SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1995.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State or other jurisdiction (I.R.S. Employer
of 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: None
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 .
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION, MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION J (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE
FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION J (2).
1
TABLE OF CONTENTS
Item Page
PART I
1. Business.......................................................... 3
2. Properties........................................................ 9
3. Legal Proceedings................................................. 9
4. Submission of Matters to a Vote of Security Holders *
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters (Inapplicable)
6. Selected Financial Data *
7. Management's Discussion and Analysis
(Abbreviated pursuant to General Instruction J(2)).............. 10
8. Financial Statements and Supplementary Data...................... 14
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 31
PART III
10. Directors and Executive Officers of the Registrant *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners and Management *
13. Certain Relationships and Related Transactions *
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.. 31
* Omitted pursuant to General Instruction J(2)
2
PART I
Item 1. Business
General
The Southern New England Telephone Company ("Telephone
Company") was incorporated in 1882 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 Telephone Company is a wholly-owned
subsidiary of Southern New England Telecommunications
Corporation ("Corporation").
The Telephone Company, a local exchange carrier ("LEC"), is
engaged in providing telecommunications services in the State
of Connecticut, most of which are subject to various degrees
of rate 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. Through its directory publishing operations, the
Telephone Company publishes and distributes telephone
directories throughout Connecticut and certain adjacent
communities. The publishing division also develops and
provides electronic publishing services.
In 1995, approximately 86% of the Telephone Company's revenues
were derived from the rate regulated telecommunication
services. The remainder was derived principally from
directory publishing operations, and activities associated
with the provision of facilities and non-access services to
interexchange carriers. About 71% of the operating revenues
from rate regulated services were attributable to intrastate
operations, with the remainder attributable to interstate
access services.
The Telephone Company is subject to the jurisdiction of the
Federal Communications Commission ("FCC") with respect to
interstate rates, services, access charges and other matters,
including the prescription of a uniform system of accounts.
The FCC also prescribes the principles and procedures
(referred to as "separations procedures") used to separate
investments, revenues, expenses, taxes and reserves between
the interstate and intrastate jurisdictions. In addition, the
FCC has adopted accounting and cost allocation rules for the
separation of costs of regulated from non-regulated
telecommunications services for interstate ratemaking
purposes. The Telephone Company's interstate services have
been subject to price cap regulation since January 1991.
Price caps are a form of incentive regulation to limit prices
and improve productivity. The price cap plan sets maximum
limits on prices and requires LECs to share earnings in excess
of authorized levels.
The Telephone Company, in providing telecommunications
services in the State of Connecticut, is subject to regulation
by the Connecticut Department of Public Utility Control
("DPUC"), which has jurisdiction with respect to intrastate
rates and services and other matters such as the approval of
accounting procedures and the issuance of securities. The
DPUC has adopted accounting and cost allocation rules for
intrastate ratemaking purposes, similar to those adopted by
the FCC, for the separation of costs of regulated from non-
regulated activities. The Telephone Company's intrastate
services have been subject to the traditional rate of return
regulation. In 1996, the DPUC issued a decision that replaced
traditional rate of return regulation with alternative (price
based) regulation to be employed during the transition to full
competition [see State Regulatory Initiatives].
3
Competition
Connecticut's telecommunications industry continues to move
toward a fully competitive marketplace brought about by
legislative and regulatory initiatives during recent years.
As a result of these initiatives, the Telephone Company is
experiencing increased competition from interexchange carriers
and competitive access providers with respect to the
wireline's (Telephone Company's) existing services.
Management supports bringing to customers the benefits of
competition and affording all competitors the opportunity to
compete fairly. As demand increases for telecommunications
services in an increasingly competitive environment, the
Telephone Company continues to seek growth opportunities
beyond its traditional services.
In May 1994, the State of Connecticut Legislature enacted
Public Act 94-83 ("Act"), providing a new regulatory framework
for the Connecticut telecommunications industry. The Act,
which took effect on July 1, 1994, represents a broad
strategic response to the changes facing the
telecommunications industry in Connecticut based on the
premise that broader participation in the Connecticut
telecommunications market will be more beneficial to the
public than will broader regulation. The Act opens
Connecticut telecommunications services to full competition,
including local exchange service currently provided primarily
by the Telephone Company, and encourages the DPUC to adopt
alternative forms of regulation for telephone companies,
including the Telephone Company.
The DPUC has conducted, and is conducting, a number of
proceedings, in phases, to implement the Act. In the
competitive phase, the DPUC addressed competition in the areas
of: local exchange service; alternative operator services and
customer owned coin operated telephone service; universal
service and lifeline program policy issues; unbundling of
LECs' local networks; and reclassification of LECs' products
and services into non-competitive, emerging competitive and
competitive categories. During the alternative regulation
phase, the DPUC issued a decision replacing traditional rate
of return regulation with alternative (price based) regulation
to be employed during the transition to full competition. In
addition, the alternative regulation phase involved a complete
financial review of the Telephone Company and addressed cost
of service, capital recovery and service standards [see State
Regulatory Initiatives].
The Telephone Company's regulated services are subject to
competition from companies and carriers, including competitive
access providers, that construct and operate their own
communications systems and networks, as well as from companies
that resell the telecommunications systems and networks of
underlying carriers. Over 85 telecommunications providers
have received approval from the DPUC to offer "10XXX" or other
competitive intrastate long-distance services. In addition,
over 35 companies have filed for initial certificates of
public convenience and necessity and are awaiting DPUC
approval. The reduction in intrastate toll rates, and the
increasingly competitive intrastate toll market continue to
place significant downward pressure on intrastate toll
revenues. Also contributing to lower intrastate toll revenues
is the implementation of intrastate equal access for all dual
preferred interexchange carrier ("PIC") capable switches by
December 1, 1996. Although the DPUC ordered the Telephone
Company to bear its proportionate share of the costs to deploy
the dual PIC technology, the DPUC added the estimated 1996
average net toll revenue loss to the cost recovery formula.
These costs will be recovered through an intrastate equal
access rate element on the presubscribed lines of all
carriers.
Since the introduction of "10XXX" competition, major carriers
have increased their marketing efforts in Connecticut to sell
intrastate long-distance services to Connecticut customers.
In response
4
to other competitors' efforts, the Telephone Company has
undertaken a number of initiatives. The Telephone Company
remains focused on providing excellent customer service
and quality products and has made several changes to its
product lines.
Throughout 1995, the Telephone Company, with its affiliate,
has enhanced several discount calling plans in its High Volume
Discount Toll service offering and realigned its discount and
rate structures to provide Connecticut customers with SNET All
Distance[SM], a seamless toll service product line which
includes a discount structure that combines intrastate,
interstate and international calling. One such product, SNET
All Distance Simple Solutions[SM], was made available to small
business and residence customers beginning in September 1995.
This easy-to-understand calling plan provides simple,
competitive rates with a sliding discount based on calling
volume.
Concerning competition for local exchange service, seven
telecommunications providers have been granted a certificate
of public convenience and necessity for local service and one
additional application is pending before the DPUC. The effect
of increased competition on the Telephone Company's operating
results cannot be predicted at this time. While some
customers may purchase services from competitors, the
Telephone Company expects that most competitors will utilize
the Telephone Company's network and that increased network
access revenues will offset a portion of local service
revenues lost to competition. The Telephone Company's ability
to compete continues to depend upon regulatory reform that
will allow pricing flexibility to meet competition and provide
a level playing field with similar regulation for similar
services and with reduced regulation to reflect an emerging
competitive marketplace. Local service competition began in
early 1996.
Regulatory Matters
State Regulatory Initiatives
In March 1996, the DPUC issued a decision that replaces
traditional rate of return regulation with alternative (price
based) regulation to be employed during the transition to full
competition. The decision contains the following major items:
price cap regulation for non-competitive services; a five year
monitoring period on financial results; and a price cap
formula on services categorized as non-competitive (utilizing
an inflation factor, a 5% productivity offset, a narrowly
defined exogenous factor, a potential service quality
adjustment and various pricing bands). In addition, basic
local service rates for residence, business and coin are
frozen until January 1, 1998, at which time the price cap
formula becomes effective for these services. The decision
also authorized a rate of return on the Telephone Company's
common equity of 11.90% during the monitoring period. The
impact of these changes on the Telephone Company's operating
results will depend on the timing of classifying the various
products and services into categories (non-competitive,
emerging competitive and competitive) for pricing (banding)
changes. As of December 31, 1995, the Telephone Company's
rate of return was below the 11.90% threshold.
On July 5, 1995, the Telephone Company filed a tariff with the
DPUC to offer wholesale local service and certain related
features. The service provides competitive local exchange
carriers with an alternative to building facilities or
constructing a ubiquitous network to meet their local service
coverage obligations. On December 20, 1995, the DPUC, in a
final decision, established interim rates for unbundled
network elements and wholesale local service. The rates will
remain in effect until the Telephone Company files revised
cost studies during the second quarter of 1996.
5
Federal Regulatory Initiatives
On February 1, 1996, the U.S. Congress passed legislation that
created broad changes in telecommunications law and regulation
nationwide. The primary thrust of this legislation opens
local telecommunications markets to competition and allows the
Regional Bell Operating Companies to provide long-distance
services. In addition, the legislation permits
telecommunications companies to enter the cable television
business and eases cable regulation. The FCC is required to
adopt terms and conditions to implement the legislation in the
near term.
The majority of the federal legislation is consistent with
legislation enacted by the State of Connecticut in 1994.
Public Act 94-83 opened the Connecticut telecommunications
market to competition, and the DPUC is nearing completion of
the implementation proceedings. Certain provisions of the
federal legislation relating to the prices the Telephone
Company charges competitors for services could, however, have
the effect of producing below cost prices, therefore
necessitating the development of a significantly larger
universal service fund than previously anticipated. If there
are conflicts between state and federal law for LECs,
including the Telephone Company, with less than 2% of the
nationwide access lines, federal law prevails subject to a
waiver and modification process included in the federal
legislation. The DPUC may grant a waiver or modification of
the federal law that is consistent with the public interest
and avoids a significant adverse economic impact on users or a
requirement that is unduly economically burdensome or
technically infeasible.
Under price cap regulation, the FCC adopted an interim plan in
1995 for interstate access rates, requiring LECs to
incorporate higher productivity targets into their rates. The
interim plan requires LECs to choose from among three
productivity factors: 4.0%, 4.7% or 5.3%. The selected
factor is subtracted from inflation-based price increases
allowed each year to account for increasing productivity. If
either the 4.0% or 4.7% factor is chosen, LECs must share 50%
of earnings above a 12.25% rate of return. In addition, all
earnings above 13.25% and 16.25%, respectively, will be
returned. If the 5.3% factor is chosen, all earnings can be
retained without sharing. In addition, companies are required
to reinitialize their price cap index ("PCI") on a one-time
basis by reducing the PCI by 0.7% for each prior year in which
they elected the 3.3% factor. The maximum PCI reduction over
the four year price cap period would therefore be 2.8%. The
Telephone Company has elected a 3.3% productivity factor each
year since entering price cap regulation in 1991.
Accordingly, the Telephone Company is required to reinitialize
its PCI downward by 2.8%. The Telephone Company has joined a
number of other LECs in filing an appeal with the D.C. Circuit
Court of Appeals challenging the lawfulness of this interim
plan. A decision on this appeal is expected in 1996.
In September 1995, the FCC released two further notices of
proposed rulemaking that sought comment on changes to the
established price cap plan including productivity
measurements, sharing, common line formula, exogenous costs
and necessary price cap rule changes to respond to a
competitive environment for LECs. In response to the FCC, the
Telephone Company commented that rule changes are required to
allow price cap LECs to compete with alternate providers. The
FCC is expected to adopt new price cap rules in 1996.
The Telephone Company's 1995 annual interstate access tariff
filing under price cap regulation took effect August 1, 1995.
The Telephone Company elected a 4.0% productivity factor and
was allowed to earn up to a 12.25% interstate rate of return
annually before any sharing is required. This filing, which
was approved by the FCC, incorporated rate reductions of
approximately $10 million in
6
decreased interstate network access revenues for the period
August 1, 1995 to June 30, 1996. Management expects this
decrease to be partially offset by increased demand. As of
December 31, 1995, the Telephone Company's interstate rate
of return was below the 12.25% threshold.
The Telephone Company's 1994 annual interstate access tariff
filing under price cap regulation took effect July 1, 1994.
The Telephone Company elected a 3.3% productivity factor and
was allowed to earn up to a 12.25% interstate rate of return
annually before any sharing is required. This filing, which
was approved by the FCC, incorporated rate reductions of
approximately $7 million in decreased annual interstate
network access revenues for the period July 1, 1994 to June
30, 1995. This decrease was offset by increased demand.
The Telephone Company will file its 1996 annual interstate
access tariff on April 2, 1996 to become effective July 1,
1996. The filing will adjust interstate access rates for an
experienced rate of inflation, the FCC's productivity target
and exogenous cost changes, if any. The Telephone Company
does not anticipate changing its 4.0% productivity factor
election for the next tariff period.
Since January 1, 1988, the Telephone Company has utilized an
FCC approved, company-specific Cost Allocation Manual ("CAM"),
which apportions costs between regulated and non-regulated
activities, and describes transactions between the Telephone
Company and its affiliates. In addition, the FCC requires
larger LECs, including the Telephone Company, to undergo an
annual independent audit to determine whether the LEC is in
compliance with its approved CAM. The Telephone Company has
received audit reports for 1988 through 1994 indicating it is
in compliance with its CAM, and is currently undergoing an
audit for the year 1995.
Capital Expenditures
The network access lines provided by the Telephone Company 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, for the Telephone Company, the number of
network access lines in service at the end of each year:
1995 1994 1993 1992 1991
Network Access Lines in
Service (thousands) 2,073 2,009 1,964 1,937 1,922
The Telephone Company has been making, and expects to continue
to make, significant capital expenditures to meet the demand
for regulated telecommunications services and to further
improve such services [see discussion of I-SNET[SM] in Item 2.
Properties]. The total gross investment in telephone plant
increased from $3.6 billion at December 31, 1990 to $4.2
billion at December 31, 1995, after giving effect to
retirements, but before deducting accumulated depreciation at
either date.
Since 1991, cash expended for capital additions was as follows:
Dollars in Millions,
For the Years Ended 1995 1994 1993 1992 1991
Cash Expended for
Capital Additions $280 $235 $232 $269 $296
7
In 1995, the Telephone Company funded its cash expenditures
for capital additions entirely through cash flows from
operations. In 1996, capital additions are expected to be
approximately $349 million. The Telephone Company expects to
fund substantially all of its 1996 capital additions through
cash flows from operations.
Directory Publishing Operations
The Telephone Company's publishing operations provides
traditional paper products including White and Yellow Pages
directories throughout Connecticut. To strategically widen
its business focus and position itself for the future, the
publishing operations is introducing new electronic publishing
services, such as SNET Access[SM], Consumer Tips and Electronic
Yellow Pages. On June 30, 1994, the DPUC lifted a restriction
which prohibited the Telephone Company from developing and
providing electronic information services, including
electronic publishing services.
Key trends affecting publishing revenues include the
Connecticut economy and competition. Publishing revenues, a
significant portion which reflect directory contracts entered
into in the prior year, continue to remain sensitive to the
Connecticut economy, which is in the early stages of recovery.
In addition, the Connecticut advertising marketplace is
undergoing major structural changes and is becoming
increasingly more fragmented and competitive. The publishing
division faces increased competition from non-traditional
services such as on-line services, desktop publishing,
electronic shopping services, CD-ROM and the expansion of
cable television. Furthermore, additional competition may
arise from the Regional Bell Operating Companies' ability to
offer information services.
Employee Relations
The Telephone Company employed approximately 8,259 persons at
February 29, 1996, of whom approximately 65% were represented
by the Connecticut Union of Telephone Workers, Inc. ("CUTW"),
an unaffiliated union.
On April 12, 1995, a new labor contract was ratified by
members of the CUTW. As part of the new contract, a voluntary
early-out offer ("EOO"), which provided incentives in the form
of enhanced pension benefits, was available to bargaining-unit
employees during July 1995. Approximately 2,600 employees, or
41.4% of the total bargaining-unit work force, accepted the
offer at that time. As of December 31, 1995, 2,000 employees
had left the Telephone Company, with the remaining 600
employees to leave no later than June 1996. CUTW members who
remain with the Telephone Company received a combination of
basic wage and lump sum increases to their wages or cash
balance plan account totaling 4.0% in January 1996. In both
January 1997 and January 1998, they will receive a combination
of basic wage and lump sum increases totaling 3.0%. In
addition, the contract also provides a sign-on bonus and
health benefit and pension enhancements. The new labor
agreement will expire on August 8, 1998. The contract is
intended to keep layoffs to a minimum while enabling the
Telephone Company to position itself to meet increasing
competition.
In December 1993, the Telephone Company recorded a
restructuring charge to provide for a comprehensive
restructuring program designed to reduce costs and improve
delivery of service. The program included incremental costs
to be incurred for employee separations. Total employee
separations under the restructuring program are expected to
approximate up to 4,000 employees. Through December 1995,
approximately 3,030 employees (660 management and 2,370
bargaining-unit employees, or 21.0% and 36.6% of the
respective total work force at the inception of the
8
restructuring program) had left the Telephone Company. Total
employee separations through the end of 1995 were offset
partially by an increase in provisional employees resulting in
a net reduction in the Telephone Company's work force of 1,485
employees from 9,677 employees at year-end 1993 to 8,192
employees at year-end 1995.
Item 2. Properties
The principal properties of the Telephone Company do not lend
themselves to a detailed description by character and
location. Of the Telephone Company's investment in telephone
plant at December 31, 1995, central office equipment
represented 41%; connecting lines not on customers' premises,
the majority of which are on or under public roads, highways
or streets and the remainder on or under private property,
represented 37%; land and buildings (occupied principally by
central offices) represented 10%; and other, principally
vehicles and general office equipment, represented 12%.
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 Telephone Company 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 Telephone Company's facilities and equipment are suitable
and adequate for the business.
The buildout of I-SNET, a $4.5 billion investment over 15
years, is expected to be completed by 2009. I-SNET, a
statewide telephony and information superhighway, is an
advanced network capable of delivering voice, video and a full
range of information and interactive multimedia services. I-
SNET passed approximately 170,000 households by December 1995
and brought service to its first customer in October 1995.
The Telephone Company expects I-SNET to pass approximately
230,000 households and provide telephony service on up to
80,000 lines by December 1996. The Telephone Company plans to
support this investment primarily through increased
productivity from the new technology deployed, ongoing cost-
reduction initiatives and customer demand for the new services
offered.
Item 3. Legal Proceedings
The Telephone Company is 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
Telephone Company.
Items 4 through 6.
Information required under Items 4 through 6 is omitted
pursuant to General Instruction J(2).
9
PART II
Item 7. Management's Discussion and Analysis (Dollars in Millions)
(Abbreviated pursuant to General Instruction J(2))
Operating Results
Income before extraordinary charge was $213.6 in 1995 compared to $183.8
in 1994. Financial results are summarized as follows:
Dollars in Millions, For the Years Ended 1995 1994
Income before extraordinary charge $ 213.6 $183.8
Extraordinary charge, net of taxes (716.3) -
Net (Loss) Income $ (502.7) $183.8
Income before extraordinary charge increased $29.8, or 16.2%,
in 1995 due to strong growth in demand for local service and
network access combined with cost-reduction initiatives,
offset partially by anticipated lower intrastate toll rates.
Also included in 1995 was an $11.0 charge, $6.3 after-tax,
associated primarily with a court ruling on the Telephone
Company's labor practices [see Note 7].
In 1995, the Telephone Company recorded a non-cash
extraordinary charge of $1,250.6, $716.3 after-tax, related to
the discontinuance of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation," for financial reporting
purposes. This non-cash extraordinary charge consisted of the
elimination of net regulatory assets and the recognition of
depreciation reserve deficiencies for intrastate and
interstate operations [see Note 2]. The Telephone Company
determined that due to emerging competition and the change in
its regulatory environment, it would change from the
methodology under SFAS No. 71, which specifies accounting
standards required for public utilities and certain other
regulated companies, to one which is more appropriate for a
competitive environment. As a result of this charge, net loss
for 1995 was $502.7.
Revenues
Total revenues increased $30.6, or 2.1%, in 1995. The
components of total revenues are summarized as follows:
Dollars in Millions, For the Years Ended 1995 1994
Local service $ 641.6 $ 618.8
Network access 369.4 354.5
Intrastate toll 266.4 295.4
Publishing and other 231.1 209.2
Total Revenues $1,508.5 $1,477.9
Local Service - Local service revenues, derived from the
provision of local exchange, public telephone and local
private line services, increased $22.8, or 3.7%, in 1995. The
increase was due primarily to strong growth of 3.2% in access
lines in service, including significant growth in second
residential access lines. The increase of 64,000 access lines
was the second largest annual increase
10
experienced. Local service revenues also increased due to growth
in subscriptions to SmartLink[R] advanced calling features, including
Caller ID, missed call dialing, call blocking and call tracing.
Management expects competition to impact local service
revenues beginning in 1996 as other telecommunication
providers offer local service [see Item 1. Competition].
Network Access - Network access charges are assessed on
interexchange carriers and end users for access to the local
exchange network. In 1995, network access revenues increased
$14.9, or 4.2%. The increase was due primarily to an increase
in interstate minutes of use of approximately 6%. Partially
offsetting the impact of the increase in minutes of use was a
decrease in tariff rates implemented on August 1, 1995, in
accordance with the Telephone Company's 1995 annual FCC filing
under price cap regulation [see Item 1. Federal Regulatory
Initiatives].
Intrastate Toll - In 1995, intrastate toll revenues, which
include primarily revenues from toll and WATS services,
decreased $29.0, or 9.8%. Toll message revenues decreased
approximately $20 due primarily to reduced intrastate toll
rates. The decline in rates was attributable to the
introduction of several toll discount calling plans that
provide competitive options to business and residence
customers. Also contributing to the decrease was a reduction
in toll message volume of approximately 2% during 1995. Lower
toll volume was due mainly to the increasingly competitive
toll market. WATS revenues, which include "800" services,
decreased approximately $6 due primarily to lower WATS message
volumes resulting from the shift to lower priced toll services
and the impact of competition. The offering of competitive
discount calling plans and the implementation of intrastate
equal access through December 1996 will continue to place
downward pressure on intrastate toll revenues.
Publishing and Other - Publishing and other revenues include
revenues from directory publishing, services rendered on
behalf of interexchange carriers, interest income and a
provision for uncollectible accounts receivable. The positive
impact of higher service revenues, increased interest income
and lower provision for uncollectibles contributed to the
increase of $21.9, or 10.5%, in 1995. Publishing revenues, a
significant portion of which reflect directory contracts
entered into in the prior year, have remained relatively flat
as expected. These revenues continue to be sensitive to the
Connecticut economy and the competitive marketplace.
Costs and Expenses
Total costs and expenses decreased $10.3, or .9%, in 1995.
Total costs and expenses are summarized as follows:
Dollars in Millions, For the Years Ended 1995 1994
Operating $ 433.9 $ 446.7
Maintenance 319.5 322.3
Total Operating Costs 753.4 769.0
Depreciation and amortization 300.9 295.8
Taxes other than income 53.8 53.6
Total Costs and Expenses $1,108.1 $1,118.4
11
Total Operating Costs - Total operating costs consist primarily
of employee-related expenses, including wages and benefits.
Cost of services and general and administrative expenses,
including marketing, represent the remaining portion of these
expenses. Total operating costs decreased $15.6, or 2.0%, in
1995. Excluding the $11.0 before-tax litigation charge
discussed previously, operating costs decreased $26.6, or
3.5%. Cost-reduction initiatives over the past two years have
been primary factors in the decrease of operating costs. A
major factor was lower work force levels during 1995 due
primarily to the EOO and severance programs under the 1993
restructuring program [see Note 5]. The Telephone Company's
work force decreased to 8,192 at year-end 1995 from 9,156 at
year-end 1994. Employee-related expense savings are
anticipated to continue from employee separations under the
1993 restructuring program [see Restructuring Charge].
Depreciation and Amortization - In 1995, depreciation and
amortization expense increased $5.1, or 1.7%. The increase in
depreciation and amortization was due primarily to revised
depreciation rate schedules for the Telephone Company's
intrastate plant, as approved by the DPUC, effective January
1, 1995. Higher levels of property, plant and equipment also
contributed to the increase.
Income Taxes
Dollars in Millions, For the Years Ended 1995 1994
Income Taxes $133.9 $121.8
The combined federal and state effective tax rate in 1995 was
38.5% compared with 39.9% in 1994. Income taxes in 1995
included an adjustment made to reflect the settlement of tax
matters. In addition, a state income tax credit was
recognized related to personal property taxes paid on certain
data processing equipment. A reconciliation of these
effective tax rates to the statutory tax rates is disclosed in
Note 4.
Restructuring Charge
In December 1993, the Telephone Company recorded a
restructuring charge to provide for a comprehensive program
designed to reduce costs and improve delivery of service. The
restructuring charge of $335.0 before-tax was comprised of
$160.0 in employee separation costs, $145.0 in process and
systems reengineering costs and $30.0 in exit and other costs.
Specifically, the program included costs to be incurred to
facilitate net employee separations beginning in January 1994.
The charge also included incremental costs of: implementing
appropriate reengineering solutions; designing and developing
new processes and tools to continue the Telephone Company's
provision of excellent service; and retraining of the
remaining employees to help them meet the changing demands of
customers. Since the inception of the restructuring program,
the Corporation experienced a cumulative reduction in 1995
employee-related expenses of approximately $50, net of costs
for provisional employees. Most of the reduction in employee-
related expenses, due to the EOO, will be realized in 1996
since the majority of the employee separations occurred in the
fourth quarter of 1995, with the remainder to occur no later
than June 1996. After full implementation of the
restructuring program, the Corporation anticipates annual
savings of approximately $120 from reduced employee-related
expenses, net of costs for provisional employees [see Note 5].
12
Balance Sheet Activities
The balance sheet as of December 31, 1995 reflects significant
changes due to the discontinuance of SFAS No. 71. These
changes resulted from the elimination of net regulatory assets
and the recognition of depreciation reserve deficiencies for
intrastate and interstate operations [see Note 2]. As a
result of the EOO, net pension curtailment losses were
recognized and charged against the restructuring reserve,
resulting in an accrued pension liability for the bargaining-
unit pension plan [see Note 10]. In addition, the current
portion of deferred income taxes decreased due primarily to
costs incurred in 1995 under the restructuring program. The
balance sheet also changed due to operating activities.
Accounts receivable increased due to increased revenues and
timing of cash collections while accounts payable increased
due primarily to timing of cash payments.
13
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of
The Southern New England Telephone Company:
We have audited the accompanying financial statements and the
financial statement schedule of The Southern New England
Telephone Company listed in Item 14(a) of this Form 10-K.
These financial statements and the financial statement
schedule are the responsibility of the Telephone Company's
management. Our responsibility is to express an opinion on
these financial statements and the financial statement
schedule 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 financial
position of The Southern New England Telephone Company as of
December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information required to be included therein.
As discussed in Note 2 to the financial statements, in 1995
the Telephone Company discontinued accounting for its
operations in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation," effective January 1, 1996.
Also, as discussed in Note 1 to the financial statements, in
1993 the Telephone Company changed its method of accounting
for postretirement benefits other than pensions,
postemployment benefits and income taxes.
Hartford, Connecticut COOPERS & LYBRAND L.L.P.
January 22, 1996
14
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENTS OF (LOSS) INCOME AND RETAINED EARNINGS
Dollars in Millions, For the
Years Ended December 31, 1995 1994 1993
Revenues
Local service $ 641.6 $ 618.8 $ 566.7
Network access 369.4 354.5 342.8
Intrastate toll 266.4 295.4 339.8
Publishing and other 231.1 209.2 195.3
Total Revenues 1,508.5 1,477.9 1,444.6
Costs and Expenses
Operating 433.9 446.7 470.9
Maintenance 319.5 322.3 322.4
Provision for business restructuring - - 335.0
Depreciation and amortization 300.9 295.8 265.2
Taxes other than income 53.8 53.6 58.0
Total Costs and Expenses 1,108.1 1,118.4 1,451.5
Operating Income (Loss) 400.4 359.5 (6.9)
Interest 52.9 53.9 68.0
Income (Loss) Before Income Taxes,
Extraordinary Charges and
Accounting Change 347.5 305.6 (74.9)
Income taxes 133.9 121.8 (43.9)
Income (Loss) Before
Extraordinary Charges
and Accounting Change 213.6 183.8 (31.0)
Extraordinary charges, net of related
taxes of $534.3 and $38.0,
respectively (716.3) - (44.0)
Cumulative effect of accounting change - - (6.5)
Net (Loss) Income $ (502.7) $ 183.8 $ (81.5)
Retained Earnings, Beginning of Period $ 648.0 $ 572.2 $ 763.7
Net (loss) income (502.7) 183.8 (81.5)
Dividends declared to parent (113.5) (108.0) (110.0)
Retained Earnings, End of Period $ 31.8 $ 648.0 $ 572.2
The accompanying notes are an integral part of these financial statements.
15
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEETS
Dollars in Millions, at December 31, 1995 1994
Assets
Cash and temporary cash investments $ 70.5 $ 44.2
Accounts receivable, net of allowance
for uncollectibles of $26.1 and
$24.9, respectively 280.1 237.7
Accounts receivable from affiliates 10.9 15.6
Materials and supplies 10.7 6.2
Prepaid publishing 37.2 39.0
Deferred income taxes 57.8 92.6
Prepaid and other 43.2 25.3
Total Current Assets 510.4 460.6
Land 17.5 16.7
Buildings 396.2 384.3
Central office equipment 1,657.2 1,618.8
Outside plant facilities and equipment 1,640.3 1,613.0
Furniture and office equipment 310.6 355.1
Station equipment and connections 22.7 23.9
Plant under construction 122.4 68.3
Total telephone plant, at cost 4,166.9 4,080.1
Less: Accumulated depreciation (2,832.9) (1,539.2)
Net Telephone Plant 1,334.0 2,540.9
Deferred charges and other assets 53.2 247.3
Total Assets $1,897.6 $3,248.8
The accompanying notes are an integral part of these financial statements.
16
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
BALANCE SHEETS (Cont.)
Dollars in Millions, Except Per Share Amounts
At December 31, 1995 1994
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 180.9 $ 169.3
Restructuring charge - current 59.0 145.5
Advance billings and customer deposits 43.0 42.3
Accrued compensated absences 33.8 34.1
Accounts payable to affiliates 29.6 12.3
Other current liabilities 61.8 72.7
Total Current Liabilities 408.1 476.2
Long-term debt 746.6 746.3
Deferred income taxes - 458.6
Unamortized investment tax credits 17.6 42.9
Restructuring charge - long-term 13.0 114.4
Other liabilities and deferred credits 149.4 231.3
Total Liabilities 1,334.7 2,069.7
Shareholder's Equity
Common stock; $12.50 par value;
30,428,596 shares issued and
30,385,900 outstanding 380.4 380.4
Proceeds in excess of par value 152.1 152.1
Retained earnings 31.8 648.0
Less: Treasury stock; 42,696 shares, at cost (1.4) (1.4)
Total Shareholder's Equity 562.9 1,179.1
Total Liabilities and Shareholder's Equity $1,897.6 $3,248.8
The accompanying notes are an integral part of these financial statements.
17
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
Dollars in Millions, For the Years
Ended December 31, 1995 1994 1993
Operating Activities
Net (loss) income $(502.7) $ 183.8 $ (81.5)
Adjustments to reconcile net (loss)
income to cash provided by operating
activities:
Depreciation and amortization 300.9 295.8 265.2
Extraordinary charges, net of tax 716.3 - 44.0
Provision for business restructuring,
before-tax - - 335.0
Cumulative effect of accounting change,
net of tax - - 6.5
Provision for uncollectible accounts 15.5 18.5 24.9
Restructuring payments (88.3) (62.2) -
Allowance for funds used during
construction (3.4) (1.3) (1.7)
Operating cash flows from:
Increase in accounts receivable (53.2) (34.2) (11.1)
(Increase) decrease in materials and
supplies (4.4) 1.8 2.4
Increase (decrease) in accounts payable 37.0 2.3 (16.7)
Increase (decrease) in deferred income
taxes 15.3 15.2 (122.4)
Decrease in investment tax credits (6.9) (7.9) (10.5)
Net change in other assets and
liabilities (15.7) (6.9) (11.6)
Other, net 9.7 2.8 12.9
Net Cash Provided by Operating Activities 420.1 407.7 435.4
Investing Activities
Cash expended for capital additions (279.8) (235.4) (231.6)
Other, net 6.5 (2.6) (4.0)
Net Cash Used by Investing Activities (273.3) (238.0) (235.6)
Financing Activities
Proceeds from long-term debt - - 420.1
Repayments of long-term debt - (240.0) (171.5)
Net payments of short-term debt from
affiliates - - (72.6)
Cash dividends paid (120.5) (100.0) (105.2)
Amounts placed in trust for debt
refinancing - - (62.1)
Other, net - - (.4)
Net Cash (Used) Provided by Financing
Activities (120.5) (340.0) 8.3
Increase (Decrease) in Cash and
Temporary Cash Investments 26.3 (170.3) 208.1
Cash and temporary cash investments,
beginning of year 44.2 214.5 6.4
Cash and Temporary Cash Investments,
End of Year $ 70.5 $ 44.2 $ 214.5
The accompanying notes are an integral part of these financial statements.
18
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Southern New England Telephone
Company ("Telephone Company") is a wholly-owned subsidiary of
Southern New England Telecommunications Corporation
("Corporation"). The accounting policies of the Telephone
Company are in conformity with generally accepted accounting
principles ("GAAP"). In the fourth quarter of 1995, the
Telephone Company discontinued using Statement of Financial
Accounting Standard ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation" effective January 1,
1996 [see Note 2].
The preparation of the 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 financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
The Telephone Company derives substantially all of its
revenues from the telecommunications service industry by
providing network and information-management services and
communications systems, in-state long-distance communication
services and directory publishing and advertising services.
Substantially all of the Telephone Company's operations and
customer base are located in Connecticut.
The 1994 and 1993 Telephone Company financial statements have
been reclassified to conform to the current year presentation.
Cash and Temporary Cash Investments - Cash and temporary cash
investments include all highly liquid investments, with
original maturities of three months or less. The Telephone
Company records payments made by draft as accounts payable
until the banks honoring the drafts have presented them for
payment. At December 31, 1995 and 1994, accounts payable
included drafts outstanding of $26.3 and $22.3, respectively.
Materials and Supplies - Materials and supplies, which are
carried at original cost, are primarily for the construction
and maintenance of telephone plant.
Telephone Plant - Telephone plant is stated at cost.
Depreciation is calculated using either the equal life group
("ELG") straight-line depreciation method or the composite
vintage group method. ELG was approved for Federal
Communications Commission ("FCC") purposes on interstate
assets placed in service beginning in 1982 and for Department
of Public Utility Control ("DPUC") purposes on intrastate
assets placed in service beginning in 1993. Composite vintage
group method is used for assets in service prior to the
adoption of ELG.
The cost of depreciable telephone plant retired, net of
removal costs and salvage, is charged to accumulated
depreciation. Replacements, renewals and betterments of
telephone plant that materially increase an asset's useful or
remaining life are capitalized. Minor replacements and all
repairs and maintenance are charged to expense.
19
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.
Transactions with Affiliates - The Telephone Company provides
certain services for the Corporation and affiliates. The
Telephone Company records substantially all the revenue from
such services as a reduction of the cost incurred to provide
such services. Amounts billed to affiliates for such services
totaled $55.2 in 1995, $46.5 in 1994 and $35.6 in 1993. In
addition, the Telephone Company charges affiliates for network
services at tariffed rates. These amounts are included in
revenue and totaled $11.9 in 1995, $11.8 in 1994 and $9.2 in
1993. The Telephone Company is charged for management
functions performed by the Corporation. The cost of these
management functions totaled $26.0 in 1995, $29.3 in 1994 and
$24.5 in 1993.
Advertising Costs - Costs for advertising products and services
are expensed as incurred.
Income Taxes - The Telephone Company is included in the
consolidated federal income tax return and, where applicable,
combined state income tax returns filed by the Corporation.
Effective January 1, 1993, the Telephone Company changed the
method of computing income taxes to the liability method with
the adoption of SFAS No. 109, "Accounting for Income Taxes."
Under the liability method, deferred tax assets and
liabilities are determined based on all temporary differences
between the financial statement and tax bases of assets and
liabilities using the currently enacted rates. Additionally,
under SFAS No. 109, the Telephone Company may recognize
deferred tax assets if it is more likely than not that the
benefit will be realized. Consolidated income tax currently
payable is allocated by the Corporation to the Telephone
Company based on the Telephone Company's contribution to
consolidated taxable income and investment tax credits.
Investment tax credits realized in prior years are being
amortized as a reduction to the provision for income taxes
over the life of the related plant.
Accounting Changes - Effective January 1, 1993, the Telephone
Company implemented SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," SFAS No. 112,
"Employers' Accounting for Postemployment Benefits" and SFAS
No. 109. The cumulative effect of the accounting change for
SFAS No. 112 resulted in a non-cash charge which reduced 1993
net income by $6.5. For SFAS No. 106, the Telephone Company
elected to amortize the transition obligation over the average
remaining service period, therefore a cumulative effect was
not recorded. In addition, a cumulative effect was not
recorded for the adoption of SFAS No. 109 in compliance with
the methods of adoption for regulated entities.
New Accounting Pronouncement - The Telephone Company will adopt
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," in fiscal
year 1996. SFAS No. 121 requires that all long-lived assets
and certain identifiable intangibles be reviewed for
impairment whenever there is an indication that the carrying
amount of the asset may not be recoverable. Such review will
compare the carrying value of all applicable assets to the
expected future undiscounted operating cash flows derived from
such assets. Management expects the adoption of SFAS No. 121
to have an immaterial impact on the financial statements.
20
NOTE 2: DISCONTINUANCE OF SFAS NO. 71
In the fourth quarter 1995, the Telephone Company determined
it was no longer eligible for application of SFAS No. 71,
which specifies accounting standards required for public
utilities and certain other regulated companies. Effective
January 1, 1996, the Telephone Company will follow accounting
principles which are more appropriate for a competitive
environment. This determination was made based on the
significant changes in technology and the increase in
telecommunications competition in Connecticut brought about by
legislative and regulatory policy changes. This accounting
change is for financial reporting purposes only and does not
affect the Telephone Company's accounting and reporting for
regulatory purposes. As a result of the discontinued use of
SFAS No. 71, in accordance with the provisions of SFAS No.
101, "Accounting for the Discontinuance of Application of FASB
Statement No. 71," the Telephone Company recorded a non-cash,
extraordinary charge of $716.3, net of tax benefits of $534.3,
in the fourth quarter of 1995.
The following table is a summary of the extraordinary charge:
Before-tax After-tax
Adjustment to net telephone plant $(1,178.0) $(703.9)
Elimination of net regulatory assets (72.6) (43.5)
Tax-related net regulatory liabilities - 20.1
Accelerated amortization of investment
tax credits - 11.0
Total Non-cash, Extraordinary Charge $(1,250.6) $(716.3)
The adjustment of $1,178.0 to net telephone plant was
necessary since estimated useful lives and depreciation
methods historically prescribed by regulators did not reflect
the rapid pace of technology and differed significantly from
those used by unregulated companies. Plant balances were
adjusted by increasing the accumulated depreciation reserve.
The increase to the accumulated depreciation reserve was
determined by a discounted cash flow analysis which considered
technological replacement and estimated impacts of future
competition. To support this analysis, a depreciation reserve
study was also performed that identified, by asset categories,
inadequate accumulated depreciation levels (i.e.,
deficiencies) that had developed over time. A comparison of
average asset lives before and after the discontinuance of
SFAS No. 71, for the most significantly affected categories of
telephone plant, is as follows:
Asset Category Before After
Digital Switch 17 10.5
Digital Circuit 11.5 8.2
Conduit 55 55
Copper 22 - 26 10.5 - 16
Fiber 32 - 40 30
The discontinuance of SFAS No. 71 also required the Telephone
Company to eliminate from its balance sheet, prepared for
financial reporting purposes, the effects of any actions of
regulators that had been recognized as assets and liabilities
pursuant to SFAS No. 71, but would not have been recognized as
assets and liabilities by unregulated companies. The
elimination of net regulatory assets relates principally to
net curtailment costs associated with other postretirement
benefits, vacation pay costs and gross earnings tax which were
being amortized as they were recognized in the ratemaking
process.
21
Upon adoption of SFAS No. 109, the effects of required
adjustments to the Telephone Company's deferred tax balances
were recorded as regulatory assets and liabilities on the
balance sheet. Both the tax-related regulatory assets and
liabilities were grossed up for the tax effect anticipated
when collected in future rates and amortized as the related
deferred taxes were recognized in the ratemaking process. As
of December 31, 1995, prior to the extraordinary charge, the
Telephone Company had tax-related regulatory assets and
liabilities of $49.8 and $84.4, respectively. These balances
were eliminated and the related deferred tax balances were
adjusted to reflect application of SFAS No. 109 consistent
with other unregulated companies.
The Telephone Company uses the deferral method of accounting
for investment tax credits and amortizes the credits as a
reduction to income tax expense over the life of the asset
that gave rise to the investment tax credit. As asset lives
were shortened, the tax credits associated with those assets
were also adjusted for the shortened lives and the result
($11.0) was included in the extraordinary charge as a credit
to income, net of associated deferred income taxes.
NOTE 3: EMPLOYEE BENEFITS
Separation Offers - In April 1995, the Telephone Company
ratified a contract with the Connecticut Union of Telephone
Workers, Inc. which included a voluntary early-out offer
("EOO"). The EOO provided enhanced pension benefits by adding
six years to the age and to the length of service of employees
for purposes of determining pension and postretirement health
care benefits eligibility. The employees also had the option
to select a pension distribution method (e.g., lump-sum,
monthly pension or a combination of both) at the time of
separation. The EOO was available to the bargaining-unit work
force during July 1995 and approximately 2,600 employees, or
41.4% of the bargaining-unit work force, accepted the offer.
As of December 31, 1995, 2,000 employees had left the
Telephone Company, with the remaining 600 to leave no later
than June 1996. Net losses related to the EOO were recorded
against the restructuring reserve [see Note 5].
As part of the bargaining-unit contract negotiated in August
1992, employees electing to retire or terminate their
employment between December 15, 1992 and February 16, 1993
were offered an early retirement incentive offer, Special
Pension Option ("SPO"). Approximately 525 employees accepted
the early retirement offer. Most employees who elected to
retire or terminate left the Telephone Company by March 19,
1993, and the remainder left by September 17, 1993. The
Telephone Company recorded a $6.0 gain in 1993 as a result of
the SPO.
Pension Plans - The Telephone Company participates in two non-
contributory, defined benefit pension plans of the
Corporation: one for management employees and one for
bargaining-unit employees. 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.
Funding of the plans is achieved through irrevocable
contributions 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
22
Security Act of 1974 using the aggregate cost method. For
purposes of determining contributions, the assumed
investment earnings rate on plan assets was 9.5% in 1995 and
declines to 7.5% in 1998.
The Telephone Company's portion of the Corporation's pension
cost (income) computed using the projected unit credit
actuarial method was $67.4, $12.4 and $(7.7) for 1995, 1994
and 1993, respectively. The increase in pension cost for 1995
was due primarily to the charges for special termination
benefits associated with the EOO, a curtailment loss for
employee separations and a settlement gain that combined,
resulted in a net loss of $76.3 in 1995. The increase in
pension cost for 1994 was due primarily to the net effect of a
lower discount rate, a 1994 curtailment loss for employee
separations and the absence of the 1993 $6.0 net settlement
gain. The 1995 net loss of $76.3 and the 1994 curtailment
loss were charged against the restructuring reserve in the
respective years [see Note 5].
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 Telephone Company
participates in the health care and life insurance benefit
plans for retired employees provided by the Corporation.
Substantially all of the Telephone Company's employees may
become eligible for these benefits if they meet certain age
and service requirements. In addition, an employee's spouse
and dependents may be eligible for health care benefits.
Effective July 1, 1996, all bargaining-unit employees who
retire after December 31, 1989 and all management employees
who retire after December 31, 1991 may have to share with the
Corporation the premium costs of postretirement health care
benefits if these costs exceed certain limits.
Effective January 1, 1993, the Telephone Company adopted SFAS
No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires that employers
accrue, during the years an employee renders service, the
expected cost, based on actuarial valuations, of health care
and other non-pension benefits provided to retirees and their
eligible dependents. With the adoption of SFAS No. 106, the
Telephone Company elected to defer, in accordance with an FCC
accounting order and final decision issued by the DPUC on July
7, 1993, recognition of the accumulated postretirement benefit
obligation in excess of the fair value of plan assets
("transition obligation") and amortize it over the average
remaining service period of 18.4 years. The adoption of SFAS
No. 106 had no material effect on 1993 income before income
taxes. The Telephone Company's portion of the postretirement
benefit cost, including the amortization of the transition
obligation, was approximately $45 for 1995, 1994 and 1993,
respectively. The Corporation funds the trusts for
postretirement health insurance benefits using the Voluntary
Employee Beneficiary Association.
Postemployment Benefits - Effective January 1, 1993, the
Telephone Company adopted SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." This statement requires
employers to accrue benefits provided to former or inactive
employees after employment but before retirement. These
benefits include workers' compensation, disability benefits
and health care continuation coverage for a limited period of
time after employment. The standard requires that these
benefits be accrued as earned where the right to the benefits
accumulates or vests. The cumulative effect of this
accounting change reduced 1993 net income by $6.5. The
adoption of SFAS No. 112 had no material effect on 1993 income
before income taxes. Health care continuation costs, which do
not vest, continue to be paid from company funds and are
expensed when paid.
23
NOTE 4: INCOME TAXES
Effective January 1, 1993, the Telephone Company adopted SFAS
No. 109, "Accounting for Income Taxes." Upon adoption of SFAS
No. 109, in accordance with SFAS No. 71, the cumulative effect
was recorded only in the balance sheet as a regulatory tax
asset and liability. The adoption of SFAS No. 109 had no
material effect on the 1993 income before income taxes. In
the fourth quarter of 1995, the Telephone Company discontinued
application of SFAS No. 71 [see Note 2], eliminating the
balances related to the regulatory tax asset and liability.
The deferred tax balances have been adjusted to reflect
application of SFAS No. 109 consistent with unregulated
companies.
Income tax expense (benefit) includes the following components:
For the Years Ended December 31, 1995 1994 1993
Federal
Current $ 91.6 $ 87.9 $ 77.2
Deferred 20.1 8.7 (103.9)
Investment tax credits, net (6.9) (7.9) (10.5)
Total Federal 104.8 88.7 (37.2)
State
Current 24.1 32.7 28.6
Deferred 5.0 .4 (35.3)
Total State 29.1 33.1 (6.7)
Total Income Taxes $ 133.9 $121.8 $(43.9)
Deferred income tax expense (benefit) resulted primarily from
restructuring program costs incurred in 1995 and 1994, which
were recorded in the financial statements in 1993 as a part of
the restructuring charge. In April 1995, new Connecticut state
income tax rates were enacted to accelerate the reduction of
current rates. The 1995 Connecticut state income tax rate of
11.25% will gradually decrease to 7.5% in 2000.
A reconciliation between income taxes and taxes computed by
applying the statutory federal income tax rate to income
(loss) before income taxes is as follows:
For the Years Ended December 31, 1995 1994 1993
Statutory Federal Income Tax Rate 35.0% 35.0% (35.0)%
Federal income taxes at statutory rate $121.6 $107.0 $(26.2)
State income taxes, net of federal
income tax effect 18.9 21.5 (4.3)
Depreciation of telephone plant
construction costs previously
deducted for tax purposes 5.1 5.1 6.3
Rate differentials applied to reversing
temporary differences (4.0) (5.1) (7.9)
Amortization of investment tax credits (6.9) (7.9) (10.5)
Prior years' tax adjustments and
other differences, net (.8) 1.2 (1.3)
Income Taxes $133.9 $121.8 $(43.9)
Effective Tax Rate 38.5% 39.9% (58.6)%
24
Deferred income tax assets (liabilities) are comprised of the following:
At December 31, 1995 1994
Depreciation $(28.1) $(542.2)
Deferred gross earnings tax - (15.9)
Restructuring charge 30.2 110.4
Unamortized investment tax credits 7.2 31.1
Pension 26.0 .5
Software 14.9 11.5
Postretirement benefits other than pensions 18.8 -
Other 31.0 38.6
Deferred Income Taxes $100.0 $(366.0)
NOTE 5: RESTRUCTURING CHARGE
In December 1993, the Telephone Company recorded a
restructuring charge of $335.0, $192.7 after-tax, to provide
for a comprehensive restructuring program. Specifically, the
program included costs to be incurred to facilitate employee
separations. The charge also included incremental costs of:
implementing appropriate reengineering solutions; designing
and developing new processes and tools to continue the
Telephone Company's provision of excellent service; and
retraining of the remaining employees to help them meet the
changing demands of customers.
The 1993 restructuring charge was originally estimated as
follows:
At December 31, 1993
Employee separation costs $160.0
Process and systems reengineering 145.0
Exit and other costs 30.0
Total Restructuring Charge $335.0
A summary of costs incurred under the restructuring program is
as follows:
For the Years Ended December 31, 1995 1994
Employee separation costs $107.8 $38.6
Process and systems reengineering 74.2 35.0
Exit and other costs 5.9 1.5
Total Costs Incurred $187.9 $75.1
Costs incurred for employee separations included payments for
severance, unused compensated absences and health care
continuation, as well as non-cash net pension and
postretirement curtailment losses of $99.6 and $12.9 in 1995
and 1994, respectively. Process and systems reengineering
costs included incremental costs incurred in connection with
the execution of numerous reengineering programs involving
network operations, customer service, repair and support
processes. Exit and other costs included expenses related to
the initial phase of redesigning work space requirements to
reduce overall corporate space requirements.
25
As previously discussed in Note 3, the EOO was available to
the bargaining-unit work force during July 1995 and
approximately 2,600 employees, or 41.4% of the bargaining-unit
work force, accepted the offer. As of December 31, 1995,
approximately 2,000 employees had left primarily during the
fourth quarter, with the remainder to leave no later than June
1996. The enhanced pension and postretirement benefits under
the EOO are expected (through June of 1996) to result in a
total non-cash charge of approximately $77, net of settlement
gains of approximately $97. In 1995, a non-cash net charge of
$99.6 was recorded. The charge included pension and
postretirement enhancements and curtailment losses of $173.8
to reflect the acceptance of the EOO, net of settlement gains
of $74.2 to account for the estimated lump-sum pension
payments made for employee separations during 1995. Future
adjustments to the restructuring charge are expected to
include settlement gains of approximately $23 in the first
half of 1996.
Total employee separations under the restructuring program are
expected to approximate up to 4,000. Through the end of 1995,
approximately 3,030 employees left the Telephone Company under
the restructuring program: 890 employees left under severance
plans through the end of 1994 and 2,140 employees left the
Telephone Company primarily under the EOO in 1995. The
remaining employee separations are expected to occur primarily
in 1996. Total employee separations through the end of 1995
were offset partially by an increase in provisional employees
resulting in a net reduction in the Telephone Company's work
force of 1,485 employees.
To date, the Telephone Company has implemented network
operations, customer service, repair and support programs and
developed new processes to substantially reduce the costs of
business while significantly improving quality and customer
service. The initial installation and ongoing development of
these new integrated processes have enabled the Telephone
Company to increase its responsiveness to customer specific
needs and to eliminate certain current labor-intensive
interfaces between the existing systems.
Since the inception of the restructuring program, the
Telephone Company experienced a cumulative reduction in 1995
employee-related expenses of approximately $50, net of costs
for provisional employees. Most of the reduction in employee-
related expenses, due to the EOO, will be realized in 1996
since the majority of the employee separations occurred in the
fourth quarter of 1995, with the remainder to occur no later
than June 1996. After full implementation of the
restructuring program, the Telephone Company anticipates
annual savings of approximately $120 from reduced employee-
related expenses, net of costs for provisional employees.
These anticipated savings will also be substantially offset by
growth in the business.
Cash expenditures for the restructuring program are estimated
to be $80 in 1996. The EOO will be funded primarily by the
pension and postretirement plans. Incremental capital
expenditures related to the restructuring program approximated
$29 and $20 in 1995 and 1994, respectively. These items were
recorded in telephone plant and will result in increased
depreciation expense in future years. The Telephone Company
currently anticipates total incremental capital expenditures
of approximately $30 in 1996 under the restructuring program.
26
The Telephone Company determined that no additional provision
for employee separations is required as a result of evaluating
the net impact of the EOO on the restructuring reserve.
Specific process and systems reengineering projects under the
restructuring program are expected to be completed in 1996.
Management expects to maintain an estimated reserve of $13 at
the end of 1996, primarily for employee separations. Also,
shifts within reserve categories are expected to occur in
1996. The Telephone Company believes that the total
restructuring reserve balance of $72.0 as of December 31, 1995
plus the expected net adjustments of approximately $23,
discussed previously, are adequate for future estimated costs
under the 1993 restructuring program.
NOTE 6: LONG-TERM DEBT
The components of long-term debt are as follows:
At December 31, Interest Rates 1995 1994
Unsecured notes 6.13% to 8.70% $705.0 $705.0
Debentures 4.38% 45.0 45.0
Total Long-term debt 750.0 750.0
Unamortized discount and premium, net (3.5) (3.8)
Capital lease obligations .1 .1
Long-term Debt $746.6 $746.3
The aggregate principal amounts of long-term debt are
scheduled for repayment starting in 2001 through 2033.
In December 1993, the Telephone Company filed a shelf
registration statement with the SEC to sell up to $540.0 in
medium-term notes with maturities ranging from 10 to 40 years.
In December 1993, the Telephone Company announced that it
would repurchase up to $220.0 of medium-term notes with interest
rates ranging from 9.60% to 9.63%. The Telephone Company
also irrevocably called $200.0 of 8.63% debentures by
providing a 30 day legal notice of redemption to the holders.
Pursuant to the registration statement, the Telephone Company
sold, in December 1993, with DPUC approval, $445.0 of
unsecured notes with interest rates ranging from 6.13% to
7.25%. Of the total medium-term notes refinanced in December
1993, $166.5 in notes were purchased. The Telephone Company
also executed an "in-substance defeasance" for the remainder
of the notes not repurchased. Sufficient U.S. Government
securities were deposited in an irrevocable trust to cover the
outstanding principal, interest and call premium payable
February 15, 1995. The proceeds were also used to redeem the
debentures in January 1994. The costs associated with the
refinancing were recorded as an extraordinary charge totaling
$44.0, net of applicable tax benefits of $38.0. As of
December 31, 1995, the issued notes were outstanding.
Additional notes may be sold in one or more issues from time
to time as market conditions warrant.
27
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Telephone Company entered into both operating and capital
leases for facilities and equipment used in its operations.
Rental expense under operating leases was $24.9, $28.7 and
$30.3 for 1995, 1994 and 1993, respectively. Future minimum
rental commitments under third party, noncancelable leases
include $19.5 in 1996, $18.5 in 1997, $17.7 in 1998, $15.4 in
1999, $13.9 in 2000 and $33.2 thereafter. Capital leases were
not significant.
Included in future minimum rental commitments for operating
leases are amounts attributable to leases with affiliates
totaling $51.2.
The Telephone Company expects total capital expenditures of
approximately $349 for additions to telephone plant during
1996. In connection with the capital program, the Telephone
Company has made certain commitments for the purchase of
material and equipment.
In June 1995, a U.S. District Court decision was issued in
favor of the Department of Labor against the Corporation and
the Telephone Company. The decision held that the Corporation
and the Telephone Company violated certain sections of the
Fair Labor Standards Act and was liable for back wages and
liquidating damages. The Corporation and the Telephone
Company are appealing this decision. The Telephone Company
recorded a liability of $11.0 as its anticipated cost of total
damages for this and other litigation matters, which was
charged to operating and maintenance expenses in 1995.
NOTE 8: 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 Debt - 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 Telephone Company for debt of the same
remaining maturities.
The carrying amount and estimated fair value of financial
instruments are as follows:
At December 31, 1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and temporary cash investments $ 70.5 $ 70.5 $ 44.2 $ 44.2
Long-term debt (746.5) (776.6) (746.2) (655.8)
28
Concentration of Credit Risk - Financial instruments that
potentially subject the Telephone Company to concentrations of
credit risk consist primarily of temporary cash investments
and trade receivables. The Telephone Company places its
temporary cash investments with the Corporation, who in turn
places its temporary cash investments with high-quality
financial institutions. Concentrations of credit risk with
respect to trade receivables are limited due to the large
number of customers in the Telephone Company's customer base.
NOTE 9: COMMON, PREFERRED AND PREFERENCE SHARES
The Telephone Company is authorized to issue up to 70,000,000
shares of common stock at a par value of $12.50 per share, as
well as 500,000 shares of preferred stock at a par value of
$50.00 per share and 50,000,000 shares of preference stock at
a par value of $1.00 per share. No preferred or preference
shares have been issued pursuant to these authorizations.
NOTE 10: SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental Cash Flow Information
For the Years Ended December 31, 1995 1994 1993
Interest Paid $ 53.0 $ 61.3 $74.0
Income Taxes Paid $122.1 $123.9 $98.8
Supplemental Income Statement Information
For the Years Ended December 31, 1995 1994 1993
Advertising Expense $18.5 $15.6 $11.2
Depreciation and amortization:
Depreciation $297.6 $292.7 $261.4
Amortization 3.3 3.1 3.8
Total Depreciation and
Amortization $300.9 $295.8 $265.2
Interest expense:
Long-term obligations $52.6 $53.0 $64.4
Short-term obligations - .5 1.5
Other .3 .4 2.1
Total Interest Expense $52.9 $53.9 $68.0
During 1995, 1994 and 1993, revenues earned from providing
services to AT&T Corp. accounted for 11.2%, 11.9% and 12.3%,
respectively, of total revenues.
29
Supplemental Balance Sheet Information
At December 31, 1995 1994
Deferred charges and other assets:
Deferred charges [see Note 2] $ .8 $ 49.8
Regulatory tax asset [see Note 2] - 62.2
Prepaid pension cost - 37.7
Other assets 52.4 97.6
Total Deferred Charges and Other Assets $53.2 $247.3
Other current liabilities:
Dividends payable $23.0 $30.0
Accrued postemployment benefit obligation 11.1 11.2
Accrued interest 10.2 10.3
Other current liabilities 17.5 21.2
Total Other Current Liabilities $61.8 $72.7
Other liabilities and deferred credits:
Accrued pension cost $ 67.8 $ 38.5
Regulatory tax liability [see Note 2] - 84.2
Other 81.6 108.6
Total Other Liabilities and Deferred Credits $149.4 $231.3
NOTE 11: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended December 31, 1st 2nd 3rd 4th Full
QTR QTR QTR QTR Year
1995
Total Revenues $374.0 $374.0 $384.0 $ 376.5 $1,508.5
Operating Income $101.5 $ 89.5 $101.5 $ 107.9 $ 400.4
Net (Loss) Income:
Income Before
Extraordinary Charge $ 53.5 $ 46.8 $ 55.6 $ 57.7 $ 213.6
Extraordinary Charge [see - - - (716.3) (716.3)
Note 2]
Net (Loss) Income $ 53.5 $ 46.8 $ 55.6 $(658.6) $ (502.7)
1994
Total Revenues $369.4 $371.1 $367.6 $369.8 $1,477.9
Operating Income $ 86.2 $ 93.6 $ 89.3 $ 90.4 $ 359.5
Net Income $ 43.1 $ 47.8 $ 45.4 $ 47.5 $ 183.8
30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
No changes in or disagreements with accountants on any matter
of 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 omitted
pursuant to General Instruction J(2).
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 Independent Accountants 14
Financial Statements Covered by Report of
Independent Accountants
Statements of (Loss) Income and Retained
Earnings - for the years ended December 31,
1995, 1994 and 1993 15
Balance Sheets - as of December 31, 1995
and 1994 16
Statements of Cash Flows - for the years
ended December 31, 1995, 1994 and 1993 18
Notes to Financial Statements 19
(2) Financial Statement Schedule Covered by Report
of Independent Accountants for the three years
ended December 31, 1995:
II - Valuation and Qualifying Accounts 36
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.
31
(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)15 are management contracts or compensatory
plans required to be filed as exhibits pursuant to Item 14 (c) of Form 10-K.
Exhibit
Number
3a Amended and Restated Certificate of Incorporation
of the registrant as filed June 14, 1990 (Exhibit
3a to 1990 Form 10-K dated 3/25/91, File No. 1-
6654).
3b By-Laws of the registrant as amended and restated
through May 11, 1988 (Exhibit 3b to 1988 Form 10-K
dated 3/23/89, File No. 1-6654).
4 Indenture dated December 13, 1993 between the
registrant 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 4 to 1994 Form 10-K dated 3/10/95, File No.
1-6654).
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. 1-6654).
10(iii)(A)3 SNET Financial Counseling Program as amended
January 1987 (Exhibit 10-D to Form SE dated
3/23/87-1, File No. 1-9157).
10(iii)(A)4 Group Life Insurance Plan and Accidental Death and
Dismemberment Benefits Plan for Outside Directors
of SNET as amended July 1, 1986 (Exhibit 10-E to
Form SE dated 3/23/87-1, File No. 1-9157).
10(iii)(A)5 SNET Pension Benefit Plan as amended November 1,
1991 (Exhibit 10-A to Form SE dated 3/20/92, File
No. 1-9157). Amendments dated December 8, 1993
(Exhibit 10(iii)(A)5 to 1993 Form 10-K dated
3/23/94, File No. 1-9157). Amendment dated
February 8, 1995 (Exhibit 10(iii)(A)5 to 1994 Form
10-K dated 3/10/95, File No. 1-9157). Amendments
effective December 13, 1995 and January 1, 1996
(Exhibit 10(iii)(A)5 to 1995 Form 10-K dated 3/20/96,
File No. 1-9157).
32
(3) Exhibits (continued):
Exhibit
Number
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).
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. 1-6654).
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. 1-6654).
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. 1-6654).
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 January 1,
1994 (Exhibit 10(iii)(A)12 to 1994 Form 10-K dated
3/10/95, File No. 1-9157).
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration
Statement No. 33-51055, File No. 1-9157)
10(iii)(A)14 Description of SNET Executive Retirement Savings
Plan (Exhibit 10(iii)(A)14 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to
Registration No. 33-64975, File No. 1-9157).
33
(3) Exhibits (continued):
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
24a Power 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, 1995 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1996.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1995 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1996.
(b) Reports on Form 8-K:
On October 24, 1995, the Telephone Company filed a report on
Form 8-K, dated October 23, 1995, announcing the
Corporation's financial results for the third quarter of
1995.
On January 22, 1996, the Telephone Company filed a report on
Form 8-K, dated January 22, 1996, announcing the
Corporation's 1995 financial results, including the fact
that it discontinued use of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation."
34
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.
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
By /s/ Donald R. Shassian
Donald R. Shassian, Senior Vice President
and Chief Financial Officer
March 20, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
Daniel J. Miglio*
Chairman, President, Chief Executive Officer
and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
Donald R. Shassian By /s/ Donald R. Shassian
Senior Vice President (Donald R. Shassian, as attorney-
and Chief Financial Officer in-fact and on his own behalf)
DIRECTORS:
William F. Andrews*
Richard H. Ayers*
Zoe Baird*
Robert L. Bennett*
Barry M. Bloom* March 20, 1996
Frank J. Connor*
William R. Fenoglio*
Claire L. Gaudiani*
James R. Greenfield*
Ira D. Hall*
Burton G. Malkiel*
Frank R. O'Keefe, Jr.*
* by power of attorney
35
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
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 1995 $24.9 $15.5 $2.9 (a) $17.2 (b) $26.1
Year 1994 21.6 18.5 6.9 (a) 22.1 (b) 24.9
Year 1993 20.4 24.9 3.5 (a) 27.2 (b) 21.6
Restructuring Charge:
Year 1995 $259.9 $ - $ - $187.9 (c) $ 72.0
Year 1994 335.0 - - 75.1 (c) 259.9
Year 1993 - 335.0 - - 335.0
(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.
(c) Includes non-cash amounts charged against the restructuring reserve of
$99.6 in 1995 and $12.9 in 1994, primarily net pension and postretirement
curtailment losses.
36
Exhibit Index
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto.
Exhibit
Number
3a Amended and Restated Certificate of Incorporation
of the registrant as filed June 14, 1990 (Exhibit
3a to 1990 Form 10-K dated 3/25/91, File No. 1-
6654).
3b By-Laws of the registrant as amended and restated
through May 11, 1988 (Exhibit 3b to 1988 Form 10-K
dated 3/23/89, File No. 1-6654).
4 Indenture dated December 13, 1993 between the
registrant 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 4 to 1994 Form 10-K dated 3/10/95, File No.
1-6654).
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. 1-6654).
10(iii)(A)3 SNET Financial Counseling Program as amended
January 1987 (Exhibit 10-D to Form SE dated
3/23/87-1, File No. 1-9157).
10(iii)(A)4 Group Life Insurance Plan and Accidental Death and
Dismemberment Benefits Plan for Outside Directors
of SNET as amended July 1, 1986 (Exhibit 10-E to
Form SE dated 3/23/87-1, File No. 1-9157).
10(iii)(A)5 SNET Pension Benefit Plan as amended November 1,
1991 (Exhibit 10-A to Form SE dated 3/20/92, File
No. 1-9157). Amendments dated December 8, 1993
(Exhibit 10(iii)(A)5 to 1993 Form 10-K dated
3/23/94, File No. 1-9157). Amendment dated
February 8, 1995 (Exhibit 10(iii)(A)5 to 1994 Form
10-K dated 3/10/95, File No. 1-9157). Amendments
effective December 13, 1995 and January 1, 1996
(Exhibit 10(iii)(A)5 to 1995 Form 10-K dated 3/20/96,
File No. 1-9157).
10(iii)(A)6 SNET Management Pension Plan as amended March 31,
1995. Amendments effective December 20, 1995 through
April 1, 1996 (Exhibit 10(iii)(A)6 to 1995 Form 10-K
dated 3/20/96, File No. 1-9157).
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. 1-6654).
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. 1-6654).
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. 1-6654).
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 January 1,
1994 (Exhibit 10(iii)(A)12 to 1994 Form 10-K dated
3/10/95, File No. 1-9157).
10(iii)(A)13 SNET Non-Employee Director Stock Plan effective
January 1, 1994 (Exhibit 4.4 to Registration
Statement No. 33-51055, File No. 1-9157)
10(iii)(A)14 Description of SNET Executive Retirement Savings
Plan (Exhibit 10(iii)(A)14 to 1993 Form 10-K dated
3/23/94, File No. 1-9157).
10(iii)(A)15 SNET 1995 Stock Incentive Plan (Exhibit 4.4 to
Registration No. 33-64975, File No. 1-9157).
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Accountants.
24a Power 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, 1995 for the SNET Management
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1996.
99b Annual Report on Form 11-K for the plan year ended
December 31, 1995 for the SNET Bargaining Unit
Retirement Savings Plan will be filed as an
amendment prior to June 30, 1996.
EXHIBIT 12
1995 Form 10-K
The Southern New England Telephone Company
Computation of
Ratio of Earnings to Fixed Charges
Dollars in Millions, For the Year Ended December 31, 1995
Income before income taxes, extraordinary charge and
accounting change $347.5
Add:
Interest on indebtedness 52.6
Portion of rents representative of
the interest factor 8.3
Earnings before fixed charges, income taxes
and extraordinary items (1) $408.4
Fixed charges
Interest on indebtedness $ 52.6
Potion of rents representative of
the interest factor 8.3
Fixed charges(2) $ 60.9
Ratio of earnings to fixed charges [(1) divided by (2)] 6.71
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report,
which includes an explanatory paragraph related to the
discontinuance of SFAS No. 71, "Accounting for Certain Types
of Regulation" in 1995 and the changes in accounting methods
in 1993, dated January 22, 1996 on our audits of the
consolidated financial statements and financial statement
schedule of The Southern New England Telephone Company as of
December 31, 1995 and 1994 and for each of the three years
in the period ended December 31, 1995, included in this
Annual Report on Form 10-K, in the following document filed
by The Southern New England Telephone Company:
Registration Statement No. 33-51371 on Form S-3 relating
to the registration of $540 million of Debt Securities.
Coopers & Lybrand L.L.P.
Hartford, Connecticut
March 20, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, The Southern New England Telephone Company, a Connecticut
corporation (hereinafter referred to as the "Company"), proposes to file
shortly with the Securities and Exchange Commission, under the provisions
of the Securities Exchange Act of 1934, as amended, their annual report
on Form 10-K; and
WHEREAS, each of the undersigned is an officer or director, or both,
of the Company, and holds the office, or offices, in the Company 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 Company, to execute and file such annual report, and thereafter to
execute and file any amendment or amendments thereto, hereby
giving and granting to said attorney full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises, as fully, to all intents and purposes, as
the undersigned might or could do, if personally present at the doing
thereof, hereby ratifying and confirming all that said attorney may or
shall lawfully do, or cause to be done, by virtue hereof.
IN WITNESS WHEREOF each of the undersigned has executed this Power of
Attorney this 13th day of March 1996.
Principal Executive Officer: Directors:
/s/ Daniel J. Miglio
Daniel J. Miglio
Chairman, President, Chief
Executive Officer and Director
/s/ William F. Andrews
William F. Andrews, Director
/s/ Richard H. Ayers
Richard H. Ayers, Director
/s/ Zoe Baird
Zoe Baird, Director
/s/ Robert L. Bennett
Robert L. Bennett, Director
/s/ Barry M. Bloom
Barry M. Bloom, Director
/s/ Frank J. Connor
Frank J. Connor, Director
/s/ William R. Fenoglio
William R. Fenoglio, Director
/s/ Claire L. Gaudiani
Claire L. Gaudiani, Director
/s/ James R. Greenfield
James R. Greenfield, Director
/s/ Ira D. Hall
Ira D. Hall, Director
/s/ Burton G. Malkiel
Burton G. Malkiel, Director
/s/ Frank R. O'Keefe, Jr.
Frank R. O'Keefe, Jr., Director
C E R T I F I C A T E
This is to certify that at a regular meeting of the Board of
Directors of The Southern New England Telephone Company held on
March 13, 1996, 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, 1995, in substantially the form submitted to this meeting,
but with such changes, additions and revisions as the officer executing
the same shall approve, such approval to be conclusively evidenced by
such execution and thereafter to execute personally, and to cause to be
filed, any amendments or supplements to such report, and to do any and
all other acts and things, and to execute and deliver any and all other
documents necessary or advisable in connection with the foregoing."
Attest:
/s/ Paula M. Anderson
Paula M. Anderson
Assistant Secretary
New Haven, Connecticut
March 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 1995 ANNUAL REPORT ON FORM 10-K OF THE
SOUTHERN NEW ENGLAND TELEPHONE COMPANY 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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 70,500
<SECURITIES> 0
<RECEIVABLES> 317,100
<ALLOWANCES> 26,100
<INVENTORY> 10,700
<CURRENT-ASSETS> 510,400
<PP&E> 4,166,900
<DEPRECIATION> 2,832,900
<TOTAL-ASSETS> 1,897,600
<CURRENT-LIABILITIES> 408,100
<BONDS> 746,600
0
0
<COMMON> 380,400
<OTHER-SE> 182,500
<TOTAL-LIABILITY-AND-EQUITY> 1,897,600
<SALES> 0
<TOTAL-REVENUES> 1,508,500
<CGS> 0
<TOTAL-COSTS> 1,108,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,900
<INCOME-PRETAX> 347,500
<INCOME-TAX> 133,900
<INCOME-CONTINUING> 213,600
<DISCONTINUED> 0
<EXTRAORDINARY> (716,300)
<CHANGES> 0
<NET-INCOME> (502,700)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
