.3 327.9
Materials, supplies and inventories 29.3 29.8
Prepaid publishing 14.0 35.9
Deferred income taxes 31.1 37.7
Prepaid taxes 19.8 1.3
Other current assets 2.4 9.7
Total Current Assets 486.4 454.6
Property, plant and equipment, at cost 4,983.7 4,917.0
Accumulated depreciation (3,225.3) (3,200.2)
Property, plant and equipment, net 1,758.4 1,716.8
Intangible assets, net 384.9 394.7
Deferred income taxes 69.6 89.7
Leases and other assets 137.6 115.1
Total Assets $2,836.9 $2,770.9
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 213.4 $ 266.8
Short-term debt 179.9 186.3
Advance billings and customer deposits 50.4 64.4
Other current liabilities 165.1 140.1
Total Current Liabilities 608.8 657.6
Long-term debt 1,146.5 1,156.9
Accrued postretirement benefit obligation 256.0 267.0
Other liabilities and deferred credits 87.8 92.2
Total Liabilities 2,099.1 2,173.7
Common Stock; $1.00 par value;
300,000,000 shares authorized;
70,314,746 and 68,896,854 issued,
respectively 70.3 68.9
Proceeds in excess of par value 690.2 622.1
Retained earnings 92.4 26.8
Treasury stock; 2,230,586 shares, at cost (84.7) (84.7)
Unearned compensation related to ESOP (30.4) (35.9)
Total Shareholders' Equity 737.8 597.2
Total Liabilities and Shareholders' Equity $2,836.9 $2,770.9
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
Dollars in Millions 1998 1997 1998 1997
Common Stock, Par Value
Balance at Beginning of Period $ 69.9 $ 68.6 $ 68.9 $ 68.4
Common shares issued, at market:
Dividend reinvestment plan .1 .1 .2 .2
Savings and incentive plans .3 - 1.2 .1
Balance at End of Period $ 70.3 $ 68.7 $ 70.3 $ 68.7
Proceeds in Excess of Par Value
Balance at Beginning of Period $ 671.5 $ 608.2 $ 622.1 $ 602.8
Common shares issued, at market:
Dividend reinvestment plan 3.2 3.4 6.2 6.8
Savings and incentive plans 10.9 1.5 46.5 3.5
Tax benefit on stock options exercised 4.6 - 15.4 -
Balance at End of Period $ 690.2 $ 613.1 $ 690.2 $ 613.1
Retained Earnings (Deficit)
Balance at Beginning of Period $ 69.0 $ (42.1) $ 26.8 $ (55.7)
Net income 53.1 50.0 125.0 92.4
Dividends declared (29.9) (29.0) (59.6) (58.0)
Tax benefit of dividends declared
on unallocated shares held in ESOP .2 .2 .2 .4
Balance at End of Period $ 92.4 $ (20.9) $ 92.4 $ (20.9)
Treasury Stock
Balance at Beginning and
End of Period $ (84.7) $(104.7) $ (84.7) $(104.7)
Unearned Compensation Related
To Employee Stock Ownership Plan
Balance at Beginning of Period $ (33.1) $ (44.4) $ (35.9) $ (47.8)
Reduction of ESOP debt - - 8.8 8.1
ESOP earned compensation accrual 2.7 2.8 (3.3) (1.9)
Balance at End of Period $ (30.4) $ (41.6) $ (30.4) $ (41.6)
Total Shareholders' Equity $ 737.8 $ 514.6 $ 737.8 $ 514.6
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
Dollars in Millions 1998 1997
Operating Activities
Net income $ 125.0 $ 92.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 190.8 186.0
Extraordinary charge, net of tax - 3.7
Cumulative effect of accounting change, net of tax (15.5) -
Change in operating assets and liabilities, net (70.9) (43.4)
Other, net 18.9 7.1
Net Cash Provided by Operating Activities: 248.3 245.8
Investing Activities
Cash expended for capital additions (229.4) (207.9)
Other, net (2.7) 17.3
Net Cash Used by Investing Activities (232.1) (190.6)
Financing Activities
Proceeds from long-term debt - 100.0
Repayments of long-term debt (1.9) (86.6)
Net payments of short-term debt (8.6) (14.6)
Stock purchases under employee stock option plans 46.2 2.1
Cash dividends paid (52.7) (50.8)
Other, net - (6.6)
Net Cash Used by Financing Activities (17.0) (56.5)
(Decrease) Increase in Cash and
Temporary Cash Investments (.8) (1.3)
Cash and temporary cash investments at
beginning of period 12.3 9.0
Cash and Temporary Cash Investments at
End of Period $ 11.5 $ 7.7
Income Taxes Paid $ 4.5 $ 53.1
Interest Paid, net of amounts capitalized $ 45.1 $ 45.1
The accompanying notes are an integral part of these financial statements.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
Note 1: Significant Accounting Policies
Basis of Presentation
The condensed, consolidated financial statements of the Southern
New England Telecommunications Corporation ("Corporation") have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments, which are normal and
recurring in nature, necessary for fair presentation for each
period shown. Certain information and footnote disclosures
normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such SEC rules and
regulations. Management believes that the disclosures made are
adequate to make the information presented not misleading.
Operating results for any interim periods, or comparisons between
interim periods, are not necessarily indicative of the results
that may be expected for full fiscal years. It is suggested that
these condensed, consolidated financial statements be read in
conjunction with the consolidated financial statements and notes
thereto included in the Corporation's 1997 Annual Report on Form
10-K.
Accounting Principle Change
Effective January 1, 1998, the Corporation changed its method of
accounting for directory publishing revenues and expenses. The
old accounting method recognized revenues and expenses related to
publishing directories using the "amortization" method. Under
this method, revenues and expenses were recognized over the lives
of the directories, generally one year. Under the new "point-of-
publication" or "as issued basis" method, revenues and expenses
are recognized when the directories are published. The change
was made because it is the preferable method generally followed
in the publishing industry and better reflects the current
operating activity of the business.
The cumulative after-tax effect of applying this accounting
change to prior years was recognized as of January 1, 1998 as a
one-time, non-cash gain of $15.5, or $.23 per share (both basic
and diluted). The gain is net of applicable income taxes of
$10.8. The application of the new accounting method during the
second quarter of 1998 increased net income by approximately $.6,
or $0.01 per share (both basic and diluted) and approximately
$4.6 or $0.07 per share (both basic and diluted) for the six
month period.
On an annual basis, the financial impact of applying the new
accounting method to 1997 was not material. Pro forma 1997
results, assuming the new accounting method had been applied
retroactively during the prior period, are as follows:
For the Three For the Six
Months Ended Months Ended
June 30, 1997 June 30, 1997
Pro As Pro As
Forma Reported Forma Reported
Income before extraordinary item $ 50.6 $ 50.0 $ 100.7 $ 96.1
Earnings per share
- basic and diluted $ .77 $ .76 $ 1.53 $ 1.46
Net income $ 50.6 $ 50.0 $ 97.0 $ 92.4
Earnings per share
- basic and diluted $ .77 $ .76 $ 1.47 $ 1.40
- 6 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
New Accounting Standard
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 revises
certain disclosures employers make about pension and other
postretirement benefit plans and will not impact the
Corporation's consolidated financial position and results of
operations. The Corporation will adopt SFAS No. 132 at year-end
1998.
Note 2: Planned Merger
The Corporation and SBC Communications Inc. ("SBC"), on January
4, 1998, approved a definitive merger agreement whereby the
Corporation will become a wholly-owned subsidiary of SBC. On
March 27, 1998, the Corporation's shareholders approved the
merger.
On February 20, 1998, the Corporation and SBC filed a Joint
Application for Approval of a Change of Control with the
Department of Public Utility Control ("DPUC"). In addition, on
the same day, the Corporation and SBC filed with the Federal
Communications Commission ("FCC") Transfer of Control
Applications for various FCC licenses held by the Corporation.
In a draft decision issued by the DPUC on August 5, 1998, the
merger was approved subject to certain conditions, some of which
are new issues to this proceeding. However, the DPUC found no
economic basis on which to order a rate reduction. The Corporation
and SBC will require additional time to fully analyze the draft
decision. After giving careful consideration to all DPUC draft
conditions, written exceptions will be filed by August 21, 1998.
The final decision is expected on September 2, 1998.
At the federal level, a decision from the FCC is expected by year-
end 1998.
In addition, all notices and applications for transfer of control
have been filed in the states in which SNET America, Inc., a
wholly-owned subsidiary of the Corporation, has authorization to
provide resold interexchange telecommunications services. A
number of approvals have been received, with the balance expected
by year end 1998.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
Note 3: Supplemental Financial Information
Operating Cash Flow(1) The following unaudited financial data on
the Corporation's product groups is not required by generally
accepted accounting principles and is provided for informational
purposes only:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997 1998 1997
Wireline $155.1 $149.9 $317.2 $293.8
Wireless 20.4 15.5 35.2 28.5
Information and entertainment (2) 18.9 23.5 47.2 48.8
Other(3) 8.3 4.0 11.9 9.8
Total $202.7 $192.9 $411.5 $380.9
(1) Represents operating income before depreciation and
amortization. Operating cash flow is not a generally accepted
accounting principle measurement.
(2) Reflects the change in accounting for directory publishing
and costs associated with the corporate restructure of
directory publishing operations into a separate subsidiary of
the Corporation on January 1, 1998.
(3) Includes SNET Real Estate, Inc. and holding company
operations.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
(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 and SBC Communications Inc.
("SBC") approved a definitive merger agreement whereby the
Corporation will become a wholly-owned subsidiary of SBC. On
March 27, 1998, the Corporation's shareholders approved the
merger.
On February 20, 1998, the Corporation and SBC filed a Joint
Application for Approval of a Change of Control with the
Department of Public Utility Control ("DPUC"). In addition, on
the same day, the Corporation and SBC filed with the Federal
Communications Commission ("FCC") Transfer of Control
Applications for various FCC licenses held by the Corporation.
In a draft decision issued by the DPUC on August 5, 1998, the
merger was approved subject to certain conditions, some of which
are new issues to this proceeding. However, the DPUC found no
economic basis on which to order a rate reduction. The Corporation
and SBC will require additional time to fully analyze the draft
decision. After giving careful consideration to all DPUC draft
conditions, written exceptions will be filed by August 21, 1998.
The final decision is expected on September 2, 1998.
At the federal level, a decision from the FCC is expected by year-
end 1998.
In addition, all notices and applications for transfer of control
have been filed in the states in which SNET America, Inc., a
wholly-owned subsidiary of the Corporation, has authorization to
provide resold interexchange telecommunications services. A
number of approvals have been received, with the balance expected
by year end 1998.
Comparison of the periods ended June 30, 1998 vs. the periods
ended June 30, 1997
Operating Results
Income before extraordinary charge and cumulative effect of
accounting change was $53.1, or $.77 per diluted share, and
$109.5, or $1.60 per diluted share, for the three and six months
ended June 30, 1998, respectively. The corresponding periods in
1997 generated income before extraordinary charge of $50.0, or
$.76 per diluted share, and $96.1, or $1.46 per diluted share.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
Revenues and Sales
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997 1998 1997
Wireline:
Local service $181.7 $175.4 $365.6 $344.8
Network access 113.6 107.4 221.8 210.0
Intrastate toll 49.9 52.2 100.7 105.6
Interstate and international toll 40.6 34.4 81.8 64.9
Premium services and equipment sales 34.4 27.7 62.1 55.4
Other revenues 14.2 10.9 27.2 23.3
Total Wireline 434.4 408.0 859.2 804.0
Wireless:
Cellular service 62.2 54.8 116.3 101.8
Cellular equipment sales 2.4 2.2 4.7 4.4
Paging 1.5 1.6 3.1 3.3
Total Wireless 66.1 58.6 124.1 109.5
Information and Entertainment 58.5 47.0 120.6 93.7
Eliminations and Other Sales (20.4) (12.0) (38.2) (22.9)
Revenues and Sales $538.6 $501.6 $1,065.7 $984.3
Wireline - Local service revenues, derived from providing local
exchange, advanced calling features and local private line
services, increased $6.3, or 3.6%, and $20.8, or 6.0%, for the
three and six month periods, respectively. The increase was due
primarily to continued strong growth of 5.9% in access lines in
service to approximately 2,335,000 lines as of June 30, 1998.
Excluding the purchase of the Woodbury Telephone Company
("Woodbury") in the third quarter of 1997, access lines would
have increased 4.9%. This increase included significant growth
in Centrex business lines and second residential lines. Local
service revenues also increased due to growth in vertical
services, primarily SmartLink[R] advanced calling features,
including Caller ID, missed call dialing, call blocking and call
tracing. In addition, local service revenues increased as a
result of increased directory assistance revenue (related to
increased rates and the elimination of free calls) and increased
private line revenue. Also contributing to the increase were
revenues received in connection with funding E-911 and Lifeline
services. Additionally, payphone revenues increased as a
result of the pay telephone reclassification and compensation
provisions of the Federal Telecommunications Act of 1996
("Act"). The increase in local service revenues was tempered by
a decrease in revenues as a result of customer migration from
flat-rate services to lower priced Centralink 1100 service.
Management expects increased competition to negatively impact
local service revenues as other telecommunications providers
continue to offer local service and as the DPUC-mandated
balloting process commences [see Competition].
Network access revenues, generated primarily from intrastate and
interstate services, increased $6.2, or 5.8%, and $11.8, or
5.6%, for the three and six month periods, respectively.
Intrastate access revenues increased $6.2, or 53.4%, for the
quarter, and $8.9, or 42.5% for the six month period, due
primarily to an increase in demand by competitive providers of
intrastate long-distance service and the inclusion of Woodbury.
Interstate access revenues were flat for the quarter, and
increased $2.9, or 1.5% for the six month period. For the
quarter, the effects of regulatory mandates (price cap and
access reform orders) offset increases resulting from growth in
special access revenue, increased access lines, and the
inclusion of Woodbury. Also contributing to revenues is the
partial recovery of amounts paid to fund Universal Service, in
accordance with FCC regulation. For the six month period,
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Form 10-Q - Part I Southern New England Telecommunications Corporation
revenue increased as a result of growth in special access
revenue, increased access lines and the inclusion of Woodbury.
Also contributing to revenues is the partial recovery of amounts
paid to fund Universal Service, in accordance with FCC
regulation. Partially offsetting these increases was the
reduction in rates caused by regulatory mandates (price cap and
access reform orders). Management expects the aforementioned
regulatory mandates to continue to place downward pressure on
network interstate access revenues.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $2.3, or 4.4%, and $4.9, or
4.6%, for the three and six month periods, respectively. The
decreases were due primarily to 7.6% and 6.9% reductions in toll
message volume, for the three and six month periods,
respectively, as well as reduced intrastate toll rates. Lower
toll volume was due primarily to the highly competitive toll
market as a result of full intrastate equal access. The decline
in rates was attributable to customer migration to several
discount calling plans that provide competitive options to
business and residential customers. Increasing 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 $6.2 or 18%
for the quarter and $16.9 or 26% for the six month period due to
strong growth in the customer base. The growth is primarily a
result of customer migration to the SNET All Distance[R] product
line which allows Connecticut customers to package and discount
their entire long-distance calling in one plan.
Premium Services and Equipment Sales revenue increased $6.7 for
the quarter and six month period due to increased Teleservices
(wholesale operator and call center services) revenues and
increased revenues resulting from the sales and leasing of
business phone sets.
Wireless - Cellular service revenues increased $7.4, or 13.5%,
and $14.5, or 14.2%, for the quarter and six month period,
respectively, due primarily to the 14.2% increase in the
subscriber base. This growth was partially offset by the
effects of promotional plans such as giving free minutes,
bundling and digital plans.
Information and Entertainment - Information and entertainment
revenues increased $11.5 or 24.5% for the quarter and $26.9 or
28.7 % for the six month period. The increases were due
primarily to the accounting change in directory publishing.
Growth in internet sales, due primarily to an increase in the
customer base from approximately 62,000 at June 30, 1997 to
109,000 at June 30, 1998 and a new pricing package also
contributed to revenue increase. In addition, revenue increased
as a result of growth in cable television revenues due primarily
to the expansion of the customer base from 1,000 at June 30,
1997 to 18,000 at June 30, 1998.
Costs and Expenses
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Operating Costs $322.4 $295.3 $627.8 $576.9
Depreciation and amortization 95.8 94.4 190.8 186.0
Taxes other than income 13.5 13.4 26.4 26.5
Total Costs and Expenses $431.7 $403.1 $845.0 $789.4
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Form 10-Q - Part I Southern New England Telecommunications Corporation
Operating costs - 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 $27.1, or 9.2%, for the quarter,
and $50.9, or 8.8%, for the six month period.
Wireline - For the three and six month periods, wireline
operating costs increased $21.3, or 8.7%, and $31.6, or 6.5%,
respectively, due primarily to costs of providing interstate and
international toll services, costs incurred in connection with
local number portability and payments to fund Universal Service,
in accordance with FCC regulation. Also contributing was an
increase in the costs of providing services to other carriers.
Wireless - For the three and six month periods, wireless
operating costs increased $2.5, or 5.9%, and $7.8, or 9.9%,
respectively. The increase for the quarter and six month period
is due primarily to increased computer software costs for the
roll out of digital service, increased cost of sales and
increased advertising costs. Partially offsetting these
increases was a decline in fraud.
Information and Entertainment - Operating costs for information
and entertainment increased $16.1, or 68.5% for the quarter, and
$28.9, or 64.5% for the six month period due primarily to costs
associated with the corporate restructure of directory
publishing operations into a separate subsidiary of the
Corporation on January 1, 1998 and the accounting change related
to publishing, the deployment of cable television service and
growth in internet services. Management expects information and
entertainment operating costs to increase as the Corporation
continues to deploy cable television services and continues to
offer internet services to an expanding customer base.
Depreciation and amortization - Depreciation and amortization
expense increased $1.4, or 1.5%, and $4.8, or 2.6%, for the
three and six month periods, respectively, due primarily to an
increase in the average depreciable telecommunications property,
plant and equipment.
Other Income, net
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997 1998 1997
Other income, net $.4 $3.9 $(.6) $4.0
The decrease for both the quarter and six month period is due
primarily to the absence in 1998 of gains on the sale of assets
that were recognized in the second quarter of 1997.
Income Taxes
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997 1998 1997
Income taxes $31.9 $30.0 $65.7 $57.7
Income tax expense increased because of higher pre-tax income.
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Form 10-Q - Part I Southern New England Telecommunications Corporation
Liquidity and Capital Resources
The Corporation generated cash flows from operations of $248.3
during the six months ended June 30, 1998 as compared with $245.8
during the six months ended June 30, 1997.
The increase in accounts receivable is due primarily to an
increase in unbilled revenues as a result of the change in
accounting for directory publishing operations (see Note 1).
The decrease in income taxes paid is due to a change in the method
of calculating and the timing of estimated tax payments, as well as
the effect of the large amount of stock options exercised in 1998.
The weighted average number of common shares outstanding for the
six month period increased for both basic EPS and diluted EPS by
2.7% and 3.6% respectively, primarily as a result of the exercise
of employee stock options. Employees exercised approximately 1.3
million stock options in the six month period, contributing $46.2
to cash flows from financing activities. In addition, tax
benefits of $15.4 were accrued by the Corporation, on the
ordinary income recognized by the employees.
The Corporation's ratio of debt to total capitalization decreased
to 64.3% at June 30, 1998 compared with 72.9% at year-end 1997.
For the second quarter of 1998, the Corporation's Board of
Directors declared a dividend of $.44 per share.
Management believes that the Corporation has sufficient internal
and external resources to finance the anticipated requirements of
business development. Capital additions and dividends are
expected to be funded primarily with cash from operations during
the remainder of 1998. The Corporation also has access to
external resources including lines of credit and long-term shelf
registration commitments.
Competition
The Corporation continues to experience an increasingly
competitive environment with respect to telecommunications
services in Connecticut, the northeast, and its entire market
area. 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.
Local service competition continues to grow in 1998. There have
been over 40 certified local exchange carriers approved by the
DPUC to provide local service in Connecticut. Competition is
expected to intensify particularly upon commencement of the DPUC-
mandated balloting process which could begin as early as mid-
1999, depending on the resolution of operation support systems
and other issues. 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 network of its wholly-owned subsidiary The Southern
New England Telephone Company ("Telephone Company") and that
increased network access revenues will offset a significant
portion of local service revenues lost to competition.
Regulatory Matters
Federal
On June 16, 1998, the Telephone Company filed its 1998 annual
interstate access price cap revisions which took effect July 1,
1998. The filing would decrease interstate network access rates
by approximately $10 for the period July 1, 1998 to June 30,
1999.
- 13 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
In 1997, the FCC released an Order on Universal Service which
changed the federal subsidy mechanisms and established new
subsidy programs for Schools, Libraries, and Rural Healthcare
providers. Effective January 1, 1998, all interstate
telecommunications service providers, including subsidiaries of
the Corporation, fund these support mechanisms based on their
retail revenues. The funding for the high cost and low income
support comes from an assessment on interstate retail revenues,
while the funding for the Education, Library, and Rural
Healthcare support comes from an assessment on both interstate
and intrastate retail revenues. The Order established a
nationwide annual cap for the Schools and Libraries Fund of
$2.25 billion and $.4 billion for the rural Healthcare fund.
On June 22, 1998, the FCC released its Fifth Order on
Reconsideration and 4th Report and Order in the Universal Service
proceeding. In that order, the FCC did not adjust the annual
caps for the new funds; rather, they adjusted the maximum amounts
that may be collected and spent during 1998 and the first six
months of 1999. Specifically, the FCC directed that nationwide,
no more than $100 be committed for the Rural Health Care program
in 1998 and no more than $1.925 billion be committed for the
Schools and Libraries program for 1998 and the first two quarters
of 1999. On an annual basis, the Corporation's contribution to
the Universal Service Fund is estimated to be approximately $18.
This expense is partially offset through a variety of mechanisms
including the retail pricing structure, interstate access rates
and direct surcharges.
The FCC released its Third Report and Order on May 12, 1998, on
Cost Recovery for Long-Term Number Portability ("LNP"). LNP
refers to the customer's ability to retain the same local
telephone number after changing to a new local service provider.
The FCC determined that incumbent local exchange carriers may
recover some portion of the cost of implementing LNP over five
years (beginning at the earliest in the first quarter of 1999),
through monthly charges to end users. In addition, recovery of
LNP costs will be accomplished through ongoing charges for LNP
query services performed for other carriers.
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 applied to certain services
categorized as non-competitive. In a draft decision, the DPUC
set forth requirements for the Telephone Company's price cap
filing for the rate year June 1, 1998 to May 31, 1999. The draft
decision requires the application of the price cap formula to
revenues from basic local residential service, basic local
business service and directory assistance services which, under
alternative regulation, were previously subject to a rate cap
which expired on January 1, 1998. If the draft decision is not
modified, the Telephone Company will be required to reflect
reduced revenues associated with these services for the period
January 1, 1998 to May 31, 1998, as well as revenues for
applicable non-competitive retail services for the rate year June
1, 1998 to May 31, 1999. While the DPUC concurred with the
Telephone Company that it is not desirable to lower the price of
basic local residential service further below cost, the Telephone
Company may be required to lower rates for other non-competitive
services to reflect the revenue impact of applying the price cap
formula to basic local residential service. The Telephone
Company has submitted written exceptions to the draft decision
and has presented oral arguments to the DPUC. If the draft
decision is not amended, an estimated $20 of revenue reductions
will occur over the rate year June 1, 1998 to May 31, 1999. A
final decision is expected in the third quarter of 1998.
In final decisions, the DPUC denied the Telephone Company's
application to reclassify private line services, direct inward
dialing, hunting services and custom calling service from the non-
competitive to the emerging-competitive category. Approval to
reclassify these services to emerging-competitive
- 14 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
would have placed them outside the price cap formula. The impact
of these decisions, which approximates $3, have been included in
the previously-discussed $20 revenue reduction associated with
the June 1, 1998 to May 31, 1999 rate year.
As part of its June 25, 1997 decision allowing the Corporation to
restructure and establish separate retail (CLEC) and wholesale
(i.e., incumbent local exchange carrier or "ILEC") organizations,
the DPUC mandated that Connecticut customers choose their local
exchange carrier via a balloting process. In order for the
balloting process to commence, the ILEC must demonstrate that the
systems offered to all CLECs provide full technical and
operational support on a comparable basis. The DPUC will examine
and critically evaluate the respective Operation Support Systems
("OSS") platforms offered to the CLECs. The DPUC's evaluation
will 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 Federal Telecommunications Act of
1996. On February 25, 1998, the DPUC issued a draft decision in
the OSS docket and concluded that by providing access to the same
system that the Corporation's CLEC would use, the ILEC has
provided a comparable interface. On July 13, 1998, the Telephone
Company notified the DPUC it has completed the implementation of
its OSS Plan filed with the DPUC in March 1998. The
Telephone Company will demonstrate its Wholesale Customer
Information Window interface at the DPUC on August 26, 1998.
Hearings in the OSS Docket are scheduled for September 1-4 with a
final decision due from the Department on November 18, 1998.
In February 1998, the DPUC opened two new dockets to examine the
provision of: (i) combinations of unbundled network elements
("UNE") and (ii) shared transport to CLECs. In a final decision,
the DPUC has required that the Telephone Company offer UNE
combinations. UNE combinations have not yet been defined and
this will be the subject of ongoing proceedings in the docket.
The price of the UNE combinations will not be known until after
the UNE combinations are defined and a further proceeding on the
pricing is conducted. Thus, the revenue impact is unknown until
these two steps are completed. On July 24, 1998, the Telephone
Company requested the DPUC to reconsider the decision. The
Telephone Company believes that the order requiring the
provisioning of rebundled UNEs is inconsistent with federal law
as interpreted by the Eighth Circuit Court of Appeals. A
decision in the shared transport docket is expected in the third
quarter of 1998. Both decisions may affect existing
interconnection agreements between the ILEC and CLECs operating
in Connecticut.
Included in its June 25, 1997 decision, the DPUC directed the
Telephone Company to initiate a "Fresh Look" period from January
1, 1998 until June 1, 1998, on all non-competitive services sold
under contracts to its customers. During the "Fresh Look" period
any Telephone Company customer who elected to obtain the
contracted service from an alternative service provider would not
be liable to pay a termination penalty to the Telephone Company
as a condition of its contract. Additionally, in February 1998,
the DPUC directed the Corporation's payphone operation to offer
to payphone location owners a four-month "Fresh Look" period
during which payphone location owners may move to an alternative
service provider without penalty. This "Fresh Look" period ended
on June 30,1998. The "Fresh Look" periods did not have a
significant impact on the Telephone Company or the Corporation's
payphone operation.
New Accounting Standard
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 revises
certain disclosures employers make about pension and other
postretirement benefit plans and will
- 15 -
Form 10-Q - Part I Southern New England Telecommunications Corporation
not impact the Corporation's consolidated financial position and
results of operations. The Corporation will adopt SFAS No. 132
at year-end 1998.
Employee Matters
The Corporation's bargaining unit employees are represented by
the Connecticut Union of Telephone Workers, Inc. ("CUTW"). In
early July 1998, it was announced that CUTW members had voted to
affiliate with the Communications Workers of America.
At June 30, 1998, 63% of the Corporation's employees were
represented by the CUTW. The current labor agreement will expire
on August 8, 1998. Management and union officials are in the
process of negotiating a new labor agreement.
- 16 -
Form 10-Q - Part II Southern New England Telecommunications Corporation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the second
quarter of 1998.
Item 4. Submission of Matters to a Vote of Security Holders
On May 13, 1998, the Corporation held its Annual Meeting
of Shareholders ("Annual Meeting").
(a) The following persons, having received the FOR votes set
opposite their respective names, constituting in excess
of a majority of the votes cast at the Annual Meeting
for the election of Directors, were duly elected Class
III Directors:
Directors For Withheld
Richard H. Ayers 54,435,544 790,036
Frank J. Connor 54,426,283 799,297
Ira D. Hall 54,420,805 804,775
Dr. Burton G. Malkiel 54,407,485 818,095
Frank R. O'Keefe, Jr. 54,378,649 846,931
If the merger is effected, in accordance with the merger
agreement, the terms of office for all elected class III
Directors will cease at the effective time of the
merger. If the merger is not effected, the terms of
office will run until 2001 and until their successors
are elected and qualified.
(b) Shareholders ratified the appointment of
PricewaterhouseCoopers LLP, as independent public
accountants, to examine the consolidated financial
statements of the Corporation for the current year
ending December 31, 1998. The vote was 54,583,162
shares FOR and 332,535 shares AGAINST, with 309,883
shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
(27) Financial Data Schedule
(b) Reports on Form 8-K
On April 24, 1998 and April 27, 1998, the Corporation
and the Telephone Company, respectively, separately
filed reports on Form 8-K, dated April 24, 1998
announcing the Corporation's financial results for the
first quarter of 1998.
On July 27, 1998, the Corporation and the Telephone
Company, separately filed reports on Form 8-K, dated
July 27, 1998 announcing the Corporation's financial
results for the second quarter of 1998.
- 17 -
Form 10-Q - Part II Southern New England Telecommunications Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Southern New England Telecommunications Corporation
August 6, 1998
/s/ Donald R. Shassian
Donald R. Shassian
Senior Vice President and Chief Financial Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
2ND QUARTER 1998 FORM 10-Q OF SOUTHERN NEW ENGLAND TELECOMMUNICATIONS
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<RECEIVABLES> 422,500
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<INCOME-PRETAX> 175,200
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