SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number 1-6654
THE SOUTHERN NEW ENGLAND TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0542646
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification Number)
227 Church Street, New Haven, CT 06510
(Address of principal executive offices) (Zip Code)
(203) 771-5200
(Registrant's telephone number,
including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF SOUTHERN NEW ENGLAND
TELECOMMUNICATIONS CORPORATION, MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H(2).
- 1 -
Form 10-Q - Part I The Southern New England Telephone Company
PART I - FINANCIAL INFORMATION
The Southern New England Telephone Company ("Telephone Company")
is a wholly-owned telephone operating subsidiary of Southern New
England Telecommunications Corporation ("Corporation") and has
its principal executive offices at 227 Church Street, New Haven,
Connecticut 06510 (telephone number (203) 771-5200).
The condensed financial statements on the following pages have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments of a normal recurring nature
necessary for fair presentation for each period shown. The 1995
financial statements have been reclassified to conform to the
current year presentation. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such SEC rules and
regulations. Management believes that the disclosures made are
adequate to make the information presented not misleading.
Operating results for any interim periods, or comparisons between
interim periods, are not necessarily indicative of the results
that may be expected for full fiscal years. It is suggested that
these financial statements be read in conjunction with the
financial statements and notes thereto included in the Telephone
Company's 1995 Annual Report on Form 10-K.
- 2 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1996 1995
Revenues
Local service $ 164.7 $ 157.4
Network access 97.0 91.5
Intrastate toll 66.4 69.1
Publishing and other 60.3 58.7
Total Revenues 388.4 376.7
Costs and Expenses
Operating 106.3 105.6
Maintenance 86.4 83.1
Depreciation and amortization 74.4 74.8
Taxes other than income 12.8 13.0
Total Costs and Expenses 279.9 276.5
Operating Income 108.5 100.2
Interest expense 11.6 13.2
Other income, net 1.0 1.3
Income Before Income Taxes 97.9 88.3
Income taxes 38.2 34.8
Net Income $ 59.7 $ 53.5
Retained Earnings, Beginning of Period $ 31.8 $ 648.0
Net income 59.7 53.5
Dividends declared to parent (35.6) (32.0)
Retained Earnings, End of period $ 55.9 $ 669.5
The accompanying notes are an integral part of these financial statements.
- 3 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED BALANCE SHEETS
Dollars in Millions March 31, 1996 December 31, 1995
(Unaudited)
Assets
Cash and temporary cash investments $ 124.2 $ 70.5
Accounts receivable, net of allowance for
uncollectibles of $26.2 and $24.9,
respectively 296.3 298.1
Accounts receivable from affiliates 11.0 10.9
Materials and supplies 11.1 10.7
Prepaid publishing 36.4 37.2
Deferred income taxes 50.5 57.8
Other current assets 50.0 25.2
Total Current Assets 579.5 510.4
Total telephone plant, at cost 4,198.7 4,166.9
Less: Accumulated depreciation 2,893.6 2,832.9
Net Telephone Plant 1,305.1 1,334.0
Deferred charges and other assets 65.9 53.2
Total Assets $1,950.5 $1,897.6
Liabilities and Shareholder's Equity
Accounts payable and accrued expenses $ 203.3 $ 180.9
Restructuring charge - current 41.2 59.0
Advance billings and customer deposits 44.8 43.0
Accrued compensated absences 33.8 33.8
Accounts payable to affiliates 17.7 29.6
Other current liabilities 93.7 61.8
Total Current Liabilities 434.5 408.1
Long-term debt 746.7 746.6
Unamortized investment tax credits 17.0 17.6
Restructuring charge - long-term 12.6 13.0
Other liabilities and deferred credits 152.7 149.4
Total Liabilities 1,363.5 1,334.7
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 55.9 31.8
Less: Treasury stock; 42,696 shares, at cost (1.4) (1.4)
Total Shareholder's Equity 587.0 562.9
Total Liabilities and Shareholder's Equity $1,950.5 $1,897.6
The accompanying notes are an integral part of these financial statements.
- 4 -
Form 10-Q - Part I The Southern New England Telephone Company
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
Dollars in Millions 1996 1995
Operating Activities
Net income $ 59.7 $ 53.5
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 74.4 74.8
Restructuring payments (18.2) (15.9)
Change in operating assets and liabilities, net 13.5 40.2
Other, net 3.5 4.5
Net Cash Provided by Operating Activities 132.9 157.1
Investing Activities
Cash expended for capital additions (57.3) (78.7)
Other, net 1.1 1.0
Net Cash Used by Investing Activities (56.2) (77.7)
Financing Activities
Cash dividends paid (23.0) (30.0)
Net Cash Used by Financing Activities (23.0) (30.0)
Increase in Cash and Temporary Cash Investments 53.7 49.4
Cash and temporary cash investments at
beginning of period 70.5 44.2
Cash and Temporary Cash Investments at
End of Period $ 124.2 $ 93.6
Income Taxes Paid $ 9.5 $ .1
Interest Paid $ 10.2 $ 10.3
The accompanying notes are an integral part of these financial statements.
- 5 -
Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Note 1: Significant Accounting Policies
Accounting Pronouncement - Effective January 1, 1996, the
Telephone Company implemented Statement of Financial Accounting
Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." The
implementation did not have a material impact on the financial
statements.
Note 2: Restructuring Charge
In December 1993, the Telephone Company recorded a restructuring
charge of $335.0 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 original 1993 restructuring charge and costs incurred during
1994 and 1995 are summarized as follows:
Balance Costs Costs Balance
at incurred incurred at
Dec. 31, during during Dec. 31,
1993 1994 1995 1995
Employee separation costs $160.0 $38.6 $107.8 $13.6
Process and systems
reengineering 145.0 35.0 74.2 35.8
Exit and other costs 30.0 1.5 5.9 22.6
Total $335.0 $75.1 $187.9 $72.0
The Telephone Company incurred restructuring costs in 1996 as follows:
For the Three Months Ended March 31, 1996
Employee separation costs $ 3.8
Process and systems reengineering 13.4
Exit and other costs 1.0
Total Costs Incurred $18.2
Costs incurred for employee separations included payments for
severance, unused compensated absences, health care continuation
and employee retraining. 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.
In July 1995, the early-out offer ("EOO") was available to the
bargaining-unit work force and approximately 2,600 employees, or
41.4% of the total bargaining-unit work force, accepted the
offer. As of March 31, 1996, approximately 2,080 employees had
left the Telephone Company, with the remaining 520 employees to
leave no later than June 1996. Future adjustments to the
restructuring charge are expected to include pension settlement
gains of approximately $23 in the second quarter of 1996.
- 6 -
Form 10-Q - Part I The Southern New England Telephone Company
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
Total employee separations under the restructuring program are
expected to approximate up to 4,000 employees. As of March 31,
1996, approximately 3,260 employees had left the Corporation
under the restructuring program: 890 employees left under
severance plans through the end of 1994, 2,140 employees left
primarily under the EOO in 1995 and 230 employees left under the
EOO and severance plans in the first quarter of 1996. The
remaining employee separations are expected to occur primarily in
1996. Total employee separations to date were offset partially
by an increase in provisional 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.
As a result of employee separations since March 31, 1995,
employee-related expenses for the first quarter of 1996 were
reduced by approximately $16 compared with the first quarter
1995, 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. 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 was funded primarily by the pension and
postretirement plans. Incremental capital expenditures related
to the restructuring program approximated $5 in the first quarter
of 1996. These items were recorded in property, plant and
equipment and will result in increased depreciation expense in
future years. The Corporation currently anticipates total
incremental capital expenditures of approximately $30 in 1996
under the restructuring program.
Specific process and systems reengineering projects under the
restructuring program are expected to be completed in 1996. In
addition, shifts within reserve categories are expected to occur
in 1996. Management believes that the total restructuring
reserve balance of $53.8 as of March 31, 1996 plus the expected
net adjustments of approximately $23, discussed previously, are
adequate for future estimated costs under the restructuring
program.
- 7 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of three months ended March 31, 1996 vs. three months
ended March 31,1995
Operating Results
Net income was $59.7 in 1996 compared with $53.5 in 1995. The
increase was 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.
Revenues and Sales
For the Three Months Ended March 31, 1996 1995
Local service $164.7 $157.4
Network access 97.0 91.5
Intrastate toll 66.4 69.1
Publishing and other 60.3 58.7
Total Revenues $388.4 $376.7
Local service revenues, derived from providing local exchange,
public telephone and local private line services, increased
$7.3, or 4.6%, in 1996. The increase was due primarily to
strong growth of 3.3% in access lines in service to
approximately 2,090,000 lines as of March 31, 1996. This
increase included significant growth in second residential
access lines. 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 telecommunications providers
start to offer local service during the year [see Competition].
Network access revenues, generated primarily from interstate and
intrastate services, increased $5.5, or 6.0%. Interstate access
revenues increased $3.6, or 4.1%, due primarily to growth in
interstate minutes of use of approximately 9% and an increase in
access lines in service, discussed previously. 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 annual Federal
Communications Commission ("FCC") filing under price cap
regulation. In addition, intrastate access revenues increased
$1.9 due primarily to an increase in intrastate minutes of use
by competitive providers of intrastate long-distance service.
Intrastate toll revenues, which include primarily revenues from
toll and WATS services, decreased $2.7, or 3.9%. Toll message
revenues decreased $2.1 due primarily to reduced intrastate toll
rates, offset partially by a 6.2% increase in toll message
volume. The decline in rates was attributable to the
introduction of several discount calling plans that provide
competitive options to business and residence customers. Higher
toll volume was due mainly to stormy weather experienced in
Connecticut during the first three months of 1996. 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.
Growth in Yellow Pages advertising was the primary contributor
to the $1.6 increase in publishing and other revenues.
- 8 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of three months ended March 31, 1996 vs. three months
ended March 31,1995
Costs and Expenses
For the Three Months Ended March 31, 1996 1995
Operating $106.3 $105.6
Maintenance 86.4 83.1
Total operating costs 192.7 188.7
Depreciation and amortization 74.4 74.8
Taxes other than income 12.8 13.0
Total Costs and Expenses $279.9 $276.5
Operating costs - 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 increased $4.0, or 2.1%, due primarily to
an increase in contracted services for systems operations (i.e.,
outsourcing of data center operations) and an increase in
advertising. Partially offsetting these increases was a
reduction in employee-related expenses as a result of a smaller
work force. The Telephone Company's work force decreased to
8,218 employees at March 31, 1996, compared with 9,141 employees
at March 31, 1995, due primarily to the EOO and severance
programs under the restructuring program [see Note 2]. The
decrease in employee-related expenses was partially offset by
overtime for storm-related repairs and a compensation increase
for bargaining-unit employees. Employee-related expense savings
are anticipated to continue from employee separations.
Interest Expense
For the Three Months Ended March 31, 1996 1995
Interest expense $11.6 $13.2
Interest expense decreased $1.6, or 12.1%, due primarily to
reporting capitalized interest as a cost of telephone plant and
a reduction to interest expense. Prior to the discontinuance of
SFAS No. 71, capitalized interest was reported as a component of
other income, net.
Income Taxes
For the Three Months Ended March 31, 1996 1995
Income Taxes $38.2 $34.8
The combined federal and state effective tax rate for the three
months ended March 31, 1996 was 39.0% compared with 39.4% for
the same period in 1995. The decrease in the effective tax rate
was due primarily to the combined effect of lower Connecticut
state tax rates and a higher level of tax credits in 1996.
- 9 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
Comparison of balances as of March 31, 1996 vs. December 31, 1995
Other Current Assets
Other current assets increased $24.8 due primarily to an
increase in prepaid property taxes partially offset by a
decrease in income taxes receivable. The increase in prepaid
property taxes is a result of the Telephone Company's annual
payment of property taxes in March 1996. The prepaid property
taxes will be amortized over the remainder of 1996. The
decrease in income taxes receivable was due to the timing of
income tax payments.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses increased $22.4 due to
timing of payments of accounts payable.
Other Current Liabilities
Other current liabilities increased $31.9 due to the timing of
income tax payments and an increase in dividends payable.
Liquidity and Capital Resources
The Telephone Company generated cash flows from operations of
$132.9 during the three months ended March 31, 1996 as compared
with $157.1 during the three months ended March 31, 1995. The
decrease was due primarily to higher income tax payments as well
as the timing of accounts receivable collections. The primary
use of corporate funds continued to be capital expenditures.
For the three months ended March 31, 1996, cash outlays relating
to the Telephone Company's restructuring charge totaled $18.2.
Primarily all of the expenditures related to incremental costs
incurred for executing numerous reengineering programs during
the first three months of 1996. All cash expenditures were
funded with cash flows from operations. Management anticipates
that cash expenditures in connection with the restructuring
program will approximate $80 in 1996 and will be funded from
operations.
Competition
The Telephone Company is experiencing increased 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 105 telecommunications providers have received approval from
the Department of Public Utility Control ("DPUC") to offer
competitive intrastate long-distance services. In addition, over
45 companies have filed for initial certificates of public
convenience and necessity and are awaiting DPUC approval. The
implementation of intrastate equal access for all dual preferred
interexchange carrier capable switches will be completed by
December 1996.
- 10 -
Form 10-Q - Part I The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
To provide competitive products, the Telephone Company, with its
affiliates, has realigned its discount and rate structures to
provide Connecticut customers with SNET All Distance[SM], a
seamless toll service product line which includes discount
calling plans that combine intrastate, interstate and
international calling. The migration of customers to these
bundled calling plans will continue to place downward pressure on
intrastate toll rates and revenues.
Concerning competition for local exchange service, eight
telecommunications providers have been granted a certificate of
public convenience and necessity for local service and four
additional applications are pending before the DPUC. The effect
of increased competition on local service revenues cannot be
predicted at this time. While some customers may purchase
services from competitors, the Telephone Company expects that
most competitors will utilize its network and that increased
network access revenues will offset a portion of local service
revenues lost to competition. Local service competition began in
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 may not be raised above current
levels until January 1, 1998, at which time the price cap formula
becomes effective for these services, unless they have been
reclassified into the emerging competitive or competitive
categories. The decision also authorized a rate of return on the
Telephone Company's common equity of 11.90% during the monitoring
period. The impact of these changes on the Telephone Company's
operating results will depend on the timing of classifying the
various products and services into categories (non-competitive,
emerging competitive and competitive) for pricing (banding)
changes. As of March 31, 1996, the Telephone Company's rate of
return was below the 11.90% threshold.
Federal Regulatory Initiatives
On January 17, 1996, the Telephone Company filed with the FCC a
petition requesting authorization to provide interstate and
international telecommunications services under non-dominant
regulation. If approved, the Telephone Company would provide the
service rather than SNET America, Inc., a separate subsidiary of
the Corporation.
On February 1, 1996, the U.S. Congress passed legislation that
created broad changes in telecommunications law and regulation
nationwide. The majority of the federal legislation is
consistent with legislation enacted by the State of Connecticut
in 1994. Certain provisions of the federal legislation relating
to the prices the Telephone Company charges competitors for
certain services (those that are below cost today based on their
end use prices) could, however, have the effect of producing
- 11 -
Form 10-Q - Parts I & II The Southern New England Telephone Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Millions)
below cost prices, therefore necessitating the development of a
significantly larger state universal service fund than previously
anticipated. The legislation allows local exchange carriers
("LECs") with less than 2% of the nation's access lines,
including the Telephone Company, to petition the DPUC for a
suspension or modification of certain requirements under the
federal law that apply specifically to LECs. The DPUC may grant
a suspension or modification of the requirements if such action
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. The Telephone
Company filed such a petition with the DPUC on March 15, 1996.
On April 2, 1996, the Telephone Company filed its 1996 annual
interstate access tariff under price cap regulation to become
effective July 1, 1996. The Telephone Company again elected a
4.0% productivity factor and will be allowed to earn up to a
12.25% interstate rate of return annually before any sharing
mechanism is invoked. The filing, if approved by the FCC, is
anticipated to decrease interstate network access revenues by $.6
for the period July 1, 1996 to June 30, 1997. Management expects
this decrease to be offset by increased demand. The price cap
interstate rate of return of 11.58% for calendar year 1995 was
also reported to the FCC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in the first
quarter of 1996.
Item 6 Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
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.
On April 23, 1996, the Telephone Company filed a
report on Form 8-K, dated April 23, 1996, announcing
the Corporation's financial results for the first
quarter of 1996.
- 12 -
Form 10-Q - Part II The Southern New England Telephone Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Southern New England Telephone Company
May 7, 1996
/s/ Donald R. Shassian
Donald R. Shassian, Senior Vice President
and Chief Financial Officer
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1ST QUARTER OF 1996 FORM 10-Q OF THE SOUTHERN NEW ENGLAND TELEPHONE
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STATEMENTS.
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